FORM 10-QSB
UNITED STATES
SECURITIES EXCHANGE COMMISSION
Washington, D. C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 1998
Commission file number:
333-26269
INTERNATIONAL ISOTOPES INC.
(Exact name of registrant as specified in its charter)
Texas 74-2763837
(State of incorporation) (IRS Employer Identification Number)
3100 Jim Christal Rd
Denton, Texas 76207
(Address of principal executive offices) (zip code)
940-484-9492
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 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
--- ----
As of October 30, 1998 the aggregate market value of the Common Stock of the
registrant held by non-affiliates of the registrant as determined by reference
to the closing price of Common Stock as reported on the Nasdaq Small Cap Market
System, was $41,117,693. As of October 30, 1998 the number of shares of Common
Stock, $.01 par value, outstanding was 6,567,625.
*Registrant became subject to the filing requirements of the Securities Exchange
Act of 1934 on August 14, 1997, when its Registration Statements on Form SB-2
and Form 8-A were declared effective by the Commission.
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INTERNATIONAL ISOTOPES INC.
TABLE OF CONTENTS
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<CAPTION>
PART I - FINANCIAL INFORMATION: Page No.
Item 1 - Financial Statements:
<S> <C>
Condensed Consolidated Balance Sheets at September 30, 1998 3
(unaudited) and December 31, 1997.
Condensed Consolidated Statements of Operations for the Nine 4
Months Ended September 30, 1998 and 1997, and for the Three Months
Ended September 30, 1998 and 1997, and for the period from November
1, 1995 (inception) through September 30, 1998 (unaudited).
Condensed Consolidated Statements of Cash Flows for the Nine 5
Months Ended September 30, 1998 and 1997 and for the period from
November 1, 1995 (inception) through September 30, 1998 (unaudited).
(1) Notes to Condensed Consolidated Financial Statements. 7
Item 2 - Management's Discussion and Analysis of Financial 10
Condition and Results of Development Stage Activities
PART II - OTHER INFORMATION:
Item 2 - Changes in Securities 14
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 16
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2
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INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
(a development stage enterprise)
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
Assets (unaudited)
- -------------------------------------- ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,906,715 $ 8,201,417
Securities available for sale, market value -- 5,082,777
Interest receivable -- 152,358
Accounts receivable 550,872 --
Assets held for sale 526,533 564,932
Inventory 2,341,092 741,853
Other 196,095 97,941
------------ ------------
Total current assets 5,521,307 14,841,278
Fixed assets, net:
Land 663,674 563,674
Plant and improvements 12,710,708 2,871,266
Furniture and equipment 13,225,138 2,845,820
------------ ------------
Total fixed assets, net 26,599,520 6,280,760
Goodwill, net 1,761,232 --
Other assets 1,008,158 --
------------ ------------
Total assets 34,890,217 21,122,038
============ ============
Liabilities and Stockholders' Equity
- --------------------------------------
Current liabilities
Accounts payable $ 3,532,593 $ 906,062
Accrued liabilities 617,932 602,064
Current installments of mortgage and notes
payable to banks (note 9) 5,359,069 634,454
------------ ------------
Total current liabilities 9,509,594 2,142,580
Mortgage and notes payable to banks, excluding
current installments 8,187,533 3,053,818
------------ ------------
Total liabilities 17,697,127 5,196,398
Stockholders' equity
Preferred stock, $1.00 par value; 5,000,000 shares
authorized, no shares issued and outstanding
Common Stock, $.01 par value; 20,000,000 shares
authorized, issued and outstanding 6,567,625
shares at September 30, 1998 and 6,370,950
shares at December 31, 1997 65,676 63,709
Additional paid-in capital 25,684,343 21,787,337
Deficit accumulated during the developmental
stage (7,836,929) (5,205,406)
Receivable from stock sales (720,000) (720,000)
------------ ------------
Total stockholders' equity 17,193,090 15,925,640
============ ============
Total liabilities and stockholders'
equity 34,890,217 21,122,038
============ ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
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INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Period from
Nine Months ended Three Months ended November 1, 1995
September 30, September 30, (inception) through
1998 1997 1998 1997 September 30, 1998
---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Sales of Products $1,293,263 $ -- $ 672,326 $ -- $1,293,263
Development Contract Income 540,500 -- 290,500 -- 540,500
Sale of accelerator components 77 152,015 -- 16,828 910,944
---------- ---------- ---------- ---------- ----------
1,833,840 152,015 962,826 16,828 2,744,707
Cost of revenue:
Cost of products (930,922) -- (511,701) -- (930,922)
Cost of development (62,830) -- -- -- (62,830)
Cost of accelerator components -- (79,287) -- (10,849) (342,727)
---------- ---------- ---------- ---------- ----------
Gross Profit 840,088 72,728 451,125 5,979 1,408,228
Operating costs and expenses:
Salaries and contract labor 842,771 2,657,724 393,425 729,690 1,877,386
Employee incentive compensation -- -- -- -- 2,397,500
Sales and Marketing 567,877 7,880 217,121 7,764 567,993
General and administrative 2,012,903 467,113 804,534 254,190 2,970,577
Consulting fees 102,826 34,479 48,779 29,296 538,429
Legal and professional fees 146,350 11,234 54,157 2,809 241,798
Rent and security 18,615 117,508 9,667 38,513 299,248
Commissions and fees 158 -- -- -- 95,473
Taxes 15,000 -- -- -- 15,000
Other -- -- -- -- 102,567
---------- ---------- ---------- ---------- ----------
Total operating expenses 3,706,500 3,295,938 1,527,683 1,062,262 9,105,971
---------- ---------- ---------- ---------- ----------
Loss from development stage
operations (2,866,412) (3,223,210) (1,076,558) (1,056,283) (7,697,743)
Other income (expense):
Gain on sale (donation) of
assets held for sale (24,332) 14,974 -- 14,974 327,006
Interest income 259,268 71,780 19,925 64,522 562,009
Other income -- 317 -- -- --
Interest expense (47) (186,342) (47) (37,039) (528,201)
Loan financing fees -- -- -- -- (750,000)
---------- ---------- ---------- ---------- ----------
Loss before extraordinary item (2,631,523) (3,322,481) (1,056,680) (1,013,826) (8,086,929)
Extraordinary gain on debt
extinguishment -- -- -- -- 250,000
---------- ---------- ---------- ---------- ----------
Net loss $(2,631,523) $(3,322,481) $(1,056,680) $(1,013,826) $(7,836,929)
========== ========== ========== ========== ==========
Net loss per common share - basic
and diluted $ (0.41) $ (0.78) $ (0.16) $ (0.20) $ (1.85)
========== ========== ========== ========== ==========
Weighted average common shares
outstanding - basic and diluted 6,480,552 4,247,933 6,562,789 5,015,950 4,244,516
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
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INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
(a development stage enterprise)
Condensed Consolidated Statement of Cash Flows
(unaudited)
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<CAPTION>
Period from
Nine Months November 1, 1995
Ended September 30, (inception) through
1998 1997 September 30, 1998
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss (2,631,523) (3,322,481) (7,836,929)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 162,025 7,153 181,039
(Gain) loss on sale or donation of assets 24,332 (14,974) (327,006)
Services compensated by stock issuance -- 1,557,920 2,178,886
Changes in operating assets and liabilities,
exclusive of effects of acquisition:
Interest receivable 152,358 -- --
Accounts receivable 136,449 (16,250) 136,449
Other assets (9,577) (3,644) (107,518)
Inventory (331,472) 54,807 (1,073,325)
Pre-paids -- (72,913) --
Accounts payable 2,341,570 102,129 3,247,632
Accrued liabilities (7,373) 1,054,608 594,691
---------- ---------- ----------
Net cash used in operating activities (163,211) (653,645) (3,006,081)
Cash flows from investing activities:
Proceeds from sale of certificate of deposit -- 300,000 400,000
Purchase of certificate of deposit -- (100,000) (400,000)
Purchase of assets for sale and operations (20,316,665) (623,250) (24,573,016)
Purchase of securities available for sale -- -- (5,082,777)
Proceeds from sale of securities available for sale 5,082,777 -- 5,082,777
Proceeds from sale of assets held for sale 14,067 -- 832,005
Purchase of assets for sale and operations in connection
with initial founding -- -- (2,900,000)
Purchase MAC Isotopes, Inc., net of cash acquired (495,000) -- (495,000)
Investment in License Fee (275,000) -- (275,000)
---------- ---------- ----------
Net cash used in investing activities (15,989,821) (423,250) (27,411,011)
Cash flows from financing activities:
Collections of stock sale receivable -- -- 160,000
Proceeds from issuance of notes payable to chairman -- -- 120,000
Proceeds from issuance of Common Stock -- 17,982,730 18,612,205
Proceeds from issuance of debt 9,951,003 3,666,317 21,902,610
Principal payments on notes payable (92,673) (6,264,533) (8,356,008)
Payments on notes payable to chairman -- (20,000) (115,000)
---------- ---------- ----------
Net cash provided by financing activities 9,858,330 15,364,514 32,323,807
Net increase (decrease) in cash and cash equivalents (6,294,702) 14,287,619 1,906,715
Cash and cash equivalents at beginning of period 8,201,417 331,397 --
---------- ---------- ----------
Cash and cash equivalents at end of period 1,906,715 14,619,016 1,906,715
========== ========== ==========
</TABLE>
(Continued)
<PAGE>
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
(a development stage enterprise)
Condensed Consolidated Statement of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Period from
Nine Months November 1, 1995
Ended September 30, (inception) through
1998 1997 September 30, 1998
--------- ------- ---------
<S> <C> <C> <C>
Supplemental disclosure of cash flow activities:
Cash paid for interest, net of amounts capitalized 47 186,342 825,201
========= ======= =========
Cash paid for financing fees 86,350 15,261 546,611
========= ======= =========
Supplemental disclosure of noncash transactions:
Common Stock issued for stock receivables -- -- 880,000
========= ======= =========
Common Stock issued for account payable to Director -- -- 62,852
========= ======= =========
Conversion of notes payable to Common Stock -- -- 5,000
========= ======= =========
Acquisition of subsidiary through issuance of Common Stock 3,173,973 -- 3,248,976
(note 7) ========= ======= =========
Acquisition of patent through issuance of Common Stock -- -- 100
========= ======= =========
Acquisition of license fee through issuance of Common Stock 225,000 -- 225,000
========= ======= =========
Acquisition of patent rights through issuance of Common Stock 500,000 -- 500,000
========= ======= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
(a development stage enterprise)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) The Company and Basis of Presentation
International Isotopes Inc. (the "Company" or "I3") was incorporated on November
15, 1995 and is a development stage enterprise. The Company's primary activities
have been to obtain assets to be used in the production of radioisotopes, to
obtain funding to complete the reconfiguration and reassembly of the linear
accelerator, and prepare for production and marketing of a full range of
radioisotopes, pharmaceutical grade radioisotopes and finished
radiopharmaceuticals. Since the Company's acquisition of MAC Isotopes, Inc. (see
note 7) was consummated to further establish a supply of certain radioisotopes,
the Company remains a development stage enterprise.
The accompanying unaudited consolidated financial statements include the results
of operations of the Company and its wholly owned subsidiaries, Gazelle Realty
and International Isotopes Idaho Inc. ("I4"). All significant intercompany
accounts and transactions have been eliminated in consolidation. The unaudited
financial statements included herein by the Company have been prepared without
audit and in accordance with generally accepted accounting principles, and have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). These statements reflect all adjustments which, in
the opinion of management, are necessary for a fair presentation of the
Company's financial position as of September 30, 1998, and the results of its
operations for the nine and three-month periods ended September 30, 1998 and
1997, and its cash flows for the nine-month periods ended September 30, 1998 and
1997. This information should be read in conjunction with the Company's audited
consolidated financial statements for the period from November 1, 1995
(inception) through December 31, 1997 as set out in the Company's Form10-KSB
filed March 31, 1998.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and display of comprehensive income in a
full set of general-purpose financial statements. Comprehensive income includes
net income and other comprehensive income which is generally comprised of
changes in the fair value of available-for-sale marketable securities, foreign
currency translation adjustments and adjustments to recognize additional minimum
pension liabilities. The Company had no accumulated other comprehensive income
at September 30, 1998 or December 31, 1997
The Company is assessing the reporting and disclosure requirements of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
statement requires a public business enterprise to report financial and
descriptive information about its reportable operating segments. The statement
is effective for financial statements for periods beginning after December 15,
1997, but is not required for interim financial statements in the initial year
of its application. The Company will adopt the provisions of SFAS No. 131 in its
December 31, 1998 consolidated financial statements.
Certain information in footnote disclosures, normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the SEC.
The financial data disclosed in the notes to the condensed consolidated
financial statements are unaudited for these periods.
-7-
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(2) Net Loss Per Common Share - Basic and Diluted
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS No. 128").
SFAS No. 128 revised the previous calculation methods and presentations of
earnings per share under APB 15 and requires that all prior-period earnings
(loss) per share data be restated. The Company adopted SFAS No. 128 in the
fourth quarter of 1997 as required by this Statement. In accordance with SFAS
No. 128, the Company has presented basic earnings (loss) per share, computed on
the basis of the weighted average number of common shares outstanding during the
period. Diluted earnings (loss) per share, which is computed on the basis of the
weighted average number of common shares and all potentially dilutive common
shares outstanding during the period, is the same as basic earnings (loss) per
share, as all potential common shares were anti-dilutive. Potential common
shares excluded from diluted weighted average common shares for the nine months
ended September 30, 1998 include 392,200 Common Stock options and 220,000 Common
Stock warrants.
(3) Inventories
Inventories consist of the following at September 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Raw materials $ 234,795 $ --
Work in progress 1,355,537 --
Finished goods 750,760 741,853
---------- --------
$2,341,092 $741,853
========== ========
</TABLE>
(4) Mortgage and Notes Payable to Banks
As of September 30, 1998, mortgage and notes payable to banks consisted of seven
loans, (a) an interim construction loan on the Administrative, Manufacturing and
Service Building located on Spencer Road in Denton, Texas in the amount of
$929,614 secured by a building and land, with a rate at September 30, 1998 of
8.5%, (b) an amortizing fifteen year loan in the amount of $321,190 which is
secured by the Superconducting Super Collider ("SSC") project land and buildings
in Waxahachie, Texas with a rate at September 30, 1998 of 8.5%, (c) an
amortizing loan for $2,483,929 that is secured by the land and building at Jim
Christal Road, the Finished Radiopharmaceutical Manufacturing Facility, in
Denton, Texas, (d) An interim construction loan, for the construction of the
Radioisotope Production Facility being built on 20 acres of land in Denton,
Texas, with a maximum committed amount of $5,000,000 and a current balance of
$4,944,450 with a rate at September 30, 1998 of 8.5%, (e) a promissory note for
a line of credit for a maximum committed sum of $2,500,000 and a current balance
of $2,467,418, secured by restricted stock pledged by the Chairman of the
Company, with a rate at September 30, 1998 of 10%, (f) a term loan in the amount
of $1,400,000, secured by restricted stock pledged by officers of the Company,
with a rate at September 30, 1998 of 8.5%, and (g) a term loan in the amount of
$1,000,000, secured by personal guarantees from officers of the Company, with a
rate at September 30, 1998 of 8.5%. Subsequent to September 30, 1998, the
Company entered into a new credit agreement with a bank that replaced the
Company's existing long-term debt (see Note 9). Accordingly, the Company has
classified principal payments currently payable of $5,392,131 as non-current in
accordance with the new credit agreement.
(5) Common Stock
On August 19, 1997, the Company completed a public offering of 2,200,000 shares
of its Common Stock at $9.00 per share. The Company received proceeds of
$17,805,823 after deducting underwriters' discounts and commissions. Additional
costs associated with the offering due to legal, audit, printing and other
expenses were $898,117 resulting in net proceeds of $16,907,706. On September
30, 1997 the Company completed the sale of an additional 100,000 shares of its
Common Stock as a result of the exercise of the underwriter's over allotment
option.
-8-
<PAGE>
In December 1997, the Company issued 155,000 shares of its unregistered
Common Stock to four key employees. On April 24, 1998 the Company issued 159,416
shares of its unregistered Common Stock for the purchase of Mac Isotopes, Inc.
On May 14, 1998 the Company issued 8,242 shares of its unregistered Common Stock
in connection with a product license agreement with Bracco Diagnostics Inc. On
July 31, 1998, the Company issued 29,017 shares of its unregistered Common Stock
in connection with an exclusive license agreement with Dr.
Roger M. Good.
Common Stock shares outstanding at September 30, 1998 totaled 6,567,625.
(6) Stock Options
During the nine month period ended September 30, 1998, the Company granted
options to purchase 80,700 shares of Common Stock to 38 employees under the
terms specified in the Company's 1997 Long Term Incentive Plan. The plan
authorizes grants of options to purchase up to 600,000 shares to officers,
employees and consultants. Common Stock options outstanding at September 30,
1998 totaled 392,200 of which 99,867 are eligible to be exercised.
(7) Acquisition of Subsidiary
On April 24, 1998, Company completed the acquisition of MAC Isotopes, Inc. from
its parent corporation, MACTEC, Inc., of Golden, Colorado and then merged MAC
Isotopes into International Isotopes Idaho Inc. ("I4") a newly formed subsidiary
of the Company. The Company exchanged $500,000 in cash and 159,416 shares of its
unregistered Common Stock for 100% of the stock in MAC Isotopes. I4 assumed MAC
Isotopes' exclusive five year contract, with an option to renew for three
additional years, for the utilization of the Department of Energy Advanced Test
Reactor facility located near Idaho Falls, Idaho. This acquisition was accounted
for under the purchase method of accounting and, accordingly, results of
operations of I4 have been included in the condensed consolidated statement of
operations since the acquisition date. Activities conducted by I4 include the
production of high specific activity medical radioisotopes to be used in
diagnostics and therapy of cancer and various other diseases.
As of September 30, 1998, the fair values assigned to certain assets acquired
and liabilities assumed are based upon preliminary estimates, which are subject
to change pending completion of a valuation. A summary of the assets acquired
and liabilities assumed in connection with the MAC Isotopes acquisition follows:
<TABLE>
<S> <C>
Current assets, net of cash acquired $ 2,051,822
Property, plant and equipment 41,810
Intangible assets 1,883,542
Current liabilities (308,201)
-----------
Total 3,668,973
Issuance of 159,416 shares of I3 Common Stock, valued at $19.91 per share 3,173,973
-----------
Cash paid, net of cash acquired $ 495,000
===========
</TABLE>
The results of operations of MAC Isotopes for the nine months ended September
30, 1998 and the year ended December 31, 1997 were insignificant, therefore pro
forma results of operations for those periods have not been provided.
(8) Development Income
In January 1998 the Company entered into a contract with Imagyn Medical
Technologies for development and manufacturing of radioisotope permanent implant
seeds for the treatment of cancer and other diseases, a process
-9-
<PAGE>
known as brachytherapy. The contract includes a $1,000,000 development fee to be
paid by Imagyn to the Company in installments during the first year of the
contract as certain developmental milestones are met. The contract grants Imagyn
exclusive distribution rights for the seed products covered thereby subject to
Imagyn meeting certain minimum seed purchase requirements. The Company has
estimated the value of the contract to be $9,000,000. Recent public disclosures
by Imagyn concerning its financial condition (including significant losses, a
decrease in sales revenue and a reduction in sales force) raised concerns about
Imagyn's ability to meet its contractual obligations to the Company. Imagyn has
to date met each of its financial obligations to the Company and has told the
Company it intends to meet all future obligations. However, there can be no
assurance that Imagyn will be able to meet all of its obligations under this
arrangement, in which case the Company has the right to employ other
distributors for the seed products covered by the Imagyn contract. At September
30, 1998 the Company had $150,000 in accounts receivable from Imagyn, and
$100,000 in accounts payable to Imagyn.
In August 1998 the Company entered into a contract with Guilford Pharmaceuticals
to provide an assessment of work needed to commercialize Guilford's Dopascan
product, an imaging agent for the diagnosis of Parkinson's disease. The Company
will bill Guilford for services at an hourly rate with the total value of the
contract estimated to be $44,000. The assessment will include a description of
remaining development work and an estimate of the resources required to
accomplish the work. At the completion of the project, the Company will provide
a written report setting forth its findings, results and conclusions. As of
September 30, 1998, $22,000 of services billed was reflected in the balance of
accounts receivable. This amount was collected in November 1998.
(9) Subsequent Events
On October 9, 1998 the Company executed two promissory notes with a commercial
lender for the purpose of refinancing existing short-term debt and to provide a
line of credit for accounts receivable. The financing included a $15,000,000
note to be repaid in monthly installments of principal & interest in the amount
of $154,379 through November 2003 at which time the remaining principal balance
will be due and a $5,000,000 revolving line of credit with a maturity date of
October 1, 1999. The interest rates for both notes, currently 9.25%, is one
percent over the prime rate as listed by the Wall Street Journal and resets
every six months. The loan is secured by substantially all of the Company's
assets and contains a $4,000,000 guarantee by I.L.Morgan, Chairman of the Board.
Funds received from this transaction were used in part to repay the $929,614
interim construction loan on the Administrative, Manufacturing and Service
Building located on Spencer Road in Denton, Texas, the $2,483,929 amortizing
loan secured by the land and building at Jim Christal Road, the Finished
Radiopharmaceutical Manufacturing Facility, in Denton, Texas and the $4,944,450
interim construction loan on the Radioisotope Production Facility being built on
20 acres of land in Denton, Texas.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF DEVELOPMENT STAGE ACTIVITIES
Except for historical information contained herein, the following contains
forward-looking information that is subject to certain risks and uncertainties.
The Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors including those
set forth in the "Risk Factors" section included in the Company's Form 10-KSB
filed with the Securities Exchange Commission (SEC) on March 31, 1998. The
following discussion should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Plan of Operations" included in the Form
10-KSB.
Overview
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<PAGE>
International Isotopes Inc., a Texas corporation, is a development stage company
that is executing plans to be the first commercial domestic producer of a full
range of radioisotopes, pharmaceutical grade radioisotopes and finished
radiopharmaceuticals (on a contract or joint venture basis) for commercial sale
to the nuclear medicine industry for the diagnosis and treatment of cancer and
other diseases. The Company is also developing instrumentation for radiation
therapy and medical imaging.
Radioisotopes, indispensable components of nuclear medicine, are radiation
emitting atoms that are used for both medical diagnostics and in-the-body ("in
vivo") therapeutics. When a specifically selected radioisotope is attached or
"tagged" to one of a variety of pharmaceuticals, the resulting product is known
as a radiopharmaceutical. The pharmaceutical component acts as a carrier to seek
out targeted internal organs, tumor sites and/or cells for which it has a
predetermined natural affinity. In diagnostics, the radioisotope component
provides a signal as to the location of the attached pharmaceutical as it
targets the specific organ or site. This process, in turn, is captured by
external imaging equipment such as positron emission tomography ("PET") and
single photon emission computed tomography ("SPECT") cameras. In therapeutics,
the radioisotope component provides in vivo treatment of the targeted organ,
cancerous tumor and/or cancerous cell site through the emission of either
photons or beta radiation. In addition to radiopharmaceutical applications,
radioisotopes may also be injected into the body at the site of a tumor as part
of a medical device. This process is known as brachytherapy. Radioisotopes are
produced commercially either by an accelerator (a cyclotron or a linear
accelerator) or a nuclear reactor. Accelerators are machines, which accelerate
charged particles, generally protons, to bombard a stable (non-radioactive)
isotope target, causing a reaction such that the target is transformed into a
radioactive isotope. A nuclear reactor produces radioisotopes by bombarding a
stable isotope target with neutrons.
Presently, the most commonly used radioisotopes in the United States, such as
Thallium-201, Gallium-67, Indium-111 and Palladium-103, which the Company
intends to commercially produce, are produced by four domestic
radiopharmaceutical companies, primarily for their own use, and by two foreign
manufacturers, and are used either independently or in various combinations or
"cocktails" to assist in the diagnosis of a myriad of medical conditions,
including coronary heart disease, pulmonary embolism, thyroid carcinoma, bone
cancer, brain disorders, acute cholecystitis (inflammation of the gall bladder),
gastrointestinal bleeding, renal artery stenosis and other diseases. The Company
also produces, through its subsidiary, International Isotopes Idaho Inc, the
radioisotopes iridium 192- used in remote brachytherapy for cancer of the
cervix, strontium-89 used in bone pain palliation due to bone cancer and
cobalt-60 used in the gamma knife for inoperable brain tumors.
Since the closing of the Company's Initial Public Offering in 1997, the
Company's operations have been concentrated in constructing the proton linear
accelerator ("LINAC") and related assets, redesigning and reconfiguring the
LINAC for production of radioisotopes and radiochemicals, acquiring land,
designing and constructing facilities for the production and distribution of
finished radiopharmaceuticals, radioisotopes, radiochemicals and brachytherapy
products, raising capital, selling certain accelerator components and excess
equipment and entering into strategic alliances with medical and pharmaceutical
companies, universities and other institutions.
In November 1997, the Company acquired two buildings located on twelve acres of
land in Denton, Texas, and moved all personnel and equipment to this location in
December 1997. In September 1998 the Company completed construction of the
Finished Radiopharmaceutical Manufacturing Facility within one of the buildings
which includes two aseptic manufacturing suites and six terminally sterilized
manufacturing suites, and has installed its processing instrumentation
equipment. The facility, constructed by MSS Clean Technology, Inc., an
internationally known contractor for supplying clean room manufacturing
facilities that meet FDA guidelines, will permit the Company to manufacture
products in accordance with cGMP procedures. Initial test runs of the Company's
I-125 brachytherapy seeds produced under its market and development agreement
with Imagyn Medical Technologies Inc. are currently underway. Validation efforts
for the facility and related equipment and instrumentation necessary for FDA
approval are underway.
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<PAGE>
In another building at this location, in December 1997, the Company installed a
CP-42 Cyclotron accelerator donated by M.D. Anderson Health Service Center to
the University of North Texas. This accelerator will be operated by the Company
under a lease agreement with the university and has been rebuilt for use in the
production of certain radioisotopes. Early in November 1998 the Company achieved
successful initial operations of this accelerator. When totally operational, the
variable energy accelerator will produce proton energies from 10 MeV to 42 MeV
capable of supplying many research isotopes required by medical institutions and
emerging radiopharmaceutical companies, as well as commercial isotopes including
Flourine-18, Gallium-67, Indium-111, Iodine-123 and Thallium-201.
In October 1998 the Company completed construction of its 37,000 square foot
Radioisotope Production Facility that will house the LINAC. The Radioisotope
Production Facility is located on 20.16 acres of land the Company has acquired
in a 500-acre high technology biomedical research industrial park located in
Denton, Texas, known as the "North Texas Research Center." The facility includes
the Accelerator Tunnel where the LINAC is currently being installed, the
accelerator power support building and the radiochemistry processing building.
Upon full operation of the Radioisotope Production Facility in conformity with
the Company's redesign and reconfiguration of the LINAC, the Company intends to
produce a wide range of currently used radioisotopes and the upcoming and
potentially superior diagnostic and therapeutic pharmaceutical grade
radioisotopes. Radioisotopes can be cost effectively produced with the Company's
high energy and high current linear accelerator.
The 27,000 square foot Administrative, Manufacturing and Service Building, also
located in the research park, was occupied by the Company in August 1998 and
serves as the assembly, service and maintenance area for the LINAC. The facility
also includes space and capabilities for medical instrument manufacturing as
well as various administrative functions.
RESULTS OF DEVELOPMENT STAGE ACTIVITIES
Nine and Three Month periods ended September 30, 1998 and 1997
The Company's net losses for the nine and three month periods ended September
30, 1998 were $2,631,523 and $1,056,680 respectively, as compared to net losses
of $3,322,481 and $1,013,826 for the comparable periods of 1997. Net loss per
common share for the nine and three month periods ended September 30, 1998 were
$.41 and $.16 respectively, as compared to net loss per common share of $.78 and
$.20 for the same periods of 1997.
The decrease in the loss for the nine month period was largely due to 1) the
receipt of development income related to the Company's ongoing product
development contracts, 2) the capitalization of internal labor costs as the
Company concentrates its efforts on the construction of the radioisotope
production accelerators as well as radiochemistry and radiopharmaceutical
facilities and 3) the acquisition of International Isotopes Idaho, Inc.
Revenues for the nine and three-month periods ended September 30, 1998 were
$1,833,840 and $962,826, respectively, as compared to $152,015 and $16,828 for
the same periods in 1997. Gross profit for the nine and three-month periods
ended September 30, 1998 was $840,088 and $451,125, respectively, as compared to
$72,728 and $5,979 for the same periods in 1997. The increase in revenues was
attributable to the acquisition of International Isotopes Idaho, Inc., a wholly
owned subsidiary, and product development contracts.
Operating expenses increased slightly to $3,706,500 and $1,527,683 for the nine
and three-month periods ended September 30, 1998, respectively, compared to
$3,295,938 and $1,062,262 for the same periods of 1997. Salaries and contract
labor expenses for the nine and three-month periods ended September 30, 1998
were $842,771 and $393,425, respectively, as compared to $2,657,724 and $729,690
for the same periods of 1997, a decrease of
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<PAGE>
$1,814,953 and $336,265. The decreases in salaries and contract labor were
attributed to the capitalization of internal labor costs. General and
administrative and sales and marketing expenses totaled $2,580,780 and
$1,021,655 for the nine and three-month periods ended September 30, 1998
respectively as compared to $474,993 and $261,954 for the same periods of 1997,
an increase of $2,033,787 and $759,701. The increase in general and
administrative and sales and marketing costs were attributable to increases in
personnel for production, marketing, quality assistance, safety and
administrative personnel as the Company expanded its organizational structure
and began limited operations.
Interest income during the nine and three-month periods ended September 30, 1998
was $259,268 and $19,925, respectively, as compared to $71,780 and $64,522 for
the comparable periods of 1997. This increase for the nine-month period was
attributable to the investment of funds received from the Company's initial
public offering completed in August 1997. Interest income decreased during the
three-month period ended September 30, 1998 as the proceeds received in the
initial public offering were being used to fund the Company's operations.
Interest expense of $47 was recorded for the both the nine and three-month
periods ended September 30, 1998, as the Company was capitalizing all
debt-related interest payments during this time due to ongoing asset
construction, as compared to $186,342 and $37,039 recognized as interest expense
for the comparable periods of 1997.
LIQUIDITY AND CAPITAL RESOURCES
From November 1, 1995 (inception) through May 1997, the Company obtained funds
primarily through principal shareholder guaranteed bank loans, sales of
accelerator components and excess equipment, sales of Common Stock in a private
placement to investors and from loans from stockholders and directors. During
the third quarter of 1997, the Company completed an underwritten public offering
of 2,200,000 shares of Common Stock, generating $16,907,706 in net proceeds to
the Company after commissions and legal, audit, printing and other expenses. The
Company received additional funds of $801,133, net of underwriters' discount, in
September 1997, as a result of the exercise of the underwriter's overallotment
option. The proceeds from this offering have been fully disbursed in the
following manner. Approximately $3,200,000 of funds from the public offering
were utilized to extinguish all Company debt outstanding at the time of the
offering, with the exception of the construction loan for the Company's
Administration, Manufacturing and Service Building. Disbursements of
approximately $11,949,329 were expended for the purposes of engineering, design
and the purchase and installation of machinery, equipment and capital assets.
Funds in the amount of $770,000 were utilized for the purchase of a subsidiary
and license agreements. Funds in the amount of $1,789,510 were utilized for
working capital purposes, including personnel, facilities, insurance and other
operating expenses. In response to market demands, funds designated in the Use
of Proceeds portion of the Company's August 1997 Prospectus for the purpose of
acquisition of radioisotopes and for the development and manufacture of the
proposed medical imaging camera and pulsed plasma device were redirected to the
construction of its Finished Radiopharmaceutical Manufacturing Facility.
The Company has experienced several changes to its financial ratios during the
past year due to construction of assets and related financing activities.
Current assets to current liabilities ratio at September 30, 1998 was 1 to 1.72
as compared to 1 to 1.19 for the corresponding period ended September 30, 1997.
The total assets to total liabilities ratio for the corresponding periods were
1.97 to 1 and 1 to 1.19. Shareholder equity decreased to $17,193,090 from
$17,697,203.
Refinancing of short-term debt, subsequent to September 30, 1998 has provided
capital for the completion of construction projects currently underway. In
addition, this refinancing provides access to funds for the purchase and/ or
lease of radiopharmaceutical equipment (see note 9 of the notes to condensed
consolidated financial statements). Management is continuing negotiations for
additional debt or equity funding to allow for increased facility expansion for
the production of finished radiopharmaceuticals to respond to additional demands
from potential customers. Management anticipates, based on its currently
proposed plans and assumptions relating to its operations, that the current cash
resources, proposed financing, income from operations and sale of assets held
for sale will be
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<PAGE>
sufficient to sustain operations for at least the next 12 months. However, there
can be no assurance that the Company will be able to secure financing on terms
satisfactory to the Company.
YEAR 2000 ISSUE
The Year 2000 will have a broad impact on the business environment in which the
Company operates due to the possibility that many computerized systems across
all industries will be unable to process information containing dates beginning
in the year 2000. The Company has established an enterprise-wide program to
assess the extent of the Company's exposure to Year 2000 issues and to formulate
and execute a plan to effectively mitigate the effects of the Year 2000 problem
on the Company's operations.
The Company has established an Executive Steering Committee to provide oversight
to the implementation of the Year 2000 program and is responsible for
reviewing and approving the plans, activities, and decisions associated with
identifying and mitigating the risk associated with the Year 2000 problem. The
committee also reviews budgetary information, provides guidelines and acts as a
liaison to the Board of Directors, which has the ultimate responsibility for the
budget and mitigation of the Year 2000 problem. Responsibilities for
implementing the plan have been assigned and the Company is in the process of
establishing an accurate inventory of equipment, systems, software, and any
embedded software that could be affected by the Year 2000 problem.
The company anticipates it will have substantially completed an inventory of all
information technology and other equipment by December 30, 1998 and will then
address the Year 2000 compliance of such equipment.
In addition to the assessment of in-house systems, the Company is currently
assessing the readiness of its vendors for the Year 2000 issue. The Company has
commenced inquiries of key vendors regarding the status or the respective Year
2000 compliance procedures, and in certain cases, certifications regarding Year
2000 compliance have been obtained. The Company intends to develop contingency
plans in the event key vendors do not provide the Company with satisfactory
evidence of the readiness to handle Year 2000 issues. The Company intends to
make every reasonable effort to assess the readiness of its key vendors and to
create action plans to address any identified risks.
Because the Company's assessment is not yet complete, the Company has not yet
estimated the total cost of the Year 2000 remediation including modification,
upgrade, or replacement of systems and equipment. The Company expects to
identify and resolve all Year 2000 issues that could materially and adversely
affect its business operations by March 31, 1999. The total cost of the
remediation efforts has not yet been estimated and unanticipated failures by key
vendors, as well as failures by the Company to execute its own remediation
efforts, could have a material adverse effect on the cost of the project and its
completion date. As a result, there can be no assurance that the Year 2000
problem will not have a material adverse effect on the Company's financial
position or results of operations.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
In July 1998 the Company issued 29,017 shares of its Common Stock to Dr. Roger
M. Good and Endo Tech Inc. for the world-wide rights under Patent No. 5,342,383
and an FDA approved 510(k) for the use, sale, lease, manufacture and
distribution of sputter coated spherical I-125 brachytherapy seeds. The Company
believes that these seeds will be superior in encapsulation safety and dose
distribution for the treatment of prostate cancer and other tumors. The Company
made an initial payment of $250,000 at the time of the execution of the
agreement. An additional payment of $250,000 is due to be paid when 100,000
seeds have been sold commercially. The Company issued the shares,
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<PAGE>
representing $500,000 of Common Stock, upon receipt of permission from the FDA
to market I-125 seeds. Additionally, the Company will issue options for 60,000
shares of its Common Stock as various annual sales volume goals are reached, and
agreed to pay a running royalty calculated as a percentage of net sales price,
based on various sales price levels. The issuance of shares of the Company's
Common Stock in connection with the license agreement with Dr. Good was exempt
from registration under the Securities Act of 1933, as amended, pursuant to
Section 4(2) thereunder.
Common Stock shares outstanding at September 30, 1998 totaled 6,567,625.
Item 5. Other Information
In January 1998 the Company entered into a contract with Imagyn Medical
Technologies for development and manufacturing of radioisotope permanent implant
seeds for the treatment of cancer and other diseases, a process known as
brachytherapy. The contract includes a $1,000,000 development fee to be paid by
Imagyn to the Company in installments during the first year of the contract as
certain developmental milestones are met. The contract grants Imagyn exclusive
distribution rights for the seed products covered thereby subject to Imagyn
meeting certain minimum purchase requirements. Imagyn has to date met each of
its financial obligations to the Company and has told the Company it intends to
meet all future obligations. However, in light of recent public disclosures by
Imagyn, concerning ongoing liquidity issues, there can be no assurance that
Imagyn will be able to meet all of its obligations, in which case the Company
has the right to seek other distributors for the seed products covered by the
Imagyn contract.
In August 1998 the Company entered into a contract with Guilford Pharmaceuticals
to provide an assessment of work needed to commercialize Guilford's Dopascan
product, an imaging agent for the diagnosis of Parkinson's disease. The Company
will bill Guilford for services at an hourly rate with the total value of the
contract estimated to be $44,000. The assessment will include a description of
remaining development work and an estimate of the resources required to
accomplish the work. At the completion of the project, the Company will provide
a written report setting forth its findings, results and conclusions. As of
September 30, 1998, $22,000 of services billed was reflected in the balance of
accounts receivable. This amount was collected in November 1998.
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<PAGE>
Item 6. Exhibits and Reports on Form 8 - K
Exhibits:
27.1 Financial Data Schedule
Reports on Form 8-K:
The Company filed Form 8-K on October 26, 1998 regarding the restructuring of
long-term financing and the occupancy of the facilities.
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