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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal period ended December 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission file number
0-22923
INTERNATIONAL ISOTOPES INC
(Exact name of registrant as specified in its charter)
Texas 74-2763837
(State of incorporation) (IRS Employer Identification Number)
1500 Spencer Rd.
Denton, Texas 76205
(Address of principal executive offices) (zip code)
940-323-2610
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
--------------------------------------------------------------
COMMON STOCK, $.01 PAR VALUE
Securities registered under Section 12(g) of the Exchange Act:
--------------------------------------------------------------
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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As of March 20, 2000 the number of shares of common stock, $.01 par value,
outstanding was 9,623,726 shares.
Documents Incorporated by Reference:
The information called for by Part III is incorporated by reference to the
definitive proxy statement for the annual meeting of shareholders of the Company
to be held on May 11, 2000, which will be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 1999.
INTERNATIONAL ISOTOPES INC
FORM 10-K
TABLE OF CONTENTS
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Page No.
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Part I.
Item 1. Business ................................................................. 3
Item 2. Properties ............................................................... 16
Item 3. Legal Proceedings ........................................................ 17
Item 4. Submission of Matters to a Vote of Securities-Holders .................... 17
Part II.
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters .......................................... 17
Item 6. Selected Financial Data .................................................. 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................. 19
Item 7a. Quantitative and Qualitative Disclosure about Market Risk................. 24
Item 8. Consolidated Financial Statements......................................... 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ...................................... 25
Part III.
Item 10. Directors and Executive Officers of Registrant ........................... 25
Item 11. Executive Compensation ................................................... 25
Item 12. Security Ownership of Certain Beneficial Owners
and Management ......................................................... 25
Item 13. Certain Relationships and Related Transactions ........................... 25
Part IV.
Item 14. Exhibits, Financial Statement Schedule
and Reports on Form 8-K .................................................. 25
Power of Attorney .................................................................. 27
Signatures ......................................................................... 28
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PART I
Except for the historical information contained herein, the matters
discussed in this Form 10-K are forward-looking statements that involve risks
and uncertainties, including the timely availability and acceptance of new
products, the impact of competitive products and pricing, the management of
growth and the other risks detailed herein, including, without limitation, the
risks discussed in this Item 1, "Business" and in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
actual results that the Company achieves may differ materially from any
forward-looking statements due to such risks and uncertainties.
ITEM 1. BUSINESS
GENERAL
International Isotopes Inc, a Texas corporation (the "Company" or
"I(3)"), is planning to produce, market and distribute a broad range of products
used in diagnostic and therapeutic nuclear medicine, research and industry. Our
strategy is to establish a position in the market as the first U.S. based
independent commercial manufacturer of a broad range of radioisotopes,
pharmaceutical grade radioisotopes and finished radiopharmaceuticals, including
medical devices (on a contract or joint venture basis) for the nuclear medicine
industry.
There are no current significant U.S. suppliers of commercial
radioisotopes or pharmaceutical-grade radioisotopes and, primarily due to
commitments of existing government-owned facilities, there is no consistent
domestic commercial supplier of promising new radioisotopes for use in research,
clinical trials and nuclear medicine. Further, many of the promising new
radioisotopes have short half-lives, less than 24 hours, necessitating
expeditious manufacture and distribution to hospitals, clinics and research
institutions. The Company calculates that, due to its central location near
major airports and its expected operating efficiencies, it will be able to serve
this market.
Radioisotopes are radiation emitting atoms that are indispensable
components of nuclear medicine 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 components
provide 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
charged particles or photon radiation to locally treat the tumor site. In
therapeutic radiopharmaceutical "in vivo" applications, radioisotopes may also
be placed into the body at the site of a tumor as part of a medical device. This
process is known as permanent implants or remotely inserted and retractable
brachytherapy.
Radioisotopes are produced commercially either by an accelerator (a
linear accelerator or a cyclotron ) or a nuclear reactor. Accelerators are
machines that accelerate charged particles, generally protons, to bombard a
stable (non-radioactive) isotope target, causing a reaction such that the target
isotope is transformed into a radioactive isotope. A nuclear reactor produces
radioisotopes by bombarding a stable isotope target with neutrons.
Our operations to date have been primarily concentrated in acquiring
the proton linear accelerator ("LINAC") and related assets, redesigning and
reconfiguring the LINAC for production of radioisotopes, acquiring land and
designing and constructing facilities for the production and distribution of
radioisotopes, radiopharmaceuticals and brachytherapy products. We have raised
equity and debt capital , hired key management and operational personnel,
established processes and production methods, marketing arrangements, quality
assurance and quality control, and distribution and customer service, and
entered into strategic alliances with medical and pharmaceutical companies,
universities and other institutions and have begun initial production.
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In May 1996 we acquired from the State of Texas the equipment,
proprietary designs and certain intellectual property rights comprising the
LINAC, which was part of the U.S. government's 53 mile Superconducting Super
Collider ("SSC ") project. The State of Texas had acquired all of the SSC
project's land, facilities, equipment and intellectual property from the U.S.
government as part of a settlement among the State of Texas, the U.S. government
and the DOE following Congress's termination of the SSC project in 1994. The
LINAC has been redesigned and reconfigured, and has been installed in the
Company's Radioisotope Production Facility to produce an energy level and beam
intensity calculated to produce radioisotopes more efficiently than the
commercial proton cyclotron accelerators that are currently in use in the United
States.
We are conducting testing and final modifications for operation of the
Radioisotope Production Facility and the LINAC in conformity with the Company's
redesign and reconfiguration. The challenges we have encountered while bringing
the LINAC into regular operations were more complicated than originally
estimated. Although the commissioning phase of the installation has taken longer
than planned, we are currently successfully completing target runs, have
produced commercial quantities of Thallium-201 and believe that the LINAC will
achieve production levels necessary to produce sales revenues originally
forecast for this year.
We completed our initial public offering in September 1997. In 1998,
through Texas State Bank, we refinanced construction and other real estate loans
in the amount of $15,000,000, established a $5,000,000 revolving receivable line
of credit and obtained $5,000,000 in equipment lease financing. From December
1998 through February 1999 we closed a private placement of securities resulting
in additional equity of $9,500,000 in 1998 and $1,938,845 through February of
1999, net of commissions and expenses. In April 1999, the Company initiated a
private placement of securities resulting in additional equity of $8,115,852,
net of commissions and expenses. In May of 1999, the Company completed an
offering of $10,000,000 in non-voting, redeemable, convertible, preferred stock
with a 5% coupon, which was funded $5,000,000 in May and $5,000,000 in October
1999. During February 2000, we closed a private placement of securities
resulting in additional equity of $5,394,545, net of commissions and expenses.
Our 35,000 square foot building housing the Radioisotope Production
Facility was completed in September 1998. The Radioisotope Production Facility
is located on 20 acres of land the Company acquired in a 500-acre high
technology biomedical research industrial park located in Denton, Texas, known
as the "North Texas Research Center." We have also completed a 27,000 square
foot building housing the Administration, Manufacturing and Service Facility for
corporate offices and construction of production equipment. In addition we
constructed a 25,000 square foot finished radiopharmaceutical production suite
in the radiopharmaceutical Manufacturing Facility and have also remodeled the
separate 12,000 square foot building located at this site for installation of
the Cyclotron used in the production of short-lived isotopes and certain
research isotopes.
Our facilities are strategically located adjacent to a principal
highway approximately 24 miles from the Dallas/Fort Worth International Airport
and approximately 14 miles from Alliance Industrial Airport. The radioisotopes
and radiopharmaceuticals we manufacture will be packaged for immediate transport
by same day or overnight carriers, which have distribution hubs at these
airports. Most radioisotopes used in nuclear medicine have limited half-lives
and the proximity of the Company's facilities to these airports will enable us
to deliver our radioisotopes and radiopharmaceuticals to most locations in the
United States within 4 hours to 24 hours of production.
INDUSTRY OVERVIEW AND TARGET MARKETS
The nuclear medicine industry consists of a variety of different market
segments. International Isotopes competes in several of these markets.
We manufacture brachytherapy seeds for use in the treatment and cure of
prostate and other cancers. Prostate cancer is the most prevalent form of cancer
among US men, with 179,300 new cases diagnosed in 1999. This market was
estimated to be $180 million in the US in 1999 and is projected to grow at an
annual rate of 20%. The European market has just begun to develop and is
expected to grow quickly over the next few years. When fully developed, the
European market is expected to roughly equal the US market.
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We have built and validated the Radiopharmaceutical Manufacturing
Facility which is fully compliant with all FDA and Texas Bureau of Radiation
Control regulations. This facility was designed specifically for the purpose of
performing radiopharmaceutical contract manufacturing for a wide variety of
customers. There is no other company in the US offering a similar service. A
number of small to medium size pharmaceutical companies are developing
radiopharmaceutical products. These companies do not have the resources to build
dedicated facilities for their products. They also do not have the expertise to
scale up the manufacturing process in a manner that meets radiation safety
guidelines and that will pass inspection by the FDA. We estimate the total
retail market potential of the products currently in phase II or phase III
clinical trials that will need to be manufactured by contract manufacturers is
approximately $700 million, of which approximately 25% will be paid to the
contract manufacturer.
The Company operates two accelerators located in Denton, Texas. In
addition, the Company's wholly owned subsidiary International Isotopes Idaho Inc
("I4") has a long term lease to use a reactor in Idaho for the production of
radiochemicals. Radiochemical use ranges from industrial to the treatment of
life threatening diseases. The radiochemical market is stable with a few
products experiencing considerable growth. For instance, production of
Iodine-125 and Palladium-103 are growing rapidly to meet the demand for
brachytherapy seed production. Demands for other isotopes are expected to grow
substantially in the next few years due to therapeutic products coming on the
market. Yttrium-90 and Holmium-166 are examples of future growth products. We
estimate the current radiochemical market to be $150 million. The following
table provides an overview of our estimates of the radioisotope marketplace:
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Estimated Annual
Radioisotope Product Use Market ($000)
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Thallium-201 Myocardial perfusion imaging $ 40,000
Strontium-89 Bone Pain Palliation 10,000
Holmium-166 Cancer treatment 1,000
Ytrrium-90 Cancer treatment 3,000
FDG/F-18 Cancer diagnosis 22,000
Iodine-123 Thyroid cancer diagnosis 15,000
Gallium-67 Cancer and inflammation diagnosis 5,000
Strontium-82 Heart function diagnosis 2,000
Copper-64 Imaging for cancer and metabolic disorders 2,000
Iodine-125 Prostate cancer therapy 15,000
Palladium-103 Prostate cancer therapy 26,000
Germanium-68 PET camera calibration source 1,000
Cobalt-57 Gamma camera calibration source 3,000
Iridium-192 Industrial radiography, brachytherapy sources 3,000
Cobalt-60 Tumor irradiation 2,000
Nickel-63 Gas chromatograph detector unit 200
Barium-133 Transmission source for gamma camera 200
Cobalt-60 recycling Industrial radiation devices 100
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$ 150,500
===============
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PRODUCTS
RADIOISOTOPES AND RADIOCHEMICALS
We will produce a full line of radioisotopes using a 42 MeV cyclotron,
our LINAC, and the reactor that is under contract to our Idaho subsidiary. We
are establishing a network of accelerators and reactors to supplement our
production capabilities for those radioisotopes we do not produce and to provide
back-up capabilities. We will use our radioisotopes as well as other purchased
isotopes to support our contract manufacturing business and to sell
radioisotopes to a variety of customers. These customers include the large,
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established firms who need backup supplies and additional supplies as their
market share grows or to replace the production of aging accelerators. We will
sell radioisotopes to medium sized users to support clinical trials of new
radiopharmaceuticals and to small users to support research and development. We
have held discussions with many potential customers and have compiled an
extensive database of their requirements. We intend to use the Internet to
inform customers of the availability, quantity and delivery of radioisotopes we
expect to produce.
Our Idaho subsidiary produces and sells reactor-produced materials.
These products are used in industrial, research and medical applications. In
addition to bulk radioisotopes, the Idaho facility provides a wide variety of
hot cell services, including inspection, photography, and destructive and
non-destructive testing of highly radioactive equipment.
FINISHED RADIOPHARMACEUTICALS
In 1999 we completed the validation of our 25,000 square foot
Radiopharmaceutical Manufacturing Facility. This facility was built to provide
contract manufacturing services to our customers. Some products, such as
radiolabeled monoclonal antibodies, can not be sterilized with an autoclave
because the high temperature in the autoclave would destroy the antibodies.
These products require ultra-clean filling operations. The facility is designed
to handle these products and includes processing equipment for cleaning and
sterilizing components and filling in aseptic conditions.
The Radiopharmaceutical Manufacturing Facility will be used to
manufacture products on a contract manufacturing or joint venture basis. It is
expected that the finished products manufactured in our facility will be
marketed by third parties. An example is the agreement signed with Bracco
Diagnostics in which Bracco will market and sell a finished radiopharmaceutical
for the diagnosis of heart disease. In February 2000 we announced an agreement
with NeoRx Corporation to manufacture NeoRx's Skeletal Targeted Radiotherapy
Product (STR) for treatment of multiple myeloma for Phase III clinical trials.
As part of this agreement, NeoRx will provide $1.3 million to fund the design
and construction of the manufacturing facility. We are in active discussions
with a number of other companies to act as their contract manufacturer.
Agreements may be structured as joint ventures, long-term agreements, alliances
with one or more companies or straight contract manufacturing in order to
reliably provide quality products and services.
MEDICAL DEVICES
We began manufacturing an FDA 510 (k ) approved and patented Iodine-125
implantable radiation brachytherapy seed in 1999. This product is marketed under
an exclusive agreement with Imagyn Medical Technologies Inc. The agreement
grants Imagyn an exclusive, worldwide license to market the brachytherapy seeds
provided minimum sales levels are attained. In June 1999 Imagyn signed a
sole-source agreement with Novation, the supply company of VHA Inc. and the
University HealthSystem Consortium. Novation serves the purchasing needs of
6,400 health care organizations nationwide. In order to meet the market demand
for seeds we began investing in automated production facilities at the beginning
of 1999. We anticipate continued investment in automation through 2000 with a
goal of supporting 20-30% of the seed market demand, although there can be no
assurance we will be able to capture this percentage of the market. We also
intend to manufacture a Palladium-103 brachytherapy seed using similar
production technology as that used in the Iodine-125 seed production.
CUSTOMER SERVICE AND DISTRIBUTION
We have established a customer service department and order entry
function to support our current and future products. Customer orders are
processed with an integrated computer system with links to finance, production
planning, manufacturing, purchasing and distribution. A flexible system is being
built to accommodate a wide range of marketing arrangements with partner
companies. Orders will be received from the product end-users, or through a
partner's customer service operation.
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The customer service function will receive orders by toll-free
telephone, fax, e-mail or a direct electronic interface with a marketing
partner. Order acknowledgments, shipment confirmations and other customer
reports will be transmitted electronically and automatically to the marketing
partner. We are investigating establishing a full e-commerce capability on our
web site, so that orders can be received and processed directly from the
Internet.
A distribution network has been established to ensure reliable delivery
of time-sensitive products. Contracts have been negotiated with courier services
such as FedEx, UPS and AirNet and dedicated computer systems for each carrier
have been installed on the Company's premises. These computer systems have been
integrated with the Company's system so that customer and order information is
automatically transferred to the carrier computers. A procedure is in place to
track shipments to their destinations, and to provide this information to
customers.
A network of specialty air couriers has also been established for
specific delivery requirements. This provides 24-hour, 7-days a week service for
raw material radioisotopes shipped into the company's facilities for further
processing, and for finished goods shipped to end-user customers. A ground
transport network is being established for less time-sensitive products, for
local deliveries and for inter-site transport.
Distribution staff is certified for the transport of dangerous goods
under regulations of the Department of Transportation ("DOT") and the
International Air Transport Association ("IATA"). Shipping facilities and
procedures are all designed to comply with applicable DOT and IATA requirements.
Both the customer service and the distribution operations are being
designed to eventually accommodate a volume of more than 1,000 orders and
shipments per day.
COMPETITION
RADIOISOTOPES AND RADIOCHEMICALS
Within the United States, there currently is no independent producer of
a full range of radioisotopes for commercial sale. Radioisotopes produced by
cyclotron accelerators are manufactured principally by pharmaceutical companies
for their own radiopharmaceutical products. Some hospitals, medical institutions
and universities also produce certain short-lived radioisotopes utilizing small
cyclotron accelerators. The most commonly used radioisotopes in the United
States are produced by Dupont Pharmaceutical Co., Mallinckrodt Medical, Inc.,
Nycomed Amersham and Theragenics, Inc., primarily for their own use. The largest
independent North American supplier of radiochemicals is MDS Nordion in Canada.
They produce cyclotron and reactor products and are a large producer of
molybdenum for use in technetium generators. McMaster University in Canada
produces and sells iodine-125. The University of Missouri Research Reactor
produces a number of radiochemicals, including Phosphorus-32, Phosphorus-33 and
Holmium-166.
FINISHED RADIOPHARMACEUTICALS
The large radiopharmaceutical companies produce and sell their own
products. They do not provide contract manufacturing services to other
companies. There are a number of small companies capable of producing products
to support pre-clinical, Phase I and Phase II studies, but these companies
generally do not have the facilities or expertise to support Phase III or
commercial production. International Isotopes is the only independent US company
offering radiopharmaceutical contract manufacturing services to biotech and
pharmaceutical companies.
MEDICAL DEVICES
In addition to International Isotopes, there are three main competitors
in the prostate brachytherapy seed market. Nycomed Amersham (NYE) is the market
leader. They manufacture iodine-125 seeds in their Arlington Heights facility.
NYE is the only company in the prostate seed business that manufactures and
markets their own product. Theragenics (TGX) is second in market share and is
the leading manufacturer of palladium-103 seeds. Indigo Medical, a Johnson &
Johnson company, markets their seed. The next largest
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seed producer is North American Scientific (NASI). The majority of NASI's sales
are with their Iodine-125 seed, though they added a palladium-103 seed in 1999.
Mentor Corp. is NASI's marketing partner. A number of other companies have
announced intentions to enter the prostate seed market. However, we expect that
the large investment and technological barriers that must be overcome to achieve
significant production quantities will deter most of these companies.
SUPPLY OF RAW MATERIALS
Enriched stable isotopes, which are used as targets (i.e. bombarded
with protons or neutrons to produce radioisotopes), constitute the principal raw
materials required for the manufacture of accelerator-produced radioisotopes.
The principal United States source for enriched stable isotopes has been the DOE
Oak Ridge National Laboratory in Oak Ridge, Tennessee, which relies on
Congressional funding for continuing production. Suitable enriched isotopes are
also available from Russia, Israel, The Netherlands and other foreign sources.
The energy and current of the LINAC are sufficient to produce most radioisotopes
from non-enriched stable isotopes, which are in abundant supply. The production
process will require various proprietary chemical separation techniques that
will produce additional cost, although these costs may be offset in part by
reduced cost of raw materials. We have been able to purchase enriched stable
isotopes from the DOE's inventory and from other companies in sufficient
quantities to meet our current needs.
In July of 1999, we entered into an agreement with the DOE to purchase
Iodine-125 from their reactor facility in Albuquerque, NM. The purpose of the
agreement is to secure a reliable domestic source of supply for radioactive
material in support of our production of brachytherapy seeds. The agreement
calls for our investment of $280,000 in facilities and capital equipment at the
Sandia facility in return for a guaranteed availability of over 1,000,000 mCi of
material over a three year period. The contract contains a sliding scale price
for the material based on schedule performance and product availability.
MANUFACTURING
During 1998 and 1999, we completed construction of the 35,000 square
foot Radioisotopes Production Facility. This building houses both the LINAC and
radiochemistry operations. Construction efforts on the LINAC continued and we
assembled the ion source and the radio-frequency quadropole accelerator in March
1999, and completed the installation of the drift tube accelerators several
months later. For the balance of the year we continued testing and
commissioning. We ran for 8000 micro-amp hours in January 2000 and during that
time discovered several design issues that required alteration. In February and
March we made several design improvements that should ensure that we are fully
operational in time to meet our delivery requirements for Thallium-201 in the
third quarter of this year.
It is anticipated that the LINAC will eventually operate with eight
hour production schedules with processing completed within two hours. During the
latter part of 1999, regulatory approval was obtained for the Radioisotope
Production Facility, which included a review of the intended manufacturing
process and inspection for compliance with cGMP regulations. In addition,
authorization was received from the Texas Department of Health, Bureau of
Radiation Control ("TDH-BRC") that allows for full operations of the LINAC.
The 42 MeV Cyclotron accelerator obtained from M.D. Anderson Cancer
Center and leased from the University of North Texas was installed in a 12,000
square foot facility for the production of short-lived radioisotopes. The
facility houses the accelerator, radiochemistry processing and operations that
are anticipated to function 5 days a week, 12 hours a day with production
schedules as short as two hours. We have received all licenses required from the
TDH-BRC issued for production of the radiochemicals we plan to produce in the
Cyclotron during 2000. Among these are Flourine-18, Thallium-201 and Iodine-123.
Construction of our finished radiopharmaceutical production suite
within the Radiopharmaceutical Manufacturing Facility, originally scheduled for
completion in the beginning of 1998 was delayed until late 1998. This delay
resulted in subsequent delays in the certification, validation and full
operation of the facility.
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Limited operation of the facility commenced in December 1998. Validation of the
facility, equipment and processes for the production of our I-125 brachytherapy
seeds for the treatment of prostate cancer was completed early in 1999. The
facility operates with three shifts six days a week as needed to meet
radioisotope and radiochemical production schedules to coincide with
radiopharmaceutical production. Further validation of the equipment and
processes required for the production of the finished radiopharmaceutical
Thallium-201 was completed in late 1999.
Quality assurance and quality control are performed according to cGMP
regulations. The Company maintains a quality control ("QC") unit that is
responsible for the quality of all components, containers, in-process materials,
labeling and final radiochemical or radiopharmaceutical products. We also
maintain a quality assurance unit responsible for reviewing and controlling
basic and training records and for the Company's compliance with cGMP
regulations. In-process materials are tested for identity, strength, quality and
purity as appropriate and approved or rejected by the QC unit before, during and
after the production process.
PATENTS AND PROPRIETARY RIGHTS
There were several patents originally covering various components of
the LINAC. These patents were developed at various U.S. government national
laboratories or by government contractors and, accordingly, were either owned or
licensed by the U.S. government. The U.S. government has permitted certain of
these patents to lapse; however, at least one of such patents licensed to the
U.S. government remains in effect. In conjunction with acquiring the LINAC from
the State of Texas, the Company acquired the intellectual property rights in the
LINAC assets as granted to Texas under a settlement agreement among the DOE, the
U.S. government and the Texas National Research Laboratory Commission ("TNRLC").
The U.S. government retains the right to use intellectual property owned by it
for non-commercial government purposes.
The Company, through its employees and consultants, has developed and
owns the proprietary rights to significant modifications and improvements to the
LINAC for the production of radioisotopes on a commercial scale. We intend to
file patent applications for some of these modifications and improvements and to
protect others as trade secrets. There can be no assurance, however, that
patents on such modifications and improvements will be issued, or if issued that
such patents, or modifications and improvements protected as trade secrets will
be successfully defended.
Since the founding of the Company, we have been both developing and
acquiring intellectual property in three major areas of technology. Since the
acquisition of the LINAC which was part of the US Government's SSC project, the
Company has been redesigning, reconfiguring, and making improvements to the
LINAC in order for it to operate in a multi-energy multi-targeting configuration
at energy levels up to seventy million electron volts ("70 MeV") and to be able
to manufacture a large variety of radioisotopes. We have also entered into a
number of different joint development programs with third parties in connection
with both the design and enhancement of the LINAC that include exclusive rights
to technology, know how, designs and patents.
In addition, the Company has acquired and developed technology in
connection with its program to manufacture radiopharmaceutical products. For
example, it has acquired an exclusive license from Dr. Roger Good and EndoTech,
Inc. to certain patents and related technical know-how relating to radioactive
seeds for use as temporary or permanent implants in the brachytherapy treatment
of cancer. Development efforts have made further improvements to the
brachytherapy seed technology potentially patentable.
These programs have resulted in the development of inventions, improvements,
discoveries and know-how which the Company protects through relying on a
combination of patent, copyright, trademark and trade secret laws and through
the use of confidentiality agreements with employees, independent contractors
and the third-party developers. We have already filed a number of patent
applications in connection with the improvements to the LINAC and are in the
process of preparing additional patent applications on other LINAC improvements
that will be filed in the future. We are also preparing a patent application on
an invention relating to a potential brachytherapy product. The Company has also
filed trademark applications for
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protecting its trademarks, "INTERNATIONAL ISOTOPES" and "I(3)" in numerous
countries around the world. We will continue to protect our intellectual assets
through an aggressive intellectual property policy.
GOVERNMENT REGULATION
The Company has obtained various permits from the Texas Department of
Health Bureau of Radiation Control (TDH/BRC) to use sources of radiation. These
include (1) radioactive material licenses (a) to manufacture and distribute
radiochemicals and radiopharmaceuticals and to perform acceptance testing on the
Cyclotron and associated components; and (b) to develop imaging systems; (2)
Registrations to (a) perform acceptance testing on the LINAC and associated
components and facilities; and (b) operate various lasers; and (3) a Radioactive
Sealed Source and Device (SSD) Registry sheet for the Iodine-125 brachytherapy
source. The SSD Registry sheet is required for regulatory agencies to authorize
medical facilities to receive and use the Iodine-125 brachytherapy source. In
addition, the Company has received a 510(k) from the United States Food and Drug
Agency (FDA) to allow medical use of the Iodine-125 brachytherapy source and has
received permits from the TDH Bureau of Food, Drug and Medical Devices to
manufacture and distribute medical products in Texas.
REGULATION OF RADIOISOTOPE PRODUCTION AND RADIOACTIVE WASTE. The
manufacture of radioisotopes and radiopharmaceuticals is subject to extensive
federal and state regulation. Prior to commencing operations, we obtained
approval of our Radioisotope Production Facility and the Radiopharmaceutical
Manufacturing Facility from the TDH-BRC and, prior to transporting
radiopharmaceuticals across state lines, from the FDA. In addition, the DOT
regulates the quantity and method of shipment of radioactive materials, and sets
specifications with respect to the class of shipping containers used. The
Radioisotope Production Facility and the Radiopharmaceutical Facility will be
subject to continual inspection for compliance with cGMP regulations, which
require that the Company manufacture radioisotopes and maintain manufacturing,
testing and quality control records in a prescribed manner. Since the
Radioisotope Production Facility and the Radiopharmaceutical Manufacturing
Facility will not handle "special nuclear materials" (i.e. nuclear fuels and
weapons grade uranium, thorium and plutonium) and, therefore, will not be
designated as a "fixed nuclear facility," we are not subject to regulation by
the United States Nuclear Regulatory Commission (the "NRC") or the DOE except in
the International Isotopes Idaho operations. Texas Department of Health and FDA
regulations provide that a radioisotope production facility may not be used for
any purpose other than the production and distribution of radioisotopes,
radiopharmaceuticals and medical devices.
We are required to file a Drug Master File ("DMF") with the FDA for
each radioisotope proposed to be produced and used in radiopharmaceutical
products. Radioisotopes delivered to pharmaceutical companies for coupling with
drug carriers to create their own proprietary radiopharmaceuticals generally
will be covered by NDAs filed by the respective pharmaceutical company, which
will make reference to our applicable DMF. The DMF is a compilation of
information relating to the proposed product, required by the FDA, to determine
the identity, purity, strength and manufacturing documentation used for the
product and also contains analytical methods documentation and compliance with
established specifications. The DMF does not contain any clinical information,
but becomes a part of the customer's NDA. In some cases, it may be necessary for
the customer to generate clinical data for the radiopharmaceutical incorporating
the radioisotope. The Company is negotiating with various pharmaceutical
companies to manufacture radioisotopes under their existing NDA's, the success
of which cannot be assured.
Pursuant to the Low Level Radioactive Waste Policy Act of 1980, states
are required to assure the safe disposal of mildly radioactive materials. The
disposal of radioactive waste is regulated in Texas by the Texas Natural
Resources Conservation Commission ("TNRCC"), which enforces federal regulations
promulgated by the NRC and the EPA and its own regulations. Regulatory issues
arising from the handling, retention and disposal of solid and liquid
radioactive waste are governed by the Texas Regulations for the Control of
Radiation. Radioactive waste produced by us will fall into the category of
low-level radioactive waste as the production and processing of radioisotopes
generate a certain amount of low-level, solid radioactive waste. Most of this
waste will be in the form of used laboratory expendables, such as latex gloves
and absorbent paper used to protect laboratory counter tops from direct exposure
to spilled materials. Most radioactive material handled by the Company is
short-lived and will be held for decay until it is indistinguishable from
background radiation. It will then be appropriately disposed of as
non-radioactive waste. Some radioactive material will be disposed of through the
usual commercial channels used by universities, medical institutions and
industrial users of radioactive materials. Texas Regulations permit a limited
amount of specified radioisotopes, generally
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<PAGE> 11
those with half-lives of less than 300 days and which have decayed through ten
half-lives, to be disposed of by transport to a commercial municipal waste
facility.
The production of radioisotopes at the Radioisotope Production Facility
includes the chemical separation of radioisotopes. This may lead to the
production of a mixture of low-level radioactive materials, water, organic
solvents and inorganic salts. As is common practice, the Company will hold such
materials on-site for a period of time until the radioisotopes decay to stable
isotopes, at which time the materials can be moved off-site for disposal by
commercial waste handlers. Liquids resulting from the processing of radioactive
products or from the washing down of hot cells or other decontamination
procedures will be stored in the Radioisotope Production Facility. The purpose
of such storage is to provide for on-site decay to levels of activity where it
is permissible to dispose of the liquids through discharge into the sewerage
system. It is calculated that its storage capacity will be sufficient to permit
the holding of radioactive material until the products decay to negligible
levels.
REGULATION OF BRACHYTHERAPY DEVICES. We are also registered as a
medical device manufacturer for brachytherapy devices with the FDA. As such, the
Company may be inspected from time to time by the FDA for compliance with cGMP
regulations. These regulations require that we manufacture our products and
maintain our documents in a prescribed manner with respect to manufacturing,
testing and control activities. Further, we will be required to comply with
various FDA requirements for labeling, reporting, malfunction and misuse
associated with the use of our devices, as well as product malfunctions that
would likely cause or contribute to death or serious injury if the malfunction
were to recur. In addition, the FDA prohibits an approved device from being
marketed for unapproved applications.
OTHER REGULATIONS. In the event the Company enters into agreements with
suppliers to acquire neutron-produced research and therapeutic radioisotopes or
accelerator-produced radioisotopes for distribution by us, we will be subject to
regulations of the Texas Department of Health regarding the handling of
radioactive materials, but we believe we will not be subject to regulation by
the NRC or any other agency for the accelerator production of the radioisotopes,
including attendant radioactive waste in connection with such production, which
will be the responsibility of the contracting supplier.
Any radiopharmaceuticals developed under arrangements between the
Company and medical institutions and universities will require, prior to sale,
approval of the FDA, which has established mandatory procedures and standards
for the clinical testing, manufacture and marketing of therapeutic and
diagnostic products. This process is protracted and costly, and involves
preclinical animal studies, the filing of an investigational new drug
application, human clinical trials and the approval of a new drug application
which will be the responsibility of our pharmaceutical company partner. We will
also will be subject to regulation by the EPA, the TNRCC and OSHA with respect
to the radioactive content of water and air discharges and the handling and
disposal of radioactive waste. We intend to comply with all such laws and
regulations and have constructed our facilities and maintain operations to
prevent effluents in order not to pose any unusual hazards to nearby residents,
employees or visitors.
PRODUCT LIABILITY AND INSURANCE
The use of our radioisotopes in radiopharmaceuticals and in clinical
trials may expose us to potential product liability which is inherent in the
testing, manufacture, marketing and sale of human diagnostic and therapeutic
products. In addition, the failure to effect timely delivery of radioisotopes
may cause a delay in a scheduled test or procedure or result in the functional
loss of radioactivity of the radioisotope, thereby exposing us to potential
liability. We currently have product liability insurance and intend to increase
coverage of product liability insurance as production levels increase. However
there can be no assurance we will be able to obtain or maintain such insurance
on acceptable terms or that any insurance obtained will provide adequate
coverage. Claims or losses in excess of any liability insurance coverage we
ultimately obtain could have a material adverse effect on our business. As of
December 31, 1999, the level of our product liability insurance was not in
compliance with a debt covenant. In March 2000, the bank granted the Company a
waiver for 1999, but has required that the level of insurance be increased in
2000.
11
<PAGE> 12
EMPLOYEES
As of February 29, 2000, we had 140 full-time employees, consisting of
thirteen executive officers, 119 additional production, scientific and
professional personnel and 8 administrative personnel. In addition, we had 25
temporary production workers. Staffing plans for 2000 include hiring
approximately fifteen to twenty more people, while reducing our temporary
workers, which will include employees for radioisotope and radiopharmaceutical
production, health and safety, development of international projects, product
distribution and customer service, and radiopharmaceutical marketing. We believe
our relationship with our employees is good. None of our employees are
represented by a union and there have been no work stoppages to date.
RISK FACTORS
LIMITED OPERATING HISTORY. During 1996 we acquired major equipment for
radioisotope production and in 1997 completed our initial public equity funding,
established a management team and hired key personnel. In 1998 we acquired and
constructed facilities, acquired equipment for production, established
procedures for current good manufacturing practices (cGMP) and obtained
regulatory approvals for initial manufacturing and distribution. The Company did
not generated significant sales during this development period and we do not
expect to generate significant sales until later in 2000 at the earliest. Sales
are dependent on the activities and success of our marketing partners. We have
encountered delays due to issues in ramping up production methods, weather,
vendors and facilities certification and may continue to experience additional
delays and unexpected costs related to continuing facilities construction,
development, marketing, distribution, regulatory matters and other unforeseen
difficulties. We cannot assure you when or if we will achieve profitability.
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FUNDING. In December
1998 and January 1999 we raised approximately $11.4 million through a private
placement of our equity, net of issuance costs. In April 1999 we initiated a
private placement of securities resulting in additional equity of $8,115,852. In
May 1999, we completed an offering of $10,000,000 in non-voting, redeemable,
convertible preferred stock with a 5% coupon, which was funded $5,000,000 in May
and $5,000,000 in October 1999. We raised an additional $5,800,000 in February
2000 through a private placement of our common stock. However, we still
anticipate that we will need substantial additional funds to enter into
manufacturing contracts, expand finished pharmaceutical manufacturing, increase
radioisotope production, continue research and development relating to the
application of our technology, and complete the FDA approval process for our
manufacturing and processing facilities. We plan to use a substantial portion of
current funds:
o for general administration and overhead, including salaries
and consulting fees,
o to repay debt in accordance with its terms,
o to continue production and commercialize our products,
o to apply for regulatory approval (if any) of our proposed
products,
o to develop and test pre-radioisotope production methods and
chemical separation techniques,
We intend to seek additional capital through public or private sales of
our securities, including equity or debt securities, in order to fund our
activities. We may not be able to obtain adequate funds, whether through
financial markets or collaborative arrangements with strategic partners or from
other sources, on acceptable terms when needed. If we are unable to secure
sufficient funds, we may have to delay, scale back or eliminate certain or all
of our research and development programs or license third parties to
commercialize products or technologies that we would otherwise seek to develop
ourselves. This would adversely affect our long-term profitability.
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<PAGE> 13
ACCUMULATED DEFICIT; ANTICIPATED LOSSES. From inception (in November
1995) through December 31, 1999 we had generated $6,609,556 in revenues and had
accumulated a deficit (including preferred stock dividends and returns) in the
amount of $27,178,528, which includes non-cash compensation charges of
approximately $2,570,312. The products scheduled for manufacturing and
distribution may require significant development and testing activities that,
together with projected general and administrative expenses, may cause operating
losses for the near future. We cannot assure you that our manufacturing,
marketing, distribution and development activities will be successful, or that
any proposed medical diagnostic and therapeutic products will generate net
operating income.
DEBT FINANCING; SECURITY INTEREST IN ASSETS. We have $5 million line of
credit that is available to us to the extent we are able to generate future
accounts receivable from the sale of our products. We also have a $15 million
bank loan that is secured by substantially all of our assets and subjects us to
numerous restrictive covenants, financial and otherwise. We were not in
compliance with several of the restrictive covenants of the above bank loan. We
obtained a waiver of the technical violations, which included the deferral for
one year, from 1999 to 2000, of a minimum revenue covenant. Based on our current
projections, we believe we will be able to comply with the minimum revenue
covenant in 2000. If we default on the loan, the bank would be entitled to
exercise certain remedies including taking possession of and selling our land,
facilities, equipment, and intellectual property.
UNCOMPLETED LINAC. Our LINAC design is based on advanced designs of the
linear accelerators at the Brookhaven National Laboratory and the Los Alamos
National Laboratory, but the LINAC's configuration differs from such linear
accelerators in that it:
o is configured to operate at a significantly lower
energy level (30-70MeV as compared to 200MeV and
800MeV, respectively),
o utilizes modern computer technology, electronics and
particle accelerating structure,
o produces a higher beam intensity for radioisotope
production (1.0mA as compared to 0.1mA to 0.15mA,
respectively), and
o utilizes beams of protons that can be extracted at
three (3) different energy levels and at variable
intensities directed to six (6) targets, to produce
multiple radioisotopes simultaneously rather than one
radioisotope at a time.
We have experienced extensive delays in preparing the LINAC for
commercial production of radioisotopes. We cannot assure you that the LINAC will
be successful and that it will operate as designed. Delays in the operation of
the LINAC or its inability to operate as designed would adversely affect our
business plan and require us to purchase radioisotopes from other sources.
EQUIPMENT OPERATIONS- Although we have completed or are completing the
LINAC, the Cyclotron and both the Radiopharmaceutical Manufacturing and the
Radioisotopes Production Facilities, we will continue to be dependent upon the
facilities and equipment to function properly in order to provide consistent,
timely shipments of products that meet our customers' specifications. If we
experience equipment failures or breakdowns we may be unable to satisfy our
customers which could result in the cancellation of contracts and the loss of
revenues.
FACILITIES RISK. We have expended approximately $42 million procuring
production equipment, designing and constructing our Radioisotope Production
Facility, Radiopharmaceutical Manufacturing Facility and Cyclotron facility and
acquiring our International Isotopes Idaho operations. Federal and state
governmental authorities have granted a majority of the necessary approvals for
operations, however, we
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<PAGE> 14
cannot assure you that each or any of these facilities will obtain all
applicable and necessary governmental approvals, permits, licenses and
validation. If such approvals, permits, licenses and/or validation are not
obtained, we cannot assure you that our facilities will be able to operate as
intended or will produce products that are marketable. In the event that any or
all of these facilities do not become operational for any reason, we will have
expended substantial sums without any significant return on our shareholders'
investment and our financial condition and operations will be materially
adversely affected.
LIMITED SOURCES FOR RAW MATERIALS. Enriched stable isotopes, which are
used as targets (i.e. they are bombarded with protons in accelerators or
neutrons in reactors to produce radioisotopes), constitute the principal raw
materials required for the manufacture of radioisotopes. The principal United
States source for enriched stable isotopes is the Oak Ridge National Laboratory
in Oak Ridge, Tennessee, which relies on government funding for continuing
production. Enriched stable isotopes are also currently available from the
Netherlands, Russia, Israel, China and other foreign sources. Failure to obtain
an adequate supply of enriched stable isotopes could materially adversely impact
our ability to manufacture radioisotopes. The energy and current of the LINAC
are sufficient to produce most radioisotopes from non-enriched stable isotopes,
which are abundant in supply. Production processes utilizing non-enriched stable
isotopes will require various proprietary chemical separation techniques and may
be less cost effective. Although we have developed many of these techniques, we
have not been able to test them all and some or all may be unsuccessful.
TECHNOLOGY PROBABILITY AND EARLY STAGE OF RADIOISOTOPE AND
RADIOPHARMACEUTICAL PRODUCTION. We manufacture proprietary products used for the
production of standard radioisotopes for the radiopharmaceutical industry and
are seeking manufacturing contracts for marketing of these isotopes through
major pharmaceutical companies, hospitals, health care organizations and
radiopharmacies as well as industrial companies. In addition to the
manufacturing of proprietary products, we will investigate a variety of new
radioisotopes and radiopharmaceuticals that have application to applied
diagnostic and therapeutic methods. The primary radioisotopes we plan to produce
have been in general use in nuclear medicine and have been approved by the FDA
for distribution by various pharmaceutical companies. However, some of our
proposed future products are being developed for us by others and are in the
early developmental stage, require significant further development, testing and
regulatory clearances and are subject to the risks of failure inherent in the
development of products based on innovative technologies. We cannot predict
whether these research and development activities will result in any
commercially viable products or applications. Due to the extended testing and
regulatory review process required before marketing clearance can be obtained,
we do not expect to be able to commence commercial production of any new
radiopharmaceuticals that are classified as diagnostic or therapeutic agents or
which may require pre-market approvals for clinical use unless we can
manufacture them under our customers' approved licenses.
GOVERNMENT REGULATION. The Texas Department of Public Health, the FDA
(if not previously approved) and comparable agencies in other countries must
approve our proposed products prior to manufacture, sale and distribution. The
regulatory process for radioisotope, pharmaceutical grade radiochemicals,
finished radiopharmaceutical products and medical devices which are classified
as diagnostic and/or therapeutic agents or that may require pre-market testing
and approval for clinical uses is lengthy and expensive. Assurance cannot be
given to you that, after the expenditure of time and funds, we will obtain
regulatory clearance for any of our proposed future products. With respect to
those products that have received, or may in the future receive, regulatory
clearance, regulators will continue to review such products and procedures on a
periodic basis. If the regulators, after inspection, determine previously
unknown problems exist or decide that we have failed to comply with the
applicable current good manufacturing practices (cGMP) regulatory requirements,
then they will require corrective action, or may impose restrictions on the
products or order us to withdraw our products from the market until compliance
is demonstrated. In addition, each of our customers will be required to have
appropriate licenses to possess and use radioactive materials, radiochemicals,
radiopharmaceuticals and medical devices. Prior to sale, distribution and
transporting radiopharmaceuticals across state lines, approval from the FDA must
be obtained as to which there can be no assurance. In addition, the DOT
regulates the quantity and method of shipment of radioactive materials, and sets
specifications with respect to the class of shipping containers used. Our
Radioisotope Production Facility is subject to continual inspection for
compliance with the State of Texas regulations and current good manufacturing
practices, which require that the Company manufacture radioisotopes and maintain
manufacturing, testing and quality control records in a prescribed manner. The
Company is also subject to
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<PAGE> 15
regulation by the United States Environmental Protection Agency ("EPA"), the
Texas Natural Resources Conservation Commission, and the United States
Occupational Safety and Health Administration ("OSHA") with respect to the
radioactive content of water and air discharges and the handling and disposal of
radioactive waste. Our failure to obtain any required approvals or delays
thereof or our failure to comply with any such regulations would have a material
adverse effect on the Company.
Certain radioisotopes manufactured by our subsidiary, International
Isotopes Idaho Inc, are subject to the U.S. Nuclear Regulatory Commission
regulations. To the extent these regulations are or become burdensome, our
business development will be adversely affected.
LIMITED NATURE OF PATENT PROTECTION. The possibility exists that
competitors are developing or will develop and distribute products similar to
ours or those of our customers. Partial security from competition is obtained by
relying on the protection afforded us under the United States and foreign patent
laws. Others may design similar products that, although not infringing upon the
patents used by us, could function adequately and be distributed into the same
market. It is possible that others may have pending patent applications that are
presently secret but that, if issued as patents, could impede our ability to
produce and market one or more planned products. It is also possible that other
parties have non-patented but prior existing products or designs that have never
been made public and therefore are not known to us or the industry in general. A
competitor could introduce such a product into the market without infringing
upon our patents. If any such competing non-infringing products are produced and
distributed, our customers' profit potential could be limited, resulting in a
decrease in our contract manufacturing gross margin.
LACK OF PROPRIETARY RIGHTS; DEPENDENCE UPON LICENSES FROM AFFILIATES.
Our officers, directors and founders have granted the Company certain rights to
patents, intellectual property, and technology and know how. The right to
acquire exclusive licenses under certain patents and patent applications,
intellectual property, technology, know-how, trade secrets and copyrights may be
obtained from other affiliates on a case by case basis. We may not be able to
negotiate certain terms and conditions of these licenses in a way that is
acceptable to us. In such event, we may have expended substantial amounts in
investigating radioisotopes, radiopharmaceuticals, proprietary products or
processes without the ability to commercialize the related products.
We cannot assure you that we will ever develop any further proprietary
technology that can be patented, or that any issued patents will provide us with
any competitive advantages or will not be challenged by any third parties.
Furthermore, it is possible that others will independently develop similar
technologies or duplicate a technology developed by us or, if patents are
issued, design around the patented aspects of a technology developed by us. It
is also possible that technology we have developed could infringe patents or
other rights owned by others who are unwilling to license their technology to us
on economically acceptable terms.
To the extent that consultants, key employees or other third parties
apply technological information independently developed by them or by others to
our proposed projects, disputes may arise as to the proprietary rights to such
information which may not be resolved in our favor. Our scientific advisors and
other consultants are employed by and/or have consulting agreements with third
parties and any inventions discovered by these individuals may or may not become
our property.
DEPENDENCE UPON KEY PERSONNEL AND CONSULTANTS. Our current operations
are dependent on Dr. David M. Camp, President and Chief Executive Officer; Mr.
Tommy Thompson, Executive Vice President; Ms. Joan Gillett, Chief Financial
Officer; Mr. Virgil Simmons, Senior Vice President International Marketing; Dr.
Homer Hupf, Vice President for Research and Radiochemistry; and Mr. Will
Lepeska, Vice President for Marketing; We are highly dependent upon these
personnel and the loss of any of these individuals would have a material adverse
effect on us. We are also dependent on certain founders and key shareholders for
transfer of intellectual property. We have obtained key person life insurance on
the lives of certain of the principals, however, the monetary amount received
may not be enough to compensate us for the loss of their services.
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<PAGE> 16
The Company will continue to seek to hire other operations, production,
processing and engineering personnel. Competition for qualified employees among
radioisotope, radiopharmaceutical and biotechnology companies, especially during
this tight labor market, is intense, and if we lose any of these persons, or are
unable to attract, retain and motivate highly skilled employees required for the
expansion of our activities, it would adversely affect our business plans. There
is no assurance we will be able to retain our existing personnel or attract
additional qualified employees.
DEPENDENCE ON THIRD PARTIES; SIGNIFICANT ADDITIONAL FUNDS FOR
MANUFACTURING AND MARKETING. Currently our manufacturing and production
facilities are sufficient for the production of the major radioisotopes,
radiochemicals, finished radiopharmaceuticals and medical devices we intend to
produce. We intend to distribute, or market directly, on a commercial scale some
of our proposed products. However, in most cases we will use corporate partners
or other entities to market our products. It is not assured that we will be able
to enter into any arrangements for marketing of our proprietary products or
acquire the additional capital to conduct such activities. Additional
manufacturing, marketing and distribution facilities will require the
expenditure of substantial additional funds and the hiring of additional
personnel.
COMPETITION. Our business plan includes the contract manufacturing of
proprietary finished radiopharmaceutical products for others, standard
radioisotope and pharmaceutical grade radiochemical production, new radioisotope
and radiochemical development and product commercialization. Many companies,
research institutes and universities are working in a number of radioisotope,
radiopharmaceutical or biotechnology disciplines similar to our fields of
interest. In addition, many companies are engaged in the development of, or
offer, products that may be competitive with the proposed diagnostic and
therapeutic radioisotopes and proprietary products we intend to manufacture for
others. Most of these entities have substantially greater financial, technical,
manufacturing, marketing, distribution and/or other resources than the Company.
These companies may be in various phases of clinical testing of radioisotope and
radiopharmaceutical products intended for various diagnostic and therapeutic
processes related to brain, cardiac function and cancer diagnosis and treatment.
Accordingly, other companies may succeed in developing products earlier, or that
are safer or more effective than those we propose to develop, and in obtaining
FDA clearances for such products before our customers obtain approval.
RISK OF PRODUCT LIABILITY. As we successfully develop our products, we
may be exposed to product liability claims. We might also be required to
indemnify affiliates against any product liability claims incurred by them as a
result of products developed by the Company under licenses granted by these
affiliates. We believe we currently carry adequate product liability insurance;
however, we cannot assure you that we will in the future be able to obtain
sufficient amounts of insurance to protect us against such liability at a
reasonable cost. If we experience an uninsured or inadequately insured product
liability claim, our business and financial condition could be materially
adversely affected.
ITEM 2. PROPERTIES
In November 1997, the Company purchased an 80,000 square foot
office/manufacturing facility and a 12,000 square foot warehouse referred to as
our "Radiopharmaceutical Manufacturing Facility". Total cost for this facility,
located on 12 acres at 3100 Jim Christal Road, Denton, Texas, including
improvements for offices, furnishings, HVAC, and a suite of production clean
rooms and equipment was approximately $9,300,000. The 12,000 square foot
warehouse houses the 42 MeV Cyclotron, donated by MD Anderson Cancer Center to
the University of North Texas, which has been remodeled and is being operated by
the Company under a ten year lease with UNT to produce short-lived and research
radioisotopes.
In early 1998, the Company completed construction of a 27,000 square
foot facility, for administration, manufacturing and services located on 1.6
acres in Denton, Texas at a cost of $ 1,260,000. The Company is using the
building for equipment manufacturing and in January 2000 moved the
executive/administrative offices there. Also in 1998, the Company completed
construction of the building housing its 35,000 square foot Radioisotope
Production Facility devoted to the LINAC at an approximate cost of $7,524,000.
This building is located on 20 acres of land in an Industrial Research Park in
Denton, Texas acquired by the Company in 1996.
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In March 1998, the Company purchased 115 acres of land in Waxahachie,
Texas from the State of Texas at a cost of $424,000. This site includes a
building with 25,059 square feet that can be used as a secondary accelerator
production and testing site.
ITEM 3. LEGAL PROCEEDINGS
On January 4, 2000, a petition was filed in the 393rd Judicial District
Court, Denton County, Texas, Cause No. 2000-60001-393, Carl Seidel vs.
International Isotopes, Inc. Carl Seidel ("Seidel"), the former CEO and
President of the Company, alleges a breach of contract with regard to the
payment of severance in connection with his departure from the Company and with
regard to reimbursement for tax liability incurred by Seidel in connection with
the exercise of Seidel's incentive stock options. Seidel seeks $270,375.00 in
severance and $373,523.00 as reimbursement for tax liability. The parties are
attempting to resolve the dispute before discovery begins. If settlement efforts
are unsuccessful, the Company intends to vigorously defend the case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Prior to the completion of the Company's IPO in August 1997, there was
no established public trading market for the Company's Common Stock. At that
time the Company's Common Stock commenced trading on the NASDAQ SmallCap Market
under the symbol of "INIS". The Company is also listed on the Boston Stock
Exchange under the symbol "ITL". High and low sales prices reported by Nasdaq
during the periods indicated are shown below:
<TABLE>
<CAPTION>
Fiscal Year Quarter High Low
<S> <C> <C> <C>
1998 1st $ 35.50 $ 8.875
1998 2nd $32.375 $16.688
1998 3rd $ 23.25 $ 9.75
1998 4th $18.875 $ 10.50
1999 1st $16.625 $ 8.625
1999 2nd $16.875 $ 7.625
1999 3rd $ 10.00 $4.3125
1999 4th $ 8.50 $4.5625
</TABLE>
On March 15, 2000, there were 256 holders of record of the Common Stock
(although the Company believes that the number of beneficial owners of its
Common Stock is approximately 3,500). The closing price on March 15, 2000 of a
share of common stock was $7.625. The Company has never paid any cash dividends
on its common stock, and the Board of Directors does not anticipate paying cash
dividends on common stock in the near future. The Company intends to retain any
future earnings to provide funds for the operation and expansion of its
business.
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RECENT SALES OF UNREGISTERED SECURITIES
In the fall of 1998 the Company initiated a private placement of Units
of its securities exclusively to accredited investors including certain officers
and directors of the Company. Each Unit consisted of 16,000 shares of common
stock at $12.50 per share and warrants to purchase an additional 16,000 shares
at $13.75 per share. From December 1998 through February 1999, the Company sold
59 units representing 944,000 shares of common stock and warrants to purchase an
additional 944,000 shares to 38 accredited investors for aggregate consideration
of $11,800,000. The sale of the Units was exempt pursuant to Section 4(2) of the
Securities Act of 1933 and Regulation D promulgated thereunder. The shares of
common stock sold and the shares of common stock issuable upon exercise of the
warrants were subsequently registered with the Securities and Exchange
Commission for resale by the purchasing accredited investors pursuant to a
Registration Statement on Form S-3 which became effective on February 10, 1999.
In April 1999, the Company sold units representing 924,410 shares of
common stock and warrants to purchase an additional 924,410 shares to accredited
investors including certain officers and directors of the Company, for an
aggregate consideration of $8,412,131. The sale of the Units was exempt pursuant
to Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder. The shares of common stock sold and the shares of common stock
issuable upon exercise of the warrants were subsequently registered with the
Securities and Exchange Commission for resale by the purchasing accredited
investors pursuant to a Registration Statement on Form S-3 which became
effective in July 1999.
In May 1999, we completed an offering of $10,000,000 in non-voting,
redeemable, convertible preferred stock with a 5% coupon, which was funded in
May and October 1999. This transaction was exempt pursuant to Section 4(2) of
the Securities Act of 1933 and Regulation D promulgated thereunder.
In February 2000, we closed a private placement of common stock
representing 1,054,652 shares of common stock and warrants to purchase an
additional 527,326 shares for an aggregate consideration of $5,800,586. The sale
of the common stock and warrants was exempt pursuant to Section 4(2) of the
Securities Act of 1933 and Regulation D promulgated thereunder.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Period of
Year ended December 31, November 1, 1995
------------------------------------------------ (inception) through
1999 1998 1997 December 31, 1996
------------ ------------ ------------ -------------------
<S> <C> <C> <C> <C>
Revenues $ 3,689,524 $ 2,009,165 $ 135,765 $ 775,102
------------ ------------ ------------ ------------
Cost of Revenue 2,850,950 1,130,574 79,287 263,440
Operating costs and expenses 14,610,731 6,537,948 4,515,834 883,637
------------ ------------ ------------ ------------
Operating loss $(13,772,157) $ (5,659,357) $ (4,459,356) $ (371,975)
------------ ------------ ------------ ------------
Net loss $(14,097,606) $ (5,519,405) $ (4,370,960) $ (834,446)
------------ ------------ ------------ ------------
Preferred stock dividends, deemed dividend and
accretion of discount (2,356,111) -- -- --
Net loss applicable to common stockholders $(16,453,717) $ (5,519,405) $ (4,370,960) $ (834,446)
============ ============ ============ ============
Net loss per common share - basic and diluted (2.03) (0.84) (0.92) (0.43)
============ ============ ============ ============
Weighted average common shares outstanding
basic and diluted 8,110,521 6,534,987 4,750,561 1,918,538
============ ============ ============ ============
Cash and cash equivalents and investments $ 2,990,300 $ 6,371,704 $ 13,284,194 $ 331,397
Property and equipment (net) 40,734,736 32,350,399 6,280,760 1,060,816
Total assets 51,549,026 45,302,703 21,122,038 3,007,179
Long-term debt, excluding current portion 17,006,704 15,258,597 3,053,818 --
Redeemable convertible preferred stock, net of discounts 8,392,475 -- -- --
Total stockholders' equity 21,095,722 23,892,622 15,925,640 309,908
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
This overview contains forward-looking statements that include, but are
not limited to, the Company's expectations regarding its future financial
condition and operating results, product development, business and growth
strategy, market conditions and competitive environment. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors disclosed in this document.
Since its incorporation in November 1995, the Company's operations have
been concentrated in acquiring its proton linear accelerator ("LINAC") and
related assets, redesigning and reconfiguring the LINAC for production of
radioisotopes, developing production methods, acquiring land, designing and
constructing facilities for the production and distribution of radioisotopes,
radiopharmaceuticals 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.
During 1999, we concentrated our efforts on making a successful
transition from a development stage enterprise to an operating manufacturing
company with a focus on finished radiopharmaceuticals. The steps
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<PAGE> 20
needed to make this transition proved to be more costly and complex than we had
anticipated, causing us to miss many of our milestones. As the year progressed
we found it necessary to make strategic changes in our structure and plans. Some
of those are described below:
o The Company and its Board of Directors recognized the need to restructure
and enhance executive management to ensure that they were providing the
skills appropriate for the situation. David M. Camp, Ph.D, who possesses a
background in chemical engineering and extensive experience in the
management of technology companies and manufacturing operations, assumed
the roles of President and Chief Executive.
o William Nicholson, a member of the Board of Directors since March of 1997,
assumed the position of Chairman of the Board, a position previously
occupied by Ira Morgan, Ph.D. Mr. Nicholson, formerly the Chief Operating
Officer of Amway Company, has been an active supporter of International
Isotopes Inc, providing guidance, advice and financial assistance when
necessary.
o We realigned the responsibilities of senior staff to shift to a more
product-oriented focus and assigned specific employees to be responsible
for all key aspects of advancing particular products to the marketplace.
o During 1999, the Regulatory/Quality Assurance organization increased its
depth of experience by adding additional key personnel and technical staff.
Alan Johnson, who has a Masters Degree in microbiology and 29 years of
experience in the radiopharmaceutical manufacturing industry, joined us as
Director of Regulatory Affairs. The FDA audited our operations and the
results were satisfactory. We received several observations which were
subsequently cleared within 60 days. Several customers, including Imagyn
and NeoRx also audited our facility. These results were also satisfactory
and we met or exceeded their requirements. An additional 510(k) for our
brachytherapy seed product with the FDA. We also submitted a DMF for the
manufacture of Thallium-201 to the FDA. Key validations were successfully
completed and significant efforts expended to support our customer's
pending SNDA filing.
o We continued efforts to modify the LINAC for commercial application and on
May 14, 1999 achieved proton energy levels of 30 million electron volts
(MeV). However, our progress slowed during the balance of the year as we
dealt with many technical issues. We have experienced many problems that
were inherent in the original design of the LINAC as created for the SSC
Project. As a consequence, the challenges to bring the LINAC into regular
operation were more complicated than originally estimated, however, we
continue to believe that it has the potential to be the most potent, cost
effective and adaptable commercial radioisotope production system in the
United States. Although the commissioning phase of the installation has
taken longer than planned, we are currently successfully completing target
runs, have produced commercial quantities of Thallium-201 and believe that
the LINAC will achieve production levels necessary to produce sales
revenues originally forecast for this year.
o Although the LINAC is designed to achieve a maximum proton energy level of
70MeV and a beam intensity of 1 milliampere, about five times the beam
intensity of most commercial cyclotrons, we plan to operate a minimum of
one year at an energy level of 30 MeV. At this level, the LINAC can produce
all the radioisotopes we have forecast for sale in the next two years. The
modified LINAC is designed to irradiate up to six targets simultaneously,
with each target, if required, producing a different radioisotope. We are
currently operating on the first two target stations and will be adding
additional stations over the balance of the year as required.
o We continued to operate the 42 MeV Cyclotron accelerator for planned
production of Iodine-123, Flourine-18 and limited amounts of Thallium-201
radioisotopes. Our efforts last year related to the Cyclotron, which is
leased from the University of North Texas, were concentrated on installing
the necessary production capability, demonstrating optimum production
parameters, achieving regular runs and recruiting and training operators.
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<PAGE> 21
o I(3) began commercial production of I-125 Brachytherapy seeds in small
quantities in late 1998. We realized that we would need to develop more
robust processes to scale up from small production quantities into large
commercial mass production of the Brachytherapy seed product. For the past
eighteen months, the Company has had a team of scientists and engineers
designing and building state of the art robotic manufacturing facilities
using automation techniques similar to those of the semiconductor industry.
By building inspection and quality checks into the robotic processes, we
believe we are creating the necessary manufacturing methods to insure
quality products while increasing manufacturing efficiency and decreasing
labor costs. Another issue, especially important during the current tight
labor market, is that the automated processes reduce the level of skill
required to operate the manufacturing line. The end result of the automated
manufacturing facilities will be a lower cost, higher quality product which
we believe will translate into a significant competitive advantage. The
first units of robotics manufacturing completed process qualifications
early in 2000 and installation of the next wave is underway. We are
continuing the ramp-up to allow us to manufacture large scale commercial
quantities of seeds with additional capacity being added to meet future
marketing requirements.
o As we entered the final phases of construction on the LINAC and the
Cyclotron, we added personnel to our radiochemistry department and
completed the purchasing and installation of the necessary equipment. The
process of locating and employing personnel with radiochemical skills and
experience was also difficult and time-consuming. We continue to face
challenges in the recruiting area. During the latter part of 1999 and early
2000, we have concentrated resources in developing the processes related to
the radiochemical separation process, especially in production of
radioisotopes like Iodine-123.
During October 1999 we entered into an agreement with NeoRx Corporation
to design the commercial manufacturing process line for their Skeletal Targeted
Radiotherapy product (STR) for the treatment of multiple myeloma. This was an
important achievement for us; we plan to use this as a model for other
commercialization projects for the development of finished radiopharmaceuticals.
In February 2000, we announced that NeoRx had awarded us the contract to be
responsible for all aspects of the manufacturing of this product. As part of the
agreement, NeoRx will provide $1,300,000 to fund process qualification, quality
control, packaging and shipping as well as provide the materials for Phase III
clinical trials.
The Company's subsidiary, International Isotopes Idaho Inc., completed
the year with several significant events. We were able to establish three year
minimum quantity sales agreements for Iridium-192. We believe these sales
agreements will generate a 20% per year increase in the volume of Iridium-192
sales. In addition, we were able to expand our positions in the Advanced Test
Reactor from 39 to 43 positions to support the growing volume of bulk
radioisotope sales. An additional objective we achieved was to support
initiating the production of more "value added" products by starting two
multi-year contracts for the production of sealed source devices, implementing
cGMP for the production of pharmaceutical grade radiochemical Sr-89 and source
recovery/Co-60 recycling.
The Company has obtained various permits from the Texas Department of
Health Bureau of Radiation Control (TDH/BRC) to use sources of radiation. These
include (1) radioactive material licenses (a) to manufacture and distribute
radiochemicals and radiopharmaceuticals and to perform acceptance testing on the
Cyclotron and associated components; and (b) to develop imaging systems; (2)
Registrations to (a) perform acceptance testing on the LINAC and associated
components and facilities; and (b) operate various lasers; and (3) a Radioactive
Sealed Source and Device (SSD) Registry sheet for the Iodine-125 brachytherapy
source. The SSD Registry sheet is required for regulatory agencies to authorize
medical facilities to receive and use the Iodine-125 brachytherapy source. In
addition, the Company has received a 510(k) from the FDA to allow medical use of
the Iodine-125 brachytherapy source and has received permits from the TDH Bureau
of Food, Drug and Medical Devices to manufacture and distribute medical products
in Texas.
21
<PAGE> 22
RESULTS OF OPERATIONS
Year ended December 31, 1999 compared to year ended December 31, 1998
REVENUES
Revenues for 1999 were $3,689,524 as compared to $2,009,165 in 1998, an
increase of $1,680,359. Product sales were $2,775,696 for 1999 as compared to
$1,422,711 for 1998, an increase of $1,352,985. I4, a wholly owned subsidiary,
provided $950,229 of this increase while initial sales of brachytherapy seeds
provided an additional $402,738 during 1999. Product developmental income,
related to our ongoing product development contracts, was $206,038 for 1999 as
compared to $522,000 for 1998, a decrease of $315,962. The decrease was related
to our emphasis on brachytherapy seed manufacturing as opposed to outside
product development. Sales of our accelerator components were $707,790 for 1999
as compared to $64,454 for 1998, an increase of $643,336. Sales of accelerator
components acquired from the State of Texas increased due to increased efforts
to market the components.
COST OF REVENUES
Cost of revenues included $2,274,029 for radioisotope sales for 1999 as
compared to $1,035,517 for 1999. The increase of $1,238,512 is attributable to
increased sales from I4, and initial sales of brachytherapy seeds during 1999.
Cost of development income was $2,631 for 1999 as compared to $62,830 for 1998.
This decrease is attributable to our emphasis on brachytherapy seed
manufacturing as opposed to outside product development. Cost of accelerator
components sold was $574,290 for 1999 as compared to $32,227 for 1998. The
increase in the cost of accelerator components sold was due to the increase in
accelerator components sold and the write off of costs associated with
non-marketable components.
OPERATING COSTS AND EXPENSES
Operating expense for 1999 was $14,610,731 as compared to $6,537,948 in
1998, an increase of $8,072,783 or 123%. Product development costs accounted for
$6,151,320 of the total increase. General and administrative expenses for 1999
were $4,347,395 as compared to $3,553,669 for 1998, a 22.3% increase, and
salaries and wages increased by $1,033,692, both as a result of increased
facilities expenses and personnel additions as required for production
activities. Research and development expenses, included in operating expenses
above, were $406,651 in 1999 as compared to $281,706 in 1998 as a result of
developing processes related to medical devices. Product development expense was
$6,976,589 in 1999 as compared to $825,269 in 1998. Product development expenses
are costs associated with the development and manufacturing of test products
prior to commercial production. Sales and marketing expense for 1999 was
$791,575 as compared to $697,530 for 1998.
OTHER INCOME (EXPENSE)
Other income (expense) during 1999 consisted of interest income and
interest expense. Interest expense increased during 1999 due to interest for the
fourth quarter of 1999 being expensed rather than capitalized since the
construction of the manufacturing facilities and related equipment had been
completed. The Company capitalized interest costs of $1,114,616 in 1999 and
$607,395 in 1998.
Year ended December 31, 1998 compared to year ended December 31, 1997
REVENUES
Revenues for 1998 were $2,009,165 as compared to $135,765 in 1997, an
increase of $1,873,400, a thirteen fold increase. Product sales were $1,422,711
for 1998 as compared to $-0- for 1997. The purchase of I(4) during 1998 provided
the increase in radioisotope sales as our Denton, Texas facilities were still in
the development stage. Product developmental income, related to our ongoing
product development contracts, was $522,000 for 1998 as compared to $-0- for
1997. Sales of our accelerator components were $64,454 for 1998 as compared to
$135,765 for 1997. Sales of accelerator components acquired from the State of
Texas decreased due to the long lead-time required to market this type of
equipment.
22
<PAGE> 23
COST OF REVENUES
Cost of revenues included $1,035,517 for radioisotope sales for 1998 as
compared to $-0- for 1997. The increase was attributable primarily to the
acquisition of I4, which provided us with our first product sales. Cost of
development income was $62,830 for 1998 as compared to $-0- for 1997. This
increase was attributable to our ongoing product development contracts that were
signed in 1998. Cost of accelerator components sold was $32,227 for 1998 as
compared to $79,287 for 1997. The decrease in the cost of accelerator components
sold was due to the decrease in accelerator components sold.
OPERATING COSTS AND EXPENSES
Operating expense for 1998 was $6,537,948 as compared to $2,118,334 in
1997, exclusive of $2,397,500 in employee incentive compensation, an increase of
$4,419,614 or 209%. The acquisition of I(4) provided $826,629 of the total
increase. General and administrative expenses for 1998 were $3,553,669 as
compared to $1,125,752 for 1997, a 216% increase, and salaries and wages
increased by $536,752, both as a result of increased activities and personnel
additions in preparation of going into production. Research and development
expenses included in operating expenses above, were $281,706 in 1998 as compared
to $0 in 1997 as a result of developing processes related to medical devices.
Product development expense was $825,269 in 1998 as compared to $0 in 1997.
Product development expenses are costs associated with the development and
manufacturing of test products prior to commercial production. Sales and
marketing expense for 1998 was $697,530 as compared to $-0- for 1997. Employee
incentive compensation, which was incurred in 1997 due to stock options issued
prior to the initial public offering, was not incurred in 1998.
OTHER INCOME (EXPENSE)
Other income (expense) during 1998 consisted primarily of interest
income, interest expense and donation of assets held for sale. Interest expense
decreased during 1998 due primarily to an increase in the amounts capitalized.
The Company capitalized interest costs of $607,395 in 1998 and $24,934 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily by
private placements of equity securities, its initial public offering, loans from
stockholders and directors and bank loans. During the third quarter of 1997, the
Company completed its initial public offering of 2,300,000 shares of common
stock at $9.00 per share, resulting in net proceeds of approximately
$17,708,839. In October 1998, Texas State Bank in McAllen, Texas provided
financing which allowed the Company to pay off all existing loans real estate
loans and to consolidate its remaining financing into a $15,000,000 loan. The
Texas State Bank loan includes (i) a fifteen year amortization and a five year
term loan with a floating interest rate which adjusts every six months on May 1
and November 1 of each year and (ii) a $5,000,000 line of credit collateralized
by accounts receivable of less than 75 days. During 1999, Texas Bank funded an
additional $5,000, 000 in lease financing for the purchase of equipment.
The Company was not in compliance with several of the restrictive
covenants of the Texas State Bank loan. The Company has obtained a waiver of the
technical violations, which included the deferral for one year, from 1999 to
2000, of a minimum revenue covenant. Based on the Company's current projections,
it believes that it will be able to comply with the minimum revenue covenant in
2000.
From December 1998 through February 1999 we closed a private placement
of securities resulting in additional equity of $9,507,414 in 1998 and
$1,938,845, through February 1999, net of commissions and fees. In April 1999
the Company initiated a private placement of securities resulting in additional
equity of $8,115,852, net of fees. In May of 1999 we completed an offering of
non-voting, redeemable, convertible, preferred stock with a 5% coupon, which was
funded in May and October 1999 with proceeds of $9,400,000,
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<PAGE> 24
net of fees. In February 2000 we completed a private placement of common stock
for proceeds of $5,394,545, net of fees.
Under the terms of the May 1999 redeemable preferred stock purchase
agreement, the Company has a capital call option which commits the investment
banker to fund up to an additional $8,000,000 for additional redeemable
preferred stock.
Although we are currently in production and generating revenues from
the sale of several products, we will continue to have a negative cash flow at
least for the short term, if not longer. Our progress to breakeven operations
will be dependent on numerous factors, including increasing our production of
radioisotopes, radiochemicals, and medical devices as well as moving steadily
forward in the development of commercial processes for finished
radiopharmaceutical products for our customers. We will continue to incur
significant expenses in maintaining a competent manufacturing staff,
satisfactory regulatory and quality organizations, a skilled, certified
engineering staff as well as the other project development and material costs
necessary for production. We anticipate we are still several years away from
achieving the production levels necessary to produce the expected economies of
scale.
The Company's history of operating losses has resulted in continued
dependence upon additional external financing. Management's plans regarding its
liquidity involve the successful execution of its 2000 business plan, including
the successful commercialization of the Company's products. The Company intends
to obtain additional capital necessary to fund operations, complete the
commissioning of the LINAC, and meet debt service requirements, from public and
private sales of equity or debt securities. The Company anticipates, based on
the execution of its business plan and its continued capital raising activities,
that it will have sufficient funds to finance its operating activities for at
least the next twelve months. In the event the Company is unable to secure
sufficient funds, the Company's operations and business expansion would be
significantly curtailed. There can be no assurance that the Company will be able
to obtain additional financing or obtain financing on terms acceptable to the
Company.
NEW ACCOUNTING STANDARDS
In June 1999, Statement of Financial Accounting Standards ("SFAS") No.
137, Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133, was issued. SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The provisions of this statement are now effective for financial statements for
fiscal years beginning after June 15, 2000, although early adoption is allowed.
We plan to adopt the provisions of this SFAS on January 1, 2001. We do not
expect the adoption of this standard to have a material effect on our results of
operations or financial position.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on
its long-term debt. The Company's exposure to interest rate risk relates to
variable rate loans that are benchmarked to US bank prime lending rates. The
Company does not use derivative financial instruments to manage overall
borrowing costs or reduce exposure to adverse fluctuations in interest rates.
The impact on the Company's borrowing costs and cash flows of a one-point
interest rate change on the outstanding balance of the variable rate debt as of
December 31, 1999 would be approximately $144,785
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<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS
The following financial statements are included herewith:
Independent Auditors' Report
Consolidated Balance Sheets of the Company as of December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information set forth under the captions "Election of Directors"
and "Executive Officers of the Company" of the Company's definitive Proxy
Statement for the Company's 2000 Annual Meeting of Shareholders (the "Proxy
Statement") is incorporated herein by reference. The Company's Proxy Statement
will be filed by the Company with the SEC not later than 120 days after December
31, 1999, the close of our fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation and
Other Matters" of the Proxy Statement is incorporated herein by reference. The
Company's Proxy Statement will be filed by the Company with the SEC not later
than 120 days after December 31, 1999, the close of our fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Outstanding Capital Stock
and Stock Ownership of Directors, Certain Executive Officers and Principal
Shareholders" of the Proxy Statement is incorporated herein by reference. The
Company's Proxy Statement will be filed by the Company with the SEC not later
than 120 days after December 31, 1999, the close of our fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" of
the Company's Proxy Statement is incorporated herein by reference. The Company's
Proxy Statement will be filed by the Company with the SEC not later than 120
days after December 31, 1999, the close of our fiscal year.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed or incorporated by reference as exhibits to
this Report:
3.1 Restated Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form SB-2 (Registration No. 333-26269)).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form SB-2 (Registration No.
333-26269)).
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<PAGE> 26
4.1 Specimen of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-26269)).
4.2 Form of Warrant Agreement between the Company and Keane Securities
Co., Inc. (incorporated by reference to Exhibit 4.2 to the Company's
Registration statement on Form SB-2 (Registration No. 333-26269)).
7.1 Press release related to building purchase dated November 14, 1997
(incorporated by reference to Exhibit 7.1 of the Company's 8-K filed
effective November 26, 1997).
7.2 Sales Contract Dated September 25, 1997 between Union Camp
Corporation and the Company(incorporated by reference to Exhibit 7.2
of the Company's 8-K filed effective November 26, 1997).
7.3 Promissory Note between the Company and Texas Bank in the amount of
$2,475,000 with an effective date of October 22, 1997(incorporated
by reference to Exhibit 7.3 of the Company's 8-K filed effective
November 26, 1997).
7.4 Press release related to IMAGYN letter of intent dated November 24,
1997(incorporated by reference to Exhibit 7.4 of the Company's 8-K
filed effective November 26, 1997).
10.1 Copy of the Company's 1997 Long Term Incentive Plan, including forms
of nonqualified Stock Option Agreement, Incentive Stock Option
Agreement and Restrictive Stock Option Agreement (incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement on
Form SB-2 (Registration No. 333-26269)).
10.2 Copy of Equipment Lease Agreement dated July 1996 among the Company,
the University of North Texas and North Texas Research Institute
regarding tomographic equipment (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form SB-2
(Registration No. 333-26269)).
10.3 Copy of Agreement dated June 5, 1997 between Registrant and Hospital
Financial Corporation (incorporated by reference to Exhibit 10.3 to
the Company's Registration Statement on Form SB-2 (Registration No.
333-26269)).
10.4 Copy of Real Estate Option Agreement effective December 13, 1996
among the Company, Terrano Realty, Inc. and NW Realty, Inc.
(incorporated by reference to Exhibit 10.6 to the Company's
Registration statement on Form SB-2 (Registration No. 333-26269)).
10.5 Copy of Employment Agreement effective November 1, 1995 between the
Company and Ira Lon Morgan, Ph.D. and addendum to Employment
Agreement (incorporated by reference to Exhibit 10.7a and 10.7b to
the Company's Registration Statement on Form SB-2 (Registration No.
333-26269)).
10.6 Copy of Employment Agreement effective May 5, 1997 between the
Company and Carl W. Seidel (incorporated by reference to Exhibit
10.8 to the Company's Registration statement on Form SB-2
(Registration No. 333-26269)).
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<PAGE> 27
10.7 Copy of Equipment Lease Agreement dated May 29, 1996 between the
Company and the University of North Texas regarding analytical
instrumentation (incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form SB-2 (Registration No.
333-26269)).
10.8 Copy of Employment Agreement effective February 17, 1997 between the
Company and Tommy L. Thompson.
21. List of subsidiaries of the Company (incorporated by reference to
Exhibit 21 to the Company's Registration Statement on Form SB-2
(Registration No. 333-26269)).
23. Power of Attorney (included as part of signature page).
23.1 Consent of KPMG LLP, as independent certified public accountants
27.1 Financial Data Schedule
Reports on Form 8-K
The Company filed a Form 8-K on February 19,1999 with respect to the filing of a
Form S-3; on May 28, 1999 with respect to amending and restating a registration
and warrant agreement, the sale of its common stock in a private placement and
the sale of its redeemable, convertible, preferred stock; on July 19, 1999 with
respect to an investor update; on October 25, 1999 with respect to the sales of
its redeemable, convertible preferred stock; and on February 9, 2000 with
respect to the sale of its common stock in a private offering.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of International Isotopes Inc,
a Texas corporation, and the undersigned directors and officer of International
Isotopes Inc, hereby constitutes and appoints David M. Camp and Joan Gillett, or
any one of them, its or his true and lawful attorney-in-fact and agent, for it
or him and in its or his name, place and stead, in any and all capacities, with
full power to act alone, to sign any and all amendments to this report, and to
file each such amendment to the Report, with all exhibits thereto, and any and
all other documents in connection therewith, with the Securities and Exchange
Commission, hereby granting unto said attorney in-fact and agent full power and
authority to do and perform any and all acts and things requisite and necessary
to be done in and about the premises as fully to all intents and purposes as it
or he might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
International Isotopes Inc.
By:
-----------------------------------------
Joan H. Gillett
Chief Financial Officer
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SIGNATURES
In accordance with the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
March 30, 2000 By: /s/ William W. Nicholson
----------------------------------------
William W. Nicholson
Chairman of the Board of Directors
March 30, 2000 By: /s/ David M. Camp
----------------------------------------
David M. Camp
President & Chief Executive Officer
March 30, 2000 By: /s/ Ira Lon Morgan, Ph.D.
----------------------------------------
Ira Lon Morgan, Ph.D.
Director
March 30, 2000 By: /s/ Tommy L. Thompson
----------------------------------------
Tommy L. Thompson
Executive Vice President
Chief Operating Officer
March 30, 2000 By: /s/ Virgil L. Simmons
----------------------------------------
Virgil L. Simmons
Senior Vice President
March 30, 2000 By: /s/ Joan Gillett
----------------------------------------
Joan Gillett
Chief Financial Officer
March 30, 2000 By: /s/ John M. McCormack
----------------------------------------
John M. McCormack
Director
March 30, 2000 By: /s/ Charles A. LeMaistre, M.D.
----------------------------------------
Charles A. LeMaistre, M.D.
Director
March 30, 2000 By: /s/ Robert J. Gary
----------------------------------------
Robert J. Gary
Director
March 30, 2000 By: /s/ Frederick J. Bonte, M.D.
----------------------------------------
Frederick J. Bonte, M.D.
Director
March 30, 2000 By: /s/ Carl W. Seidel
----------------------------------------
Carl W. Seidel
Director
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INTERNATIONAL ISOTOPES, INC.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
Independent Auditors' Report........................................................ 30
FINANCIAL STATEMENTS
Consolidated Balance Sheets of the Company
as of December 31, 1999 and 1998................................................ 31
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997................................................. 32
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997................................................. 33
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997................................................. 34
Notes to Consolidated Financial Statements ......................................... 36
</TABLE>
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<PAGE> 30
Independent Auditors' Report
The Board of Directors
International Isotopes Inc.:
We have audited the accompanying consolidated balance sheets of
International Isotopes Inc. and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
International Isotopes Inc. and subsidiaries as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
Dallas, Texas
March 17, 2000
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<PAGE> 31
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,990,300 $ 6,371,704
Accounts receivable 765,367 240,433
Assets held for sale -- 526,533
Inventories 2,421,434 1,744,467
Prepaids and other current assets 1,179,040 78,578
------------ ------------
Total current assets 7,356,141 8,961,715
Property, plant and equipment, net 40,734,736 32,350,399
Goodwill, net 1,394,302 1,687,846
Intangibles and other assets 2,063,847 2,302,743
------------ ------------
Total assets $ 51,549,026 $ 45,302,703
============ ============
Liabilities, Redeemable Convertible Preferred
Stock and Stockholders' Equity
Current liabilities
Accounts payable $ 2,077,051 $ 1,825,246
Accrued liabilities 1,105,273 973,752
Current portion of lease obligations (note 8) 1,346,958 235,309
Current installments of mortgage and notes payable to banks 524,843 3,117,177
------------ ------------
Total current liabilities 5,054,125 6,151,484
Non-current portion of lease obligations (note 8) 3,053,025 774,758
Mortgage and notes payable to banks, excluding current installments 13,953,679 14,483,839
------------ ------------
Total liabilities 22,060,829 21,410,081
Redeemable convertible preferred stock, net 8,392,475 --
(liquidation value of $10,000,000) (note 6)
Stockholders' equity (note 6)
Preferred stock, $0.01 par value; 5,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, $0.01 par value; 20,000,000 shares authorized,
issued and outstanding 8,569,074 shares at December 31, 1999
and 7,351,625 shares at December 31, 1998 85,689 73,516
Additional paid-in capital 48,828,561 35,183,917
Accumulated deficit (27,178,528) (10,724,811)
Receivable from stockholders (640,000) (640,000)
------------ ------------
Total stockholders' equity 21,095,722 23,892,622
------------ ------------
Total liabilities and stockholders' equity $ 51,549,026 $ 45,302,703
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Sales of product $ 2,775,696 1,422,711 --
Development contract income 206,038 522,000 --
Sale of accelerator components 707,790 64,454 135,765
------------ ------------ ------------
Total revenue 3,689,524 2,009,165 135,765
Cost of revenue:
Cost of products 2,274,029 1,035,517 --
Cost of development contract 2,631 62,830 --
Cost of accelerator components 574,290 32,227 79,287
------------ ------------ ------------
Gross profit 838,574 878,591 56,478
------------ ------------ ------------
Operating costs and expenses:
Salaries and contract labor 2,322,360 1,461,480 992,582
Employee incentive compensation 172,812 -- 2,397,500
Sales and marketing 791,575 697,530 --
Product development 6,976,589 825,269 --
General, administrative and consulting 4,347,395 3,553,669 1,125,752
------------ ------------ ------------
Total operating expenses 14,610,731 6,537,948 4,515,834
------------ ------------ ------------
Operating loss (13,772,157) (5,659,357) (4,459,356)
Other income (expense):
Gain on sale (donation) of assets held for sale -- (24,330) 14,974
Interest income 242,537 288,494 297,835
Interest expense (567,986) (462) (224,413)
------------ ------------ ------------
Loss before extraordinary item (14,097,606) (5,395,655) (4,370,960)
Extraordinary loss on debt extinguishment -- (123,750) --
------------ ------------ ------------
Net loss (14,097,606) (5,519,405) (4,370,960)
------------ ------------ ------------
Preferred stock dividend, deemed dividend
and accretion of discount (2,356,111) -- --
Net loss applicable to common shareholders $(16,453,717) $ (5,519,405) $ (4,370,960)
============ ============ ============
Net loss per common share - basic and diluted $ (2.03) $ (0.84) $ (0.92)
============ ============ ============
Weighted average common shares outstanding -
basic and diluted 8,110,521 6,534,987 4,750,561
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Additional Receivable Total
Common Stock Paid-in From Accumulated Stockholders'
Shares Amount Capital Stockholders Deficit Equity
--------- ---------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 3,766,663 37,666 1,266,688 (160,000) (834,446) 309,908
Collection of stock sale receivable 160,000 160,000
Shares returned by owners 395,994 395,994
Shares issued through private placement 62,500 625 99,375 100,000
Shares issued to employees and
directors, including shares
contributed by founders 86,787 868 1,170,991 (472,000) 699,859
Shares issued in initial public offering,
net 2,300,000 23,000 17,685,839 17,708,839
Shares issued to employees 155,000 1,550 1,168,450 (248,000) 922,000
Net loss (4,370,960) (4,370,960)
--------- ---------- ---------- -------- ----------- ----------
Balance, December 31, 1997 6,370,950 63,709 21,787,337 (720,000) (5,205,406) 15,925,640
Shares issued for purchase of subsidiary 159,416 1,594 3,172,379 3,173,973
Shares issued for license agreement & patent 37,259 372 724,628 725,000
Shares issued through private placement 784,000 7,840 9,499,574 9,507,414
Forgiveness of stock sale receivable 80,000 80,000
Net loss (5,519,405) (5,519,405)
--------- ---------- ---------- -------- ----------- ----------
Balance, December 31, 1998 7,351,625 $ 73,515 35,183,918 (640,000) (10,724,811) 23,892,622
Net effect of repurchase agreement MAC Tech (note 3) (869,559) (869,559)
Issuance of warrants (note 6) 1,368,417 1,368,417
Beneficial conversion effect of redeemable
convertible preferred stock (note 6) 1,930,450 (1,930,450)
Common stock issued in private placement 1,084,410 10,844 10,043,853 10,054,697
Issuance of common stock for services 98,039 980 999,020 1,000,000
Accretion of issuance costs on
redeemable convertible preferred stock (322,925) (322,925)
Issuance of common stock to officer (note 6) 35,000 350 172,462 172,812
Redeemable convertible preferred stock dividend (102,736) (102,736)
Net loss (14,097,606) (14,097,606)
--------- ---------- ---------- -------- ----------- ----------
Balance December 31, 1999 8,569,074 $ 85,689 48,828,561 (640,000) (27,178,528) 21,095,722
</TABLE>
See accompanying notes to consolidated financial statements.
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INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(14,097,606) (5,519,405) (4,370,960)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 1,945,355 490,180 17,354
(Gain) loss on disposed assets 205,380 24,330 (14,974)
Noncash compensation 172,462 -- 1,918,000
Warrants issued for services received 38,317
Forgiveness of receivable from stockholder -- 80,000 --
Extraordinary loss on extinguishment of debt -- 123,750 --
Changes in operating assets and liabilities,
exclusive of effects of acquisition:
Interest receivable -- 152,358 (152,358)
Accounts receivable (524,934) 446,888 --
Prepaids and other assets (34,456) (435,883) (87,086)
Assets held for sale 321,153 -- --
Inventory (676,967) (485,607) 15,645
Accounts payable 949,824 (167,031) 91,990
Accrued liabilities 131,521 348,447 585,589
------------ ------------ ------------
Net cash used in operating activities (11,569,951) (4,941,973) (1,996,800)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of certificate of deposit -- -- 400,000
Purchase of certificate of deposit -- -- (100,000)
Purchase of assets for operations (6,597,992) (24,290,167) (4,694,947)
Purchase of securities available for sale -- -- (5,082,777)
Proceeds from sale of securities available for sale -- 5,082,777 --
Proceeds from sale of assets held for sale -- 14,069 126,887
Purchase MAC Isotopes, Inc., net of cash acquired -- (495,000) --
Investment in trademarks and license fee -- (275,000) --
------------ ------------ ------------
Net cash used in investing activities (6,597,992) (19,963,321) (9,350,837)
------------ ------------ ------------
Cash flows from financing activities:
Collections of stock sale receivable -- -- 160,000
Settlement of contingent consideration - MAC Isotopes, Inc. (869,559) -- --
Proceeds from issuance of redeemable
convertible preferred stock and warrants 9,400,000 -- --
Proceeds from issuance of common stock
and common stock subscriptions 10,054,697 9,507,414 17,808,839
Payments on capital leases (573,369) (220,825) --
Proceeds from issuance of debt -- 17,601,014 7,201,607
Principal payments on notes payable (3,122,494) (3,812,022) (5,932,789)
Payments of preferred stock dividends (102,736) -- --
Payments on notes payable to chairman -- -- (20,000)
------------ ------------ ------------
Net cash provided by financing activities 14,786,539 23,075,581 19,217,657
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (3,381,404) (1,829,713) 7,870,020
Cash and cash equivalents at beginning of year 6,371,704 8,201,417 331,397
------------ ------------ ------------
Cash and cash equivalents at end of year 2,990,300 6,371,704 8,201,417
============ ============ ============
</TABLE>
(Continued)
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INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
------------ ------------ -------
<S> <C> <C> <C>
Supplemental disclosure of cash flow activities:
Cash paid for interest, net of amounts capitalized $ 567,986 84,455 238,011
============ ============ =======
Cash paid for financing fees $ -- 86,350 10,261
============ ============ =======
Supplemental disclosure of noncash transactions:
Common stock issued for stock receivables $ -- -- 720,000
============ ============ =======
Common stock issued for account payable to
director $ -- -- 62,852
============ ============ =======
Common stock issued for prepayment of royalties $ 1,000,000 -- --
============ ============ =======
Acquisition of subsidiary through issuance of common stock $ -- 3,173,973 --
============ ============ =======
Capital expenditures included in accounts payable $ 103,235 801,254 509,879
============ ============ =======
Acquisition of license fee and patent rights through
issuance of common stock $ -- 725,000 --
============ ============ =======
Acquisition of equipment through capital leases $ 3,963,285 1,147,796 --
============ ============ =======
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE> 36
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business and Liquidity
International Isotopes Inc (the Company) was incorporated in Texas in
November 1995 as Applied Isotopes Products Corporation. The Company
changed its name to International Isotopes Inc. in January 1997. The
Company acquired the technology, proprietary designs and intellectual
property for the design and assembly of a proton linear accelerator
(LINAC) to produce radioisotopes used in nuclear medicine for the
detection and treatment of various forms of cancer and other diseases.
Certain of these assets were purchased in May 1996 from the State of
Texas arising from the termination of the government funded
Superconducting Super Collider (SSC) project. The Company also owns
100% of the outstanding common shares of Gazelle Realty, Inc. and
International Isotopes Idaho, Inc. (I4). Gazelle Realty, Inc. owned 20
acres of land on which the facility for the LINAC has been constructed
and 1.6 acres of land on which the administration, manufacturing, and
research and development building was constructed. During 1997 all the
property owned by Gazelle Realty, Inc. was transferred to the Company.
International Isotopes Idaho, Inc. has an 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.
Prior to initial production in late 1999, the Company had devoted
substantially all of its efforts, since inception, to the acquisition
and construction of the LINAC project and related assets,
pharmaceutical production and to raising capital and other
organizational activities. The operating revenues to date have been
limited to the sales of accelerator components purchased from the State
of Texas, product development income, initial sales of I-125
brachytherapy seeds and sales of reactor produced products from I4.
Additionally, the Company has derived operating capital from the sales
of assets. The Company has financed its operations in part through
private placements of its equity securities and its initial public
offering (the "Offering") which occurred on August 19, 1997 (note 6).
The Company utilized funds obtained from the Offering to increase its
capital assets primarily through the assembly and upgrade of the LINAC
for efficient production of radioisotopes and radiopharmaceuticals, as
well as construction and acquisition of manufacturing facilities, and
other production equipment. The Company is actively pursuing strategic
alliances with pharmaceutical companies and universities. The Company
has employed additional key personnel in the area of LINAC
manufacturing, operations, radioisotope and radiopharmaceutical
production, quality assurance and regulatory compliance. Prior to the
fourth quarter of 1999, the Company was considered to be in the
development stage.
To date, the Company's product sales have consisted of accelerator
components acquired from the State of Texas, reactor produced product
from I4 and initial sales of I-125 brachytherapy seeds. The Company has
not manufactured any accelerator produced radioisotope products and
there can be no assurance that the Company will be able to manufacture
or market its products in the future, that future revenues will be
significant, that any sales will be profitable, or that the Company
will have sufficient funds available to manufacture or market its
products. The Company's Radioisotope Production Facility is subject to
extensive government regulations. Further, the Company's future
operations are dependent on the success of the Company's
commercialization efforts, market acceptance of its products and
ability to obtain adequate financing until sufficient cash flows can be
generated from operations.
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INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The Company has limited history of operations and has experienced
operating losses and significant costs in the acquisition of key
personnel, land and facilities. The Company expects operating losses to
continue as it increases radioisotope and radiopharmaceutical
production, obtains further validation and customer approval, and
increases marketing and product development.
The Company initiated a private placement of its common stock in late
1998. The offering, which consisted of units, each consisting of 16,000
shares of stock per unit at $12.50 per share and 16,000 three-year
warrants with an exercise price of $13.75, Total proceeds raised under
this private placement amounted to $11,446,259, net of commissions and
placement costs of $353,741.
The Company initiated another private placement of its common stock in
April 1999. The offering consisted of shares of common stock at $9.10
per share and three-year warrants for the purchase of additional shares
of common stock at an exercise price of $10.00 per share. A total of
924,410 shares of common stock (plus warrants to purchase an additional
924,410 shares) were sold, raising $8,115,852, net of commissions and
placement costs of $276,304.
In May 1999, the Company entered into an agreement to sell equity
securities. Under this agreement, in May 1999 and October 1999, the
Company sold a total of 10,000 shares of its newly created Series A 5%
Redeemable Convertible Preferred Stock, $.01 par value per share,
liquidating value $1,000 per share, and warrants to purchase 410,000
shares of the Company's common stock, $.01 par value per share, raising
$9,400,000 net of fees of $600,000. Under the terms of the agreement
the Company has a capital call option which commits the investment
banker to fund up to an additional $8,000,000 in exchange for
additional shares of Redeemable Convertible Preferred Stock and
warrants.
In February 2000, the Company completed a private placement of its
common stock. The offering consisted of shares of common stock at $5.50
per share and three-year warrants for the purchase of an additional 1/2
share of common stock at an exercise price of $5.50 per share. A total
of 1,054,652 shares of common stock (plus warrants to purchase an
additional 527,326 shares) were sold, raising $5,394,545, net of fees
of $406,041.
The Company is continuing efforts to raise additional funding through
the private placement of its securities and is continuing to negotiate
potential financing options including long term mortgage financing for
its facilities.
The Company has incurred losses from operations since inception and has
an accumulated deficit of $27,178,528 as of December 31, 1999. The
Company's history of operating losses has resulted in continued
dependence upon additional external financing. Management's plans
regarding its liquidity involve the successful execution of its 2000
business plan, including the successful commercialization of the
Company's products. The Company intends to obtain additional capital
necessary to fund operations, complete the commissioning of the LINAC,
and meet debt service requirements, from public and private sales of
equity or debt securities. The Company anticipates, based on the
execution of its business plan and its continued capital raising
activities, that it will have sufficient funds to finance its operating
activities for at least the next twelve months. In the event the
Company is unable to secure sufficient funds, the Company's operations
and business expansion would be significantly curtailed. There can be
no assurance that the Company will be able to obtain additional
financing or obtain financing on terms acceptable to the Company.
(b) Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries Gazelle Realty, Inc. and
International Isotopes Idaho, Inc. All significant
37
<PAGE> 38
intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications were made to prior years'
presentation to conform to the current year presentation.
(c) Financial Instruments and Cash Equivalents
The Company's financial instruments consist of cash equivalents,
accounts receivable and payable and notes payable. The carrying value
of these financial instruments approximates fair value because of their
short-term nature or because they bear interest at rates which
approximate market rates.
Cash equivalents of $2,990,330 and $6,371,704 at December 31, 1999 and
1998, respectively, consist of money market accounts. For purposes of
the consolidated statements of cash flows, the Company considers all
highly liquid financial instruments with original maturities of three
months or less at date of purchase to be cash equivalents.
(d) Property, Plant and Equipment
The Company capitalizes interest cost during construction periods of
both its buildings and equipment. Interest costs capitalized were
$1,114,616 and $607,395 in 1999 and 1998 respectively.
Property, plant and equipment are stated at cost less accumulated
depreciation. The majority of these assets owned by the Company,
concurrent with its formation, represented assets acquired from the
terminated Superconducting Super Collider project. A portion of these
assets were retained for the construction of the LINAC. The remainder
of such assets were acquired with the intention of being sold for
operating capital and were classified on the balance sheets as assets
held for sale (see note 1(e) below).
Depreciation on property, plant and equipment is computed using the
straight-line method over the estimated useful life of the asset. The
ranges of estimated useful lives are as follows:
Years
Buildings 39
Plant assets 5 - 30
Computer equipment 5
Furniture & fixtures 3 - 7
(e) Assets Held for Sale
Assets held for sale consisted primarily of excess accelerator,
mechanical and test equipment acquired from the terminated
Superconducting Super Collider project and were carried at the lower of
cost or fair value less cost to sell. These assets were being disposed
of through private sales and auctions. For the year ended December 31,
1998, the Company sold for cash assets held for sale with a book value
of $64,454 resulting in a loss on sale of $24,330. The remaining assets
held for sale were written off in 1999.
(f) Inventories
Inventories are carried at the lower of cost or market. Cost is
determined using the first-in first out method.
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INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rate
is recognized in income in the period that includes the enactment date.
(h) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and reported amounts of revenues and
expenses during the reporting period to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(i) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by comparison of the carrying
amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
(j) Revenue Recognition
Revenue is recognized when product development milestones are
accomplished, products are shipped and accelerator components are
shipped. No warranty coverage or right of return provisions are given
to customers.
(k) Research, Development and Advertising Costs
Research, development and advertising costs are expensed when incurred.
Research and development expenses were $406,651 and $281,706 in 1999
and 1998 respectively.
(l) Stock Option Plan
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS No. 123"), which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date
of grant. SFAS No. 123 superseded certain provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations.
Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earning per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value based method
defined in SFAS No. 123 had been applied. The Company has elected to
apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provision of SFAS No. 123 for its granted employee stock
options.
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INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(m) Goodwill
Goodwill represents the excess of the aggregate purchase price over the
fair value of net assets acquired and is amortized on a straight-line
basis over 77 months. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the
goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The
amount of goodwill impairment, if any, is measured based on projected
discounted future operating cash flows compared to the carrying value
of goodwill.
(n) Net Loss Per Common Share-Basic and Diluted
Basic loss per share is computed on the basis of the weighted average
number of common shares outstanding during the year. Diluted 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 year, is the same as basic loss per share for the years
ended December 31, 1999, 1998 and 1997, as all common stock options and
warrants were anti-dilutive.
At December 31, 1999, the Company had 687,400 common stock options and
3,256,410 common stock warrants outstanding (note 6). Options and
warrants excluded from the computation of diluted loss per share would
have resulted in additional weighted average securities, under the
treasury stock method, totaling 34,940, 225,406 and 94,921 for the
years ended December 31, 1999, 1998 and 1997, respectively. The
potentially dilutive effect of these securities has not been considered
in the computation of diluted net loss per common share since their
inclusion would be anti-dilutive. See also note 3.
(o) Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" which
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. For
each period presented in the accompanying consolidated statements of
operations, comprehensive loss and net loss are the same amount.
(p) Operating Segments
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for public business enterprises to
report information about operating segments in financial reports issued
to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The
Company was in the development stage through most of 1999 and had not
begun significant operations. The Company's management anticipates
operating through various segments beginning in 2000 as operations for
those segments begin. In the periods presented, management utilized
consolidated financial information to make business decisions and
allocate resources.
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INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(2) INVENTORIES
Inventories consist of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Raw materials $ 564,354 $ 388,930
Finished goods 58,362 --
Work in progress 1,798,718 1,355,537
----------- -----------
$ 2,421,434 $ 1,744,467
=========== ===========
</TABLE>
As of December 31, 1999 and 1998, the Company had a reserve for
obsolescence of $70,292 and $-0-, respectively. During 1999, the
Company recorded inventory write-offs of $368,298. There were no such
write-offs in 1998 or 1997.
(3) ACQUISITIONS
On April 24, 1998, the 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, a newly formed subsidiary of the Company. The Company
exchanged $500,000 in cash and 159,416 shares of its Common Stock,
valued at $3,173,973 for 100% of the stock in MAC Isotopes. MACTEC has
the option to sell 50% of the shares back to the Company on each of
April 23, 1999 and April 24, 2000 for a purchase price of $19.91 per
share. If the Company does not repurchase the shares, Auric Partners,
of which William Nicholson, a director of the Company, is a partner, is
required to purchase the shares. If Auric purchases the shares, the
Company is obligated to issue to Auric warrants to purchase common
stock of the Company in sufficient quantity and at an exercise price
that will compensate it for the difference between $19.91 and the then
current market price of the Company's stock.
In April 1999, MACTEC exercised the right to sell 50% of the shares of
common stock at a price of $19.91 per share. The Company facilitated
the sale of common stock at the market price of $9.00 per share and
paid MACTEC the difference of $10.91 per share or $896,559 in cash. The
payment was recorded as a reduction to additional paid in capital.
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 common stock,
at $19.91 per share 3,173,973
-----------
Cash paid, net of cash acquired $ 495,000
===========
</TABLE>
41
<PAGE> 42
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(4) PROPERTY, PLANT AND EQUIPMENT
In November 1997, the Company purchased an office/manufacturing
facility and a warehouse referred to as its "Radiopharmaceutical
Manufacturing Facility". Total cost for this facility, located on 12
acres at 3100 Jim Christal Road, Denton, Texas, including improvements
for offices, furnishings, HVAC, and a suite of production clean rooms
and equipment was approximately $9,300,000. The 12,000 square foot
warehouse houses the 42 MeV Cyclotron, donated by MD Anderson Cancer
Center to the University of North Texas, which has been remodeled and
is being operated by the Company under a ten year lease from UNT to
produce short-lived and research radioisotopes.
In early 1998, the Company completed construction of a facility, for
administration, manufacturing and services located on 1.6 acres in
Denton, Texas at a cost of $1,260,000. The Company is using the
building for equipment manufacturing and executive/administrative
offices.
Also in 1998, the Company completed construction of the building
housing its Radioisotope Production Facility devoted to the LINAC at an
approximate cost of $7,524,000. This building is located on 20 acres of
land in an Industrial Research Park in Denton, Texas acquired by the
Company in 1996.
In March 1998, the Company purchased 115 acres of land in Waxahachie,
Texas from the State of Texas at a cost of $424,000. This site includes
a building that can be used as a secondary accelerator production and
testing site.
Property, plant and equipment is summarized as follows at December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Land $ 663,674 $ 663,674
Furniture and fixtures 999,579 958,663
Plant and improvements 14,716,131 14,211,707
Production equipment 26,147,482 16,829,565
------------ ------------
42,526,866 32,663,609
Less accumulated depreciation and amortization (1,792,130) (313,210)
------------ ------------
Property, plant & equipment, net $ 40,734,736 $ 32,350,399
============ ============
</TABLE>
At December 31, 1999, gross property, plant and equipment of
$14,967,585, consisting primarily of the LINAC and related equipment
were not yet operational and not subject to depreciation. Depreciation
of these assets commenced on January 1, 2000.
42
<PAGE> 43
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(5) MORTGAGE AND NOTES PAYABLE TO BANKS
Mortgage and notes payable to banks as of December 31, 1999 and 1998,
consist of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Variable rate line of credit payable to financial institution secured by stock
owned by the Chairman of the Board. Repaid in 1999 $ -- $ 2,450,060
Variable rate (9.25% at December 31, 1999) note payable to bank secured by
substantially all of the Company's assets. Face amount of the note is
$15,000,000. Principal and current interest are payable in monthly installments
of approximately $154,379 with a final balloon payment of $12,057,765 due
November 1, 2003 14,478,522 14,918,638
Variable rate revolving line of credit secured by accounts
receivable. Maximum amount of the line of credit is $5,000,000 with interest
payments due monthly and the principal balance on December 31, 2000 -- 232,318
------------ ------------
Total mortgage and notes payable to banks 14,478,522 17,601,016
Less current installments (524,843) (3,117,177)
------------ ------------
Mortgage and notes payable to banks, excluding current installments $ 13,953,679 $ 14,483,839
============ ============
</TABLE>
The aggregate maturities of mortgage and notes payable to banks are as follows:
<TABLE>
<S> <C>
Years Ending December 31:
2000 540,354
2001 592,511
2002 649,703
2003 12,695,954
-----------
$14,478,522
-----------
</TABLE>
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 based on eligible accounts
receivable. The financing included a $15,000,000 note to be repaid in
monthly installments of principal and interest in the amount of
$154,379 through November 2003 at which time the remaining principal
balance will be due and a revolving line of credit with a maximum
availability of $5,000,000 and a maturity date of December 31, 2000.
The interest rate, 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, then Chairman of the
Board. Funds of $15,000,000 received from execution of the note
financing were used in part to repay two interim construction loans
($5,874,064 outstanding at time of repayment) and $9,125,936 of other
indebtedness. Terms of this loan contains various restrictive
covenants, including prohibition of additional liens existing on
security interest, limitation on additional indebtedness, limitations
on dividends and similar payments and prohibition of any mergers or
acquisitions. In connection with the repayment of indebtedness, the
Company paid a prepayment penalty of $123,750 which has been presented
as an extraordinary loss in the accompanying statement of operations
for the year ended December 31, 1998.
The Company was not in compliance with several of the restrictive
covenants of the above promissory note. The Company has obtained a
waiver of the technical violations, which included the deferral for one
year, from 1999 to 2000, of a minimum revenue covenant. Based on its
current projections, the Company believes that it will be able to
comply with the minimum revenue covenant in 2000.
(6) STOCKHOLDERS' EQUITY AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
Common stock - Between March and July 1997, in order to establish a
pool of shares for issuances to new employees, seven of the Company's
founding stockholders contributed 247,496 shares of common stock,
valued at $1.60 per share, to the Company. These shares, plus an
additional 47,504 shares (total of 295,000 shares) were sold to certain
key employees and directors at a purchase price of $1.60 per share, for
notes aggregating $472,000. On December 31, 1997, the Company issued
155,000 additional shares of common stock at a purchase price
43
<PAGE> 44
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
of $1.60 per share to four employees in exchange for stock notes
receivable of $248,000. These transactions resulted in the issuance of
450,000 total shares of common stock, of which 125,000 shares were
issued as compensation for loan guarantees in January 1997, at a
purchase price of the then estimated fair value of $1.60 per share. The
remaining 325,000 shares were issued at quoted market values ranging
from $7.00 to $9.00 per share, resulting in charges to operations for
employee incentive compensation totaling $1,918,000 plus related
employee taxes of $479,500 (total charges of $2,397,500). All stock
notes receivable are recourse notes and are due December 31, 2000 and
bear interest at 6.14% compounded semi-annually.
On August 19, 1997 and September 30, 1997, the Company completed the
Offering of 2,300,000 shares of its Common Stock at $9.00 per share.
The Company received proceeds of $17,708,839 after deducting
underwriters' discounts and commissions and issuance cost of $4,872,294
of which $1,980,000 related to the issuance of common stock warrants.
On April 24, 1998 the Company issued 159,416 shares of common stock for
the purchase of subsidiary. The shares were issued at a price of $19.91
per share or $3,173,973 in the aggregate.
On May 14, 1998 the Company issued 8,242 shares of common stock for a
license agreement. The shares were issued at a price of $27.30 per
share or $225,000 in the aggregate.
On July 1, 1998 the Company issued 29,017 shares of common stock for
patent rights. The shares were issued at a price of $17.23 per share or
$500,000 in the aggregate.
During December 1998, the Company issued in a private placement, 49
units consisting each of 16,000 shares of common stock and 16,000
warrants. The warrants are exercisable at any time during a three year
period ending November 2001 at an exercise price equaling 110% of the
private placement offering price of the shares ($13.75 per share). The
private placement resulted in net proceeds to the Company of $9,507,414
after deducting placement fees and issuance costs of $292,586.
During January 1999, the Company issued in a private placement, 10
units consisting each of 16,000 shares of common stock and 16,000
warrants. The warrants are exercisable at any time during a three year
period ending November 2001 at an exercise price equaling 110% of the
private placement offering price of the shares ($13.75 per share). The
private placement resulted in net proceeds to the Company of $1,938,845
after deducting placement fees and issuance costs of $61,155.
During April 1999, the Company issued in a private placement, 924,410
shares of common stock and 924,410 warrants. The warrants are
exercisable at any time during a three year period ending April 2002 at
an exercise price equaling 110% of the private placement offering price
of the shares ($10.00 per share). The private placement resulted in net
proceeds to the Company of $8,115,852 after deducting placement fees
and issuance costs of $296,279.
On October 1, 1999, the Company issued, as a prepayment of royalties
for I-125 brachytherapy seed sales, 98,039 shares of common stock. The
fair market value of the common stock on the date of issuance was
$10.20 per share or $1,000,000 in aggregate.
On November 8, 1999, the Company issued, as an inducement for
employment, 35,000 shares of common stock. The fair market value of the
common stock on the date of issuance was $4.94 per
44
<PAGE> 45
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
share or $172,812 in aggregate. This stock issuance was recorded as
compensation expense when issued.
Stock Option Plan - In January 1997, the Company adopted a Stock
Incentive Plan (the Plan) pursuant to which the Company's Board of
Directors may grant stock options to officers, key employees, and
consultants. The Plan authorizes grants of options to purchase up to
600,000 shares of authorized but unissued common stock. Stock options
are granted with an exercise price of not less than 85% of the quoted
market value of the common stock at the date of grant. The Company's
options generally have a three-year vesting period and a maximum term
of three years. A summary of the stock options issued under the
Company's Plan is as follows:
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Weighted-Average
Fixed Options Shares Exercise Price
- ------------- -------- ----------------
<S> <C> <C>
Outstanding at beginning of year 394,400 9.33
-------- ----
Granted 429,700 5.38
Exercised -- --
Forfeited (136,700) 9.52
-------- ----
Outstanding at end of year 687,400 6.86
======== ====
</TABLE>
45
<PAGE> 46
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Weighted-Average
Fixed Options Shares Exercise Price
- ------------- ------- ----------------
<S> <C> <C>
Outstanding at beginning of year 346,800 7.66
------- -----
Granted 82,400 15.65
Exercised -- --
Forfeited (34,800) 7.66
------- -----
Outstanding at end of year 394,400 9.33
======= =====
</TABLE>
Year Ended December 31, 1997
<TABLE>
<CAPTION>
Weighted-Average
Fixed Options Shares Exercise Price
- ------------- ------- ----------------
<S> <C> <C>
Outstanding at beginning of year -- --
------- ----
Granted 346,900 7.66
Exercised -- --
Forfeited (100) 7.66
------- ----
Outstanding at end of year 346,800 7.66
======= ====
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Options Weighted- Weighted Number Weighted
Outstanding at Average Average Exercisable at Average
Range of Exercise December 31, Remaining Exercise December 31, Exercise
Prices 1999 Contractual Life Price 1999 Price
<S> <C> <C> <C> <C> <C>
$4.94 to $9.99 645,100 2.07 years $ 6.18 141,500 $ 7.70
$10.00 to $14.99 1,700 1.92 years $ 11.96 567 $11.96
$15.00 to $19.99 28,200 1.33 years $ 16.01 1,433 $15.00
$20.00 to $26.00 12,400 1.30 years $ 20.57 4,133 $20.57
</TABLE>
46
<PAGE> 47
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions for 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- -------
<S> <C> <C> <C>
Expected dividend yield -- -- --
Risk-free interest rate 5.8% 5.6% 5.6%
Expected volatility 77% - 103% 45% - 96% 24%
Expected life 3 years 3 years 3 years
Weighted average fair value $2.32 $9.12 $2.26
</TABLE>
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for the Plan and, accordingly, except for stock options
issued at less than quoted market value at date of issue, no
compensation cost has been recognized for its stock options in the
accompanying consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net loss
applicable to common shareholders would have been increased to the pro
forma amounts indicated below for the years ended December 31, 1999,
1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Net loss applicable As reported (16,453,717) (5,519,405) (4,370,960)
to common shareholders
Pro forma (16,752,465) (5,806,478) (4,610,828)
Net loss per basic As reported (2.03) (0.84) (0.92)
and diluted share:
Pro forma (2.07) (0.89) (0.97)
</TABLE>
Preferred Stock and Redeemable Convertible Preferred Stock - Under the
terms of the original Articles of Incorporation and By-Laws in effect
at December 31, 1996, the Company was authorized to issue 5,000,000
shares of Preferred Stock, par value $1.00 per share. No shares of
$1.00 par Preferred Stock were issued. Restated Articles of
Incorporation and By-Laws adopted by the Company effective March 20,
1997, changed the par value of Preferred Stock to $.01 and revised
certain voting rights. Under the Restated Articles of Incorporation and
By-Laws, Preferred Stock may be issued in series from time to time at
the discretion of the Board of Directors. The Board of Directors is
authorized to set the distinguishing characteristics of each series
prior to issuance, including the granting of limited or full voting
rights, rights to payment of dividends and amounts payable in event of
liquidation, dissolution or winding up of the Company.
In May 1999 and October 1999, the Company issued a total of 10,000
shares (5,000 in May 1999 and 5,000 in October 1999) of 5% cumulative
redeemable convertible $0.01 par value $1,000 face value preferred
stock ("Preferred Stock") together with 410,000 warrants to purchase
common stock at $11.86 per share, for aggregate proceeds of
$10,000,000, before issuance costs of $600,000. Dividends are 5% per
annum payable in cash or common stock (at the Company's option)
beginning October 15, 1999 for the May issuance and January 15, 2000
for the October issuance and continuing quarterly thereafter through
May 20, 2002 for the May 1999 issuance and October 15, 2002 for the
October 1999 issuance. If paid in common stock, the number of shares is
based on the average market price for the 10 trading days immediately
preceding the dividend payment date (the "Average
47
<PAGE> 48
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Price"). As of December 31, 1999, the Company had paid cash dividends
on the Preferred Stock of $102,736.
The Preferred Stock is convertible to common stock at $11.86 per share
at issuance and the conversion price is reset at each dividend payment
date to the then Average Price (with a floor of $7.00 per share and a
ceiling of $11.86 per share).
The Preferred Stock is mandatorily redeemable on May 20, 2002 for the
May 1999 issuance and October 15, 2002 for the October 1999 issuance in
cash or common stock at the then Average Price, at the Company's
option. Early redemption may be required at the option of the holder
under certain circumstances and may be exercised at the option of the
Company under other circumstances. Mandatory redemption events include
change in control, suspension or delisting from NASDAQ, the BSE or any
subsequent market on which the common stock is listed for five
consecutive days, breach by the Company of any representations,
warranties or other conditions in the preferred stock purchase
agreement, and other events. Warrants are exercisable at any time up to
May 20, 2002 for the May 1999 issuance and October 15, 2002 for the
October 1999 issuance.
The warrants associated with the Preferred Stock were valued as of the
dates issued. On May 20, 1999, 205,000 warrants were issued. The
resulting value, using Black-Scholes model with the value of the
underlying stock being $11.67, exercise price of $11.86, volatility
rate of 60%, risk free rate of 5.6% and contractual life of three
years, was $5.17 per warrant or $1,059,850.
On October 15, 1999, another 205,000 warrants were issued. The
resulting value, using Black-Scholes model with the value of the
underlying stock being $5.63, exercise price of $11.86, volatility rate
of 60%, risk free rate of 5.6% and contractual life of three years, was
$1.32 per warrant or $270,600.
The total warrant value, $1,330,450, was recorded to additional paid-in
capital and is being accreted to Preferred Stock from the date of
issuance to the date of mandatory redemption of the Preferred Stock.
After consideration of the warrant value, the Preferred Stock has a
"beneficial conversion feature" of $1,930,450 that has been recognized
as an additional return to the holders through a charge to accumulated
deficit and an increase to additional paid-in capital.
Warrants - In connection with the aforementioned Offering, on August
19, 1997 the Company issued, to Keane Securities Co., Inc., warrants to
purchase 220,000 shares of the Company's common stock. The warrants are
exercisable at any time during a four-year period beginning August 19,
1998 with an exercise price equal to 120% of the initial public
offering price of the shares ($10.80 per share). As of December 31,
1999 none of the warrants have been exercised.
On September 20, 1999, the Company engaged Stonegate Securities, Inc.
("Stonegate") to serve as its non-exclusive financial advisor and to
furnish investment banking services to the Company. The Company paid an
initial fee of $5,000 on October 1, 1999, and a second fee of $25,000
on October 26, 1999. Beginning November 15, 1999, a fee of $5,000 per
month shall begin, which amount shall be payable at the Company's sole
discretion, subject to Stonegate's satisfactory performance. In
addition, the Company delivered to Stonegate warrants to purchase
50,000 shares of common stock at $11.86 per share, vesting as follows.
Warrants to purchase 15,000 shares vested immediately upon ratification
of the agreement by the Company's board of directors. Warrants to
purchase 10,000 shares vested on January 15, 2000. Warrants to purchase
25,000 shares shall vest at the Company's sole discretion, subject to
Stonegate's satisfactory performance. The term of the engagement is for
a
48
<PAGE> 49
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
twenty-four month period from the date of the agreement. As of December
31, 1999 none of the warrants had been exercised.
The following summarizes outstanding warrants at December 31, 1999:
<TABLE>
<CAPTION>
Outstanding at December 31, 1999 Exercisable at December 31, 1999
-------------------------------- --------------------------------
Weighted Average Weighted Average
Remaining Remaining
Exercise Prices Warrants Contractual Life Warrants Contractual Life
- --------------- -------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
$ 10.00 2,576,410 2.02 years $ 2,576,410 2.02 years
11.86 460,000 2.64 years 435,000 2.63 years
13.50 220,000 0.63 years 220,000 0.63 years
</TABLE>
(7) INCOME TAXES
Income tax expense (benefit) differed from the amounts computed by
applying the U.S. federal income tax rate of 34% to pretax losses as a
result of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax benefit $(4,793,186) $(1,876,598) $(1,486,126)
Nondeductible expenses and other 1,443 16,073 (9,813)
Change in valuation allowance 4,791,743 1,860,525 1,495,939
----------- ----------- -----------
Total income tax expense $ -- $ -- $ --
=========== =========== ============
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets (liabilities) as of
December 31, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Goodwill $ 57,111 $ --
Startup costs 2,908,602 3,634,051
Property, plant and equipment (37,916) 19,206
Net operating loss carryforward 5,480,223 --
Inventory reserve 23,899
Other -- (13,081)
----------- -----------
8,431,919 3,640,176
Less valuation allowance (8,431,919) (3,640,176)
----------- -----------
Net deferred taxes $ -- $ --
=========== ===========
</TABLE>
The valuation allowances for 1999 and 1998 have been applied to offset
the deferred tax assets in recognition of the uncertainty that such tax
benefits will be realized. The net change in valuation allowance for
the years ended December 31, 1999, 1998, and 1997 was an increase of
$4,778,662, $1,860,525 and $1,495,939, respectively. At December 31,
1999, the Company has a net operating loss carryforward for tax
purposes of approximately $16,100,000 that will expire in 2019.
49
<PAGE> 50
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(8) LEASE COMMITMENTS
The Company is obligated under various capital leases for certain
equipment that expire at various dates during the next five years. At
December 31, 1999, the gross amount of equipment and related
accumulated amortization recorded under capital leases were as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Production equipment $ 5,009,243 $ 1,045,958
Furniture & fixtures 338,500 338,500
----------- -----------
5,347,743 1,384,458
Less accumulated amortization (818,480) (154,995)
----------- -----------
$ 4,529,263 $ 1,229,463
=========== ===========
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
The Company leases office space and certain office equipment under
operating leases expiring at various dates through 2004. Rental expense
under such leases for the years ended December 31, 1999, 1998 and 1997
was $161,823, $352,703 and $189,000, respectively.
Future minimum lease payments under noncancelable operating leases
(with initial or remaining lease terms in excess of one year) and
future minimum capital lease payments as of December 31, 1999 are:
50
<PAGE> 51
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
<TABLE>
<CAPTION>
Capital Operating
Years ending December 31 Leases Leases
----------- ----------
<S> <C> <C>
2000 $ 1,758,036 $ 242,885
2001 1,571,882 171,730
2002 1,403,456 147,416
2003 455,110 141,416
2004 4,653 141,416
Thereafter -- 190,196
----------- ----------
Total minimum lease payments 5,193,137 $1,035,059
==========
Less amount representing interest (at rates ranging
from 8.5% to 25%) 793,154
-----------
Present value of net minimum capital
lease payments 4,399,983
Less current portion of obligations under
capital leases 1,346,958
-----------
Obligations under capital leases,
excluding current portions $ 3,053,025
===========
</TABLE>
51
<PAGE> 52
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3.1 Restated Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form SB-2 (Registration No. 333-26269)).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form SB-2 (Registration No.
333-26269)).
4.1 Specimen of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-26269)).
4.2 Form of Warrant Agreement between the Company and Keane Securities
Co., Inc. (incorporated by reference to Exhibit 4.2 to the Company's
Registration statement on Form SB-2 (Registration No. 333-26269)).
7.1 Press release related to building purchase dated November 14, 1997
(incorporated by reference to Exhibit 7.1 of the Company's 8-K filed
effective November 26, 1997).
7.2 Sales Contract Dated September 25, 1997 between Union Camp
Corporation and the Company(incorporated by reference to Exhibit 7.2
of the Company's 8-K filed effective November 26, 1997).
7.3 Promissory Note between the Company and Texas Bank in the amount of
$2,475,000 with an effective date of October 22, 1997(incorporated
by reference to Exhibit 7.3 of the Company's 8-K filed effective
November 26, 1997).
7.4 Press release related to IMAGYN letter of intent dated November 24,
1997(incorporated by reference to Exhibit 7.4 of the Company's 8-K
filed effective November 26, 1997).
10.1 Copy of the Company's 1997 Long Term Incentive Plan, including forms
of nonqualified Stock Option Agreement, Incentive Stock Option
Agreement and Restrictive Stock Option Agreement (incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement on
Form SB-2 (Registration No. 333-26269)).
10.2 Copy of Equipment Lease Agreement dated July 1996 among the Company,
the University of North Texas and North Texas Research Institute
regarding tomographic equipment (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form SB-2
(Registration No. 333-26269)).
10.3 Copy of Agreement dated June 5, 1997 between Registrant and Hospital
Financial Corporation (incorporated by reference to Exhibit 10.3 to
the Company's Registration Statement on Form SB-2 (Registration No.
333-26269)).
10.4 Copy of Real Estate Option Agreement effective December 13, 1996
among the Company, Terrano Realty, Inc. and NW Realty, Inc.
(incorporated by reference to Exhibit 10.6 to the Company's
Registration statement on Form SB-2 (Registration No. 333-26269)).
10.5 Copy of Employment Agreement effective November 1, 1995 between the
Company and Ira Lon Morgan, Ph.D. and addendum to Employment
Agreement (incorporated by reference to Exhibit 10.7a and 10.7b to
the Company's Registration Statement on Form SB-2 (Registration No.
333-26269)).
10.6 Copy of Employment Agreement effective May 5, 1997 between the
Company and Carl W. Seidel (incorporated by reference to Exhibit
10.8 to the Company's Registration statement on Form SB-2
(Registration No. 333-26269)).
</TABLE>
<PAGE> 53
<TABLE>
<S> <C>
10.7 Copy of Equipment Lease Agreement dated May 29, 1996 between the
Company and the University of North Texas regarding analytical
instrumentation (incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form SB-2 (Registration No.
333-26269)).
10.8 Copy of Employment Agreement effective February 17, 1997 between the
Company and Tommy L. Thompson (incorporated by reference to Exhibit
10.8 to the Company's Form 10-KSB for the fiscal period ended
December 31, 1997).
21. List of subsidiaries of the Company (incorporated by reference to
Exhibit 21 to the Company's Registration Statement on Form SB-2
(Registration No. 333-26269)).
23. Power of Attorney (included as part of signature page).
23.1 Consent of KPMG LLP, as independent certified public accountants
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
International Isotopes Inc.:
We consent to incorporation by reference in the registration statement (No.
333-31538) on Form S-3 of International Isotopes Inc. of our report dated March
17, 2000, relating to the consolidated balance sheets of International Isotopes
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1999, which report
appears in the 1999 annual report on Form 10-K of International Isotopes Inc.
KPMG LLP
Dallas, Texas
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,990,300
<SECURITIES> 0
<RECEIVABLES> 765,367
<ALLOWANCES> 0
<INVENTORY> 2,421,434
<CURRENT-ASSETS> 1,179,040
<PP&E> 42,526,866
<DEPRECIATION> 1,792,130
<TOTAL-ASSETS> 51,549,026
<CURRENT-LIABILITIES> 5,054,125
<BONDS> 0
8,392,475
0
<COMMON> 85,689
<OTHER-SE> 48,188,561
<TOTAL-LIABILITY-AND-EQUITY> 51,549,026
<SALES> 3,689,524
<TOTAL-REVENUES> 3,689,524
<CGS> 2,850,950
<TOTAL-COSTS> 14,610,731
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 567,986
<INCOME-PRETAX> (14,097,606)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,097,606)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (2,356,111)
<NET-INCOME> (16,453,717)
<EPS-BASIC> (2.03)
<EPS-DILUTED> (2.03)
</TABLE>
