<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2000
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)
940-323-2624
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES x NO
As of November 8, 2000 the number of shares of Common Stock, $.01 par value,
outstanding was 10,366,602.
<PAGE> 2
INTERNATIONAL ISOTOPES INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I - FINANCIAL INFORMATION:
Item 1 - Financial Statements:
Unaudited Condensed Consolidated Balance Sheets at September 30, 2000
and December 31, 1999. 3
Unaudited Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2000 and 1999, and for the Nine Months
Ended September 30, 2000 and 1999 4
Unaudited Condensed Consolidated Statements of Cash Flows for
the 5 Nine Months Ended September 30, 2000 and 1999. 5
Notes to Unaudited Condensed Consolidated Financial Statements. 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II - OTHER INFORMATION:
Item 2 - Changes in Securities 15
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
</TABLE>
-2-
<PAGE> 3
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
Assets 2000 1999
------- --------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,619,778 $ 2,990,300
Accounts receivable 1,934,137 765,367
Inventories 3,739,779 2,421,434
Prepaids and other current assets 934,393 1,179,040
--------------- ---------------
Total current assets 9,228,087 7,356,141
Property, plant and equipment, net 41,846,945 40,734,736
Goodwill, net 1,174,144 1,394,302
Intangibles and other assets 1,991,785 2,063,847
--------------- ---------------
Total assets $ 54,240,961 $ 51,549,026
=============== ===============
Liabilities, Redeemable Convertible Preferred Stock, and Stockholders' Equity
Current liabilities
Accounts payable $ 3,932,228 $ 2,077,051
Accrued liabilities 1,235,416 1,105,273
Current portion of lease obligations 1,493,206 1,346,958
Current installments of mortgage and notes payable to banks 2,611,717 524,843
--------------- ---------------
Total current liabilities 9,272,567 5,054,125
Non-current portion of lease obligations 2,504,296 3,053,025
Mortgage and notes payable to banks, excluding current installments 13,614,032 13,953,679
--------------- ---------------
Total liabilities 25,390,895 22,060,829
Redeemable convertible preferred stock, net 17,397,537 8,392,475
(liquidation value of $20,000,000 at September 30, 2000 and
$10,000,000 at December 31, 1999)
Stockholders' equity
Preferred stock, $0.01 par value; 5,000,000 shares authorized,
20,000 shares issued and outstanding -- --
Common stock, $0.01 par value; 50,000,000 shares authorized,
issued and outstanding 9,742,293 shares at September 30, 2000
and 8,569,074 shares at December 31, 1999 97,422 85,689
Additional paid-in capital 67,123,406 48,828,561
Accumulated deficit (55,128,299) (27,178,528)
Receivable from stockholders (640,000) (640,000)
--------------- ---------------
Total stockholders' equity 11,452,529 21,095,722
--------------- ---------------
Total liabilities and stockholders' equity $ 54,240,961 $ 51,549,026
=============== ===============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
-3-
<PAGE> 4
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months ended September 30, Nine Months ended September 30,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Sales of product 1,532,994 $ 692,749 $ 3,569,154 $ 1,926,763
Development contract income 537,880 68,532 1,355,725 127,351
Sale of accelerator components -- 6,790 -- 707,790
-------------- -------------- -------------- --------------
Total revenue 2,070,874 768,071 4,924,879 2,761,904
Cost of revenue:
Cost of products 3,369,314 674,369 7,937,406 1,747,522
Cost of development contract 327,274 -- 630,556 --
Cost of accelerator components -- -- -- 358,467
-------------- -------------- -------------- --------------
Gross profit (loss) (1,625,714) 93,702 (3,643,083) 655,915
-------------- -------------- -------------- --------------
Operating costs and expenses:
Salaries and contract labor 734,996 476,507 1,626,183 1,316,357
Sales and marketing 178,913 173,432 368,113 676,558
Product development -- 1,646,509 2,735,519 4,605,389
General, administrative and consulting 1,799,029 987,109 4,753,646 2,948,717
-------------- -------------- -------------- --------------
Total operating expenses 2,712,938 3,283,557 9,483,461 9,547,021
-------------- -------------- -------------- --------------
Operating loss (4,338,652) (3,189,855) (13,126,544) (8,891,106)
Other income (expense):
Loss on disposal of assets held for sale -- (42,967) -- (42,967)
Interest income 49,648 58,589 113,530 158,203
Interest expense (500,677) (8,168) (1,473,722) (10,666)
-------------- -------------- -------------- --------------
Net loss (4,789,681) (3,182,401) (14,486,736) (8,786,536)
Preferred stock dividend, deemed dividends
and accretion of discount (4,563,761) (113,320) (12,960,557) (1,529,830)
-------------- -------------- -------------- --------------
Net loss applicable to common shareholders $ (9,353,442) $ (3,295,721) $ (27,447,293) $ (10,316,366)
============== ============== ============== ==============
Net loss per common share - basic and diluted $ (0.97) $ (0.39) $ (2.90) $ (1.30)
============== ============== ============== ==============
Weighted average common shares outstanding -
basic and diluted 9,686,222 8,485,055 9,480,620 7,963,503
============== ============== ============== ==============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
-4-
<PAGE> 5
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months ended September 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (14,486,736) $ (8,786,536)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 2,508,022 1,209,513
(Gain) loss on sale or donation of assets -- 42,967
Services compensated by stock issuance 469,783 --
Changes in operating assets and liabilities:
Accounts receivable (1,168,770) (353,018)
Other assets 316,709 (120,114)
Inventory (1,318,345) (261,662)
Accounts payable 1,495,563 139,520
Accrued liabilities 130,143 (164,957)
------------- -------------
Net cash used in operating activities (12,053,631) (8,294,287)
------------- -------------
Cash flows from investing activities:
Purchase of fixed assets (2,290,646) (4,868,016)
Proceeds from sale of assets held for sale -- 320,613
------------- -------------
Net cash used in investing activities (2,290,646) (4,547,403)
------------- -------------
Cash flows from financing activities:
Payment of contingent consideration - MAC Isotopes, Inc. (1,266,441) (869,559)
Proceeds from issuance of redeemable convertible
preferred stock and warrants 9,320,000 4,700,000
Proceeds from issuance of common stock,
net of issuance costs 5,450,264 10,053,692
Payments on capital leases (1,152,295) (646,144)
Proceeds from issuance of debt 4,641,579 --
Principal payments on notes payable (2,894,352) (3,185,965)
Payments of preferred stock dividends (125,000) --
------------- -------------
Net cash provided by financing activities 13,973,755 10,052,024
------------- -------------
Net increase in cash and cash equivalents (370,522) (2,789,666)
Cash and cash equivalents at beginning of period 2,990,300 6,371,704
------------- -------------
Cash and cash equivalents at end of period $ 2,619,778 $ 3,582,038
============= =============
</TABLE>
(Continued)
-5-
<PAGE> 6
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months ended September 30,
2000 1999
------------- --------------
<S> <C> <C>
Supplemental disclosure of cash flow activities:
Cash paid for interest, net of amounts capitalized $ 1,473,722 $ 10,666
============= ==============
Supplemental disclosure of noncash transactions:
Common stock issued for preferred stock dividend $ 425,000 $ --
============= ==============
Capital expenditures included in accounts payable $ 462,849 $ 215,342
============= ==============
Common stock issued for prepayment of royalties $ -- $ 1,000,000
============= ==============
Acquisition of equipment through capital leases $ 749,814 $ 3,981,965
============= ==============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
-6-
<PAGE> 7
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
(1) The Company and Basis of Presentation
International Isotopes Inc (the Company) was incorporated in Texas in November
1995. 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.
Prior to initial production in late 1999, the Company had devoted substantially
all of its efforts 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 International Isotopes Idaho Inc. ("I4").
Additionally, the Company has derived operating capital from the sales of
equipment. 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. The Company utilized funds
obtained from these financings 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 accompanying unaudited consolidated financial statements include the results
of operations of the Company and its wholly owned subsidiaries, Gazelle Realty
and I4. All significant intercompany accounts and transactions have been
eliminated in consolidation. The unaudited consolidated financial statements
included herein have been prepared without audit and in accordance with
generally accepted accounting principles, for interim periods, and have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). These statements reflect all adjustments which, in the opinion
of management, are necessary for the fair presentation of the Company's
financial position as of September 30, 2000, the results of its operations for
the three and nine-month periods ended September 30, 2000 and 1999, and its cash
flows for the nine-month periods ended September 30, 2000 and 1999. This
information should be read in conjunction with the Company's audited
consolidated financial statements as set out in the Company's annual report on
Form 10-K filed March 30, 2000.
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
a development stage through most of 1999 and has not begun significant
operations. In the periods presented, management utilized consolidated financial
information to make business decisions and allocate resources.
Certain information in footnote disclosures, normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations
-7-
<PAGE> 8
of the SEC. The financial data disclosed in the notes to the condensed
consolidated financial statements are unaudited for these periods.
(2) Current Developments and Liquidity
The Company has experienced cumulative losses of $39,309,154 since inception and
has principally funded operations and plant and equipment expenditures from
proceeds from public and private placements of equity. The Company has also
borrowed funds under short and long-term borrowing arrangements. The Company has
incurred an operating loss for the nine months ended September 30, 2000 of
$14,486,736 and has funded operations through the issuance of preferred and
common stock aggregating $14,770,264 in net cash proceeds. The Company has also
had net borrowings under note payable arrangements of $1,747,227 (a short term
note from William Nicholson, chairman of the board of directors, in the amount
of $1,165,986, an increase of $860,900 in the revolving line of credit, with
Texas State Bank, secured by accounts receivable, a long term note payable of
$100,000 through Eastern Idaho Economic, secured by the building located at 4317
Commerce Circle, Idaho Falls, ID, and principal payments of $379,659 to Texas
State Bank on the long term note payable), exclusive of capital lease
transactions for equipment.
The Company is currently considering several strategic alternatives. The
alternatives, all or some of which may be acted upon, consist of the following.
In November 2000, The Company signed a nonbinding letter of intent with a third
party to sell its brachytherapy seed business. The arrangement is subject to
completion of due diligence by the prospective buyer and negotiation of the
terms of the transaction. If the transaction is consummated, it is expected to
close by December 31, 2000. The net book value of the tangible equipment related
to the brachytherapy seed business is $4,944,410 at September 30, 2000 and the
value of the intangible assets, which consist of prepaid royalties, is $651,508
at September 30, 2000.
International Isotopes is also currently seeking buyers for the LINAC, including
related real property and improvements. The net book value of equipment, land
and improvements related to the LINAC is $23,025,578 at September 30, 2000.
There can be no assurance that the proceeds from the sale of the LINAC will be
sufficient to recover the recorded asset amounts. Accordingly, the Company may
realize a loss on the sale of the LINAC, if such sale is consummated.
The Company is also actively marketing its administration building, land and
related improvements as well as other real property. The net book value of the
building, land and improvements available for sale is $1,128,785 at September
30, 2000. There can be no assurance that the proceeds from the sales of these
assets will be sufficient to recover the recorded amounts. Accordingly, the
Company may realize a loss on the sale of the building and other real property
and improvements if such sales are consummated.
The Company has also entertained offers from other companies for the remaining
radiopharmaceutical and I4 business, however no arrangements have been entered
into nor has the Company determined that these businesses should be divested of
as of the time of this filing. The net book value of tangible and intangible
assets associated with these businesses is $21,041,866 and $3,448,814,
respectively at September 30, 2000. There can be no assurance that the sales
proceeds obtained from the sale of these businesses will be sufficient to
recover the recorded asset amounts. Accordingly, in the event the Company enters
into transactions to sell these businesses, the Company may realize a loss on
the sale of these businesses.
As part of the decision to sell the LINAC, the Company terminated 30 employees
in November 2000. Severance costs related to the employee terminations
approximate $125,000. Additional headcount reductions could take place in the
fourth quarter ended December 31,2000, related to other strategic decisions by
the Company.
-8-
<PAGE> 9
The Company intends to undertake all or a combination of the above strategic
alternatives in order to either generate proceeds sufficient to fund remaining
operations or to provide an adequate return for the Company's shareholders.
International Isotopes will continue to seek alternative forms of financing to
sustain operations while its strategies are implemented. The Company is in
negotiations with its financial institution lender and other key vendors to
restructure debt service and other cash obligations while the above strategies
are implemented. There can be no assurance that the Company's strategies,
including debt restructuring, will be successfully implemented or that if
implemented, that such strategies will generate sufficient cash proceeds to fund
the remaining operations for the foreseeable future. In the event the Company is
unable to generate sufficient financing, its operations would be significantly
curtailed.
(3) Net Loss Per Common Share - Basic and Diluted
Basic loss per share excludes dilution for potentially dilutive securities and
is computed by dividing loss applicable to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted loss per
share, which is computed on the basis of the weighted average number of common
shares and all potentially dilutive securities outstanding during the period, is
the same as basic loss per share as all potentially dilutive securities were
anti-dilutive.
At September 30, 2000, the Company had 1,085,400 common stock options and
7,312,376 common stock warrants outstanding. Potentially dilutive securities,
comprised of redeemable convertible preferred stock issued in May 1999, October
1999 and June 2000, stock options and warrants have not been considered in the
computation of diluted net loss per common share since their inclusion would be
anti-dilutive.
(4) Inventories
Inventories consist of the following at September 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Raw materials $ 1,120,488 $ 564,354
Work in progress 2,234,676 1,798,718
Finished goods 384,615 58,362
------------------ -----------------
$ 3,739,779 $ 2,421,434
================== =================
</TABLE>
(5) Common Stock
In September of 2000, the Company elected to issue common stock in payment for
the quarterly dividend on the Series B redeemable convertible preferred stock.
The Company satisfied the $175,000 dividend payment by issuing 49,808 shares of
common stock at $3.51 per share, the average closing price of the common stock
for the preceding 5 trading days.
In August of 2000, the Company issued stock, in two transactions, to certain
employees as compensation for services provided. On August 18, 2000 the Company
issued 14,000 shares of common stock at $4.06 per share for a total value of
$56,875. On August 23, 2000 the Company issued 5,000 shares of common stock at
$3.88 per share for a total value of $19,375.
In July of 2000, the Company elected to issue common stock in payment for the
quarterly dividend on the Series A redeemable convertible preferred stock. The
Company satisfied the $125,000 second quarter dividend payment by issuing 30,389
-9-
<PAGE> 10
shares of common stock at $4.11 per share, the average closing price of the
common stock for the preceding 10 trading days, discarding the highest and the
lowest for the period.
In February of 2000, the Company completed a private placement of units of its
securities to accredited investors. Each unit consisted of 1 share of common
stock at $5.50 per share and a warrant to purchase one half of an additional
share at $5.50 per share. The Company sold units representing 1,054,652 shares
of common stock and warrants to purchase an additional 527,326 shares to
accredited investors for aggregate consideration of $5,800,586, before issuance
costs of $422,410. The sale of the units was an exempt offering 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 April 11, 2000.
In January of 2000, the Company elected to issue common stock in payment for the
quarterly dividend on redeemable convertible preferred stock. The Company
satisfied the $125,000 dividend payment by issuing 19,370 shares of common stock
at $6.45 per share, the average closing price of the common stock for the
preceding 10 trading days, discarding the highest and the lowest for the period.
On April 24, 1998, the Company agreed to reimburse MACTEC, Inc ("MACTEC") for
decreases in market value of the Company's common stock issued as part of the
acquisition of International Isotopes Idaho, Inc. from MACTEC. Under the
agreement, one-half of the reimbursement was made at April 24, 1999 and on April
24, 2000 the Company advanced to MACTEC $1,586,908, for final reimbursement for
decreases in the market value of the common stock. William Nicholson, chairman
of the board of directors, made a loan to the Company in the amount of
$1,500,000 with which to fund the reimbursement. MACTEC sold on open market the
79,708 shares of common stock and paid the net proceeds of $320,466 to the
Company in August of 2000.
(6) Redeemable Convertible Preferred Stock
On June 15, 2000, the Company completed a private placement of 10,000 shares of
7% cumulative redeemable convertible $0.01 par value $1,000 face value preferred
stock ("Series B Preferred Stock") together with 2,500,000 warrants to purchase
common stock at $4.00 per share, for aggregate proceeds of $10 million, before
issuance costs of $680,000. Dividends are 7% per annum payable in cash or common
stock (at the Company's option) beginning September 1, 2000 and continuing
quarterly thereafter through June 1, 2003. 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 Price").
The Series B Preferred Stock is mandatorily redeemable on May 31, 2003 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 on December 1, 2000, and
June 1, 2001, and 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. The Series B Preferred
Stock is convertible to common stock at $4.00 per share and the warrants are
exercisable at any time up to June 1, 2003 at $4.00 per share.
The Company assigned an aggregate value of $3,283,582 to the warrants ($1.31 per
share) using an option pricing model with the following assumptions: value of
underlying stock of $4.50, exercise price of $4.00 per share, volatility of 60%,
risk-free interest rate of 6.50%, and contractual term of three years. The
warrant value was
-10-
<PAGE> 11
recorded to additional paid-in capital and is being accreted to the Series B
Preferred Stock over 5 1/2 months, the earliest redemption period.
After consideration of the warrant value and the in-the-money conversion price
at the commitment date, the Series B Preferred Stock has a "beneficial
conversion feature" of $5,213,582 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. The beneficial conversion feature is considered an
additional return to the preferred stockholders in the determination of net loss
applicable to the common shareholders.
The conversion price applicable to the Company's Series A Preferred Stock issued
in May and October 1999 was altered, in accordance with its terms, upon the
issuance of the Series B Preferred Stock on June 15, 2000. The Company was
required to alter the price used to calculate the number of common shares
issuable upon the conversion of the Series A Preferred Stock to Common Stock.
The conversion price was reduced to $4.00 from a floor of $7.00 and a ceiling of
$11.86. This change caused an increase in the value of the beneficial conversion
feature in the amount of $1,250,000 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. The beneficial conversion feature provided to the
Series A preferred stockholders has also been included in the determination of
net loss applicable to common shareholders.
Additionally, with respect to the holders of the Series A Preferred Stock, the
Company was required to increase the number of warrants to purchase common stock
granted to them from 410,000 to 1,215,650 and decrease the warrant exercise
price to $4.00 from $11.86. These changes caused an increase in the value of the
warrants from $1,330,450, calculated at the original issuance of the warrants,
to $2,340,127. The revised value was calculated using an option pricing model
with the value of the underlying stock of $4.50, exercise price of $4.00,
volatility rate of 60%, a risk free interest rate of 6.5% and the contractual
term of the warrants. This increase in warrant value of $1,009,677 has been
recognized as an additional return to the Series A preferred stockholders
through a charge to accumulated deficit and an increase to additional paid-in
capital. The incremental warrant value provided to the Series A preferred
stockholders has also been included in the determination of net loss applicable
to common shareholders.
The conversion price applicable to the Company's Series A Preferred Stock issued
in May and October 1999 was again altered, in accordance with its terms, on
August 22, 2000 upon the 180 day reset of the exercise price of warrants issued
with common stock during the February, 2000 private placement. The Company was
required to alter the price used to calculate the number of common shares
issuable upon the conversion of the Series A Preferred Stock to Common Stock.
The conversion price was reduced to $3.38 from $4.00. This change caused an
increase in the value of the beneficial conversion feature in the amount of
$719,320 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.
The beneficial conversion feature provided to the Series A preferred
stockholders has also been included in the determination of net loss applicable
to common shareholders.
Additionally, with respect to the holders of the Series A Preferred Stock, the
Company was required to increase the number of warrants to purchase common stock
granted to them from 1,215,650 to 1,438,640 and decrease the warrant exercise
price to $3.38 from $4.00. These changes caused an increase in the value of the
warrants from $2,340,127, calculated at the original issuance of the warrants
and previously adjusted by the Series B issuance, to $2,474,461. The revised
value was calculated using an option pricing model with the value of the
underlying stock of $4.00, exercise price of $3.38, volatility rate of 60%, a
risk free interest rate of 6.5% and the contractual term of the warrants. This
increase in warrant value of $134,334 has been recognized as an additional
return to the Series A preferred stockholders through a charge to accumulated
deficit and an increase to additional paid-in capital. The incremental warrant
value provided to the Series A preferred stockholders has also been included in
the determination of net loss applicable to common shareholders.
-11-
<PAGE> 12
(7) Subsequent Events
On October 4, 2000, the Company issued 100,000 shares to Stonegate Securities
for services provided in connection with the private placement of common stock
and warrants closed in February 2000. The stock was issued at $3.88 per share
for a total consideration of $387,500.
On October 15, 2000, the Company issued 34,151 shares of common stock in payment
of the quarterly dividend requirement of $125,000 on the Series A Preferred
Stock.
On October 20, 2000, holders of 1,783 shares of Series B redeemable convertible
preferred stock, with a face value of $1,783,000, converted their preferred
stock to 445,750 shares of common stock at the conversion price of $4.00 per
share. In addition, on October 20, 2000, the Company elected to pay prorated
dividends on the converted shares of $17,097, by issuing 6,104 shares of common
stock at $2.80 per share.
On October 26, 2000, the Company issued 25,000 shares of common stock to an
employee as compensation for services provided.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for historical information contained herein, the following contains
forward-looking information that is subject to certain risks and uncertainties.
The Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors including those
set forth in the "Risk Factors" section included in the Company's Form 10-K,
filed with the Securities Exchange Commission (SEC) on March 30, 2000 ("Form
10-K"). The following discussion should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Form 10-K.
RESULTS OF OPERATIONS
Three and nine month periods ended September 30, 2000 and 1999. The Company's
net loss for the three and nine month periods ended September 30, 2000 were
$4,789,681 and $14,486,736, as compared to net loss of $3,182,401 and $8,786,536
for the comparable periods of 1999. Net loss per common share for the three and
nine month periods ended September 30, 2000 were $0.97 and $2.90, as compared to
net loss per common share of $0.39 and $1.30 for the same periods of 1999.
The increase in the loss for the three and nine month periods ended September
30, 2000 was largely due to expenses relating to materials, manufacturing
supplies and other production-related goods, hiring additional manufacturing
personnel, increased activities, completion of the validation of facilities,
equipment and procedures, regulatory costs and licensing requirements. In
addition, FY 2000 depreciation expenses were substantially higher as equipment
which was previously under construction was placed into service in January 2000.
Revenues for the three and nine month period ended September 30, 2000 were
$2,070,874 and $4,924,879 as compared to $768,071 and $2,761,904 for the same
periods in 1999. Gross profit (loss) for the three and nine month periods ended
September 30, 2000 was ($1,625,714) and ($3,643,083) as compared to $93,702 and
$655,915 for the same periods in 1999. The increase in revenues for the three
and nine month periods were attributable to the sales of
-12-
<PAGE> 13
finished brachytherapy seeds and development contract income which offset
decreases in equipment sales and lower revenues from I(4). A significant portion
of the increase in development contract revenues is attributable to the $1.3
million contract signed with NeoRx Corporation (NeoRx) to provide plant
development for a manufacturing facility which will produce NeoRx's Skeletal
Radiotherapy product. The decrease in gross profit was caused by the Company
increasing its production capacity in anticipation of increased future
production levels and manufacturing activities.
Operating expenses decreased to $2,712,938 and $9,483,461 for the three and nine
month periods ended September 30, 2000 compared to $3,283,557 and $9,547,021 for
the same periods of 1999. Salaries and contract labor expenses for the three and
nine month periods ended September 30, 2000 were $734,996 and $1,626,183 as
compared to $476,507 and $1,316,357 for the same periods of 1999, an increase of
$258,489 and $309,826 respectively. General, administrative and consulting
expenses totaled $1,799,029 and $4,753,646 for the three and nine month periods
ended September 30, 2000 as compared to $987,109 and $2,948,717 for the same
periods of 1999, increases of $811,920 and $1,804,929 respectively. Sales and
marketing expenses increased to $178,913 and decreased to $368,113 for the three
and nine month periods ended September 30, 2000 as compared to $173,432 and
$676,558 for the corresponding periods of 1999. The increase in operating
expenses was attributable to increases in personnel for production, marketing,
quality control, environmental health and safety, and administrative personnel
as the Company expanded its organizational structure and began limited
operations. Other increases in operating expenses included increased insurance
for property, general and product liability, license fees, supplies, materials
related to manufacturing and increased depreciation expense as more equipment
and facilities commenced operations. Product development costs of $0 and
$2,735,519 were incurred during the three and nine month periods ended September
30, 2000 as compared to $1,646,509 and $4,605,389 for the corresponding periods
of 1999.
Interest income during the three and nine month periods ended September 30, 2000
was $49,648 and $113,530 as compared to $58,589 and $158,203 for the comparable
periods of 1999, decreases of $8,941 and $44,673 respectively. The decreases in
interest income for the three and nine month periods ended September 30, 2000
compared to the comparable periods of 1999 were attributable to a reduction in
the invested funds available from various private placements which were used to
fund the Company's facilities construction, equipment purchases and operations.
Interest expense for the three and nine month periods ended September 30, 2000
was $500,677 and $1,473,722 as compared to $8,168 and $10,666 for the comparable
periods of 1999 as construction of the Company's facilities was in progress. As
facilities and construction in progress were completed, interest costs no longer
qualified for capitalization and were expensed as incurred.
Liquidity and Capital Resources
On September 30, 2000 the Company had cash and cash equivalents of $2,619,778
compared to $2,990,300 at December 31, 1999. For the nine months ended September
30, 2000, net cash used in operating activities of $12,053,631 and net cash used
in investing activities, for capital expenditures, of $2,290,646 were provided
by financing activities of $13,973,755.
The Company has experienced cumulative losses of $39,309,154 since inception and
has principally funded operations and plant and equipment expenditures from
proceeds from public and private placement of equity. The Company has also
borrowed funds under short and long-term borrowing arrangements. The Company has
incurred an operating loss for the nine months ended September 30, 2000 of
$14,486,736 and has funded operations through the issuance of preferred and
common stock aggregating $14,770,264 in net cash proceeds. The Company has also
had net borrowings under note payable arrangements of $1,747,227 (a short term
note from William Nicholson, chairman of the board of directors, in the amount
of $1,165,986, an increase of $860,900 in the revolving line of credit, with
Texas State Bank, secured by accounts receivable, a long term note payable of
$100,000 through Eastern
-13-
<PAGE> 14
Idaho Economic, secured by the building located at 4317 Commerce Circle, Idaho
Falls, ID, and principal payments of $379,659 to Texas State Bank on the long
term note payable), exclusive of capital lease transactions for equipment.
The Company is currently considering several strategic alternatives. The
alternatives, all or some of which may be acted upon, consist of the following.
In November 2000, the Company signed a nonbinding letter of intent with a third
party to sell its brachytherapy seed business. The arrangement is subject to
completion of due diligence by the prospective buyer and negotiation of the
terms of the transaction. If the transaction is consummated, it is expected to
close by December 31, 2000. The net book value of the tangible equipment related
to the brachytherapy seed business is $4,944,410 at September 30, 2000 and the
value of the intangible assets, which consist of prepaid royalties, is $651,508
at September 30, 2000.
International Isotopes is also currently seeking buyers for the LINAC, including
related real property and improvements. The net book value of equipment, land
and improvements related to the LINAC is $23,025,578 at September 30, 2000.
There can be no assurance that the proceeds from the sale of the LINAC will be
sufficient to recover the recorded asset amounts. Accordingly, the Company may
realize a loss on the sale of the LINAC, if such sale is consummated.
The Company is also actively marketing its administration building, land and
related improvements as well as other real property. The net book value of the
building, land and improvements available for sale is $1,128,785 at September
30, 2000. There can be no assurance that the proceeds from the sales of these
assets will be sufficient to recover the recorded amounts. Accordingly, the
Company may realize a loss on the sale of the building and other real property
and improvements if such sales are consummated.
The Company has also entertained offers from other companies for the remaining
radiopharmaceutical and I4 business, however no arrangements have been entered
into nor has the Company determined that these businesses should be divested of
as of the time of this filing. The net book value of tangible and intangible
assets associated with these businesses is $21,041,866 and $3,448,814,
respectively at September 30, 2000. There can be no assurance that the sales
proceeds obtained from the sale of these businesses will be sufficient to
recover the recorded asset amounts. Accordingly, in the event the Company enters
into transactions to sell these businesses, the Company may realize a loss on
the sale of these businesses.
As part of the decision to sell the LINAC, the Company terminated 30 employees
in November 2000. Severance costs related to the employee terminations
approximate $125,000. Additional headcount reductions could take place in the
fourth quarter ended December 31,2000, related to other strategic decisions by
the Company.
The Company intends to undertake all or a combination of the above strategic
alternatives in order to either generate proceeds sufficient to fund remaining
operations or to provide an adequate return for the Company's shareholders.
International Isotopes will continue to seek alternative forms of financing to
sustain operations while its strategies are implemented. The Company is in
negotiations with its financial institution lender and other key vendors to
restructure debt service and other cash obligations while the above strategies
are implemented. There can be no assurance that the Company's strategies,
including debt restructuring, will be successfully implemented or that if
implemented, that such strategies will generate sufficient cash proceeds to fund
the remaining operations for the foreseeable future. In the event the Company is
unable to generate sufficient financing, its operations would be significantly
curtailed.
On June 15, 2000, the Company completed a private placement of 10,000 shares of
7% cumulative redeemable convertible $0.01 par value $1,000 face value Series B
Preferred Stock together with 2,500,000 warrants to purchase common stock at
$4.00 per share, for aggregate proceeds of $10 million, before issuance costs of
$680,000, resulting in net proceeds of $9,320,000. The Series B Preferred Stock
is mandatorily redeemable on May 31, 2002 in cash or
-14-
<PAGE> 15
common stock, at the Company's option. Early redemption may be required at the
option of the holders on December 1, 2000 and June 1, 2001, and in the event of
other circumstances, such as change in control, suspension or delisting from
NASDAQ or BSE, or other circumstances.
On February 1, 2000, the Company initiated a private placement of its equity
securities. The securities were offered at $5.50 per unit, which included one
share of common stock and a warrant to purchase one-half an additional share of
common stock at $5.50 per share. A total of 1,054,652 shares of common stock
(plus warrants to purchase an additional 527,326 shares) were issued for gross
proceeds of $5,800,586. Commissions in the amount of $422,410 were paid to the
placement agent, resulting in net proceeds of $5,378,176.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 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, as amended by SFAS 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement 133, and SFAS 138, Accounting for Certain Derivatives Instruments and
Certain Hedging Activities, require that an entity recognize all derivatives as
either assets or liabilities measured at fair value. The accounting for changes
in the fair value of a derivative depends on the use of the derivative. The
provisions of this statement are effective for the Company as of January 1,
2001. The impact of adopting this statement on January 1, 2001, will not be
determinable until December 31, 2000.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation: an Interpretation of APB
Opinion No. 25. This interpretation clarifies the application of APB Opinion No.
25, Accounting for Stock Issued to Employees, and is effective July 1, 2000. The
adoption of this interpretation did not have a material effect on our results of
operations or financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
This bulletin summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB No. 101B that delayed the implementation date
of SAB No. 101 until the fourth fiscal quarter of fiscal years beginning after
December 15, 1999. We do not expect our adoption of the provisions of this
bulletin to have a material effect on our results of operations or financial
position.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
In January of 2000, the Company elected to issue common stock in payment for the
quarterly dividend on its Series A redeemable convertible preferred stock. The
Company satisfied the $125,000 dividend payment by issuing 19,370 shares of
common stock at $6.45 per share, the average closing price of the stock for the
preceding 10 trading days, discarding the highest and the lowest price for the
period.
On February 1, 2000, the Company initiated a private placement of its equity
securities. The securities were offered at $5.50 per unit, which included one
share of common stock and a warrant to purchase one-half an additional share of
common stock at $5.50 per share. A total of 1,054,652 shares of common stock
(plus warrants to purchase an additional 527,326 shares) were issued for gross
proceeds of $5,800,586. Commissions in the amount of $422,410 were paid to the
placement agent, resulting in net proceeds of $5,378,176.
On June 15, 2000, the Company completed a private placement of 10,000 shares of
7% cumulative redeemable convertible $0.01 par value $1,000 face value preferred
stock ("Series B Preferred Stock") together with 2,500,000 warrants to purchase
common stock at $4.00 per share, for aggregate proceeds of $10 million, before
issuance costs of $680,000. Dividends are 7% per annum payable in cash or common
stock (at the Company's option) beginning September 1, 2000 and continuing
quarterly thereafter through June 1, 2003. The Series B Preferred Stock is
convertible into common stock at a price of $4.00 per share.
In July of 2000, the Company elected to issue common stock in payment for the
quarterly dividend on its Series A redeemable convertible preferred stock. The
Company satisfied the $125,000 dividend payment by issuing 30,389 shares of
common stock at $4.11 per share, the average closing price of the stock for the
preceding 10 trading days, discarding the highest and the lowest price for the
period.
In August of 2000, the Company issued stock, in two transactions, to certain
employees as compensation for services provided. On August 18, 2000 the Company
issued 14,000 shares of common stock at $4.06 per share for a total
consideration of $56,875. On August 23, 2000 the Company issued 5,000 shares of
common stock at $3.88 per share for a total consideration of $19,375.
In September of 2000, the Company elected to issue common stock in payment for
the quarterly dividend on the Series B redeemable convertible preferred stock.
The Company satisfied the $175,000 dividend payment by issuing 49,808 shares of
common stock at $3.51 per share, the average closing price of the common stock
for the preceding 5 trading days.
The conversion price applicable to the Company's Series A Preferred Stock issued
in May and October 1999 was altered, in accordance with its terms, upon the
issuance of the Series B Preferred Stock on June 15, 2000. The
-15-
<PAGE> 16
Company was required to alter the price used to calculate the number of common
shares issuable upon the conversion of the Series A Preferred Stock to Common
Stock. The conversion price was reduced to $4.00 from a floor of $7.00 and a
ceiling of $11.86. Additionally, the Company was required to increase the number
of warrants granted from 410,000 to 1,215,650 and decrease the exercise price to
$4.00 from $11.86.
The conversion price applicable to the Company's Series A Preferred Stock issued
in May and October 1999 was again altered, in accordance with its terms, on
August 22, 2000 upon the 180 day reset of the exercise price of warrants issued
with common stock during February, 2000 private placement. The Company was
required to alter the price used to calculate the number of common shares
issuable upon the conversion of the Series A Preferred Stock to Common Stock.
The conversion price was reduced to $3.38 from $4.00. Additionally, the Company
was required to increase the number of warrants granted from 1,215,650 to
1,435,454 and decrease the warrant exercise price to $3.38 from $4.00.
On October 2, 2000, the Company issued 13,304 shares of common stock in
connection with the Employee Stock Purchase Plan, at a price of $2.55 per share
for a total consideration of $33,925.
On October 4, 2000, the Company issued 100,000 shares to Stonegate Securities
for services provided in connection with the private placement of common stock
and warrants closed in February 2000. The stock was issued at $3.88 per share
for a total expense of $387,500.
On October 15, 2000, the Company issued 34,151 shares of common stock in payment
of the quarterly dividend requirement of $125,000 on the Series A Preferred
Stock.
On October 20, 2000, holders of 1,783 shares of Series B redeemable convertible
preferred stock, with a face value of $1,783,000, converted their preferred
stock to 445,750 shares of common stock at the conversion price of $4.00 per
share. In addition, on October 20, 2000, the Company elected to pay prorated
dividend on the converted shares of $17,097, by issuing 6,104 shares of common
stock at $2.80 per share
On October 26, 2000, the Company issued 25,000 shares of common stock to an
employee as compensation for services provided.
Item 4. Submission of Matters to a Vote of Security Holders
On August 23, 2000, a special meeting of shareholders was held. The purpose of
the meeting was to vote on the following:
1. To amend the Company's Articles of Incorporation to increase
from 20,000,000 to 50,000,000 the number of shares of Common
Stock the Company is authorized to issue.
2. To approve the Company's issuance of Common Stock upon
conversion of its 7% Series B Convertible Redeemable Preferred
Stock and the exercise of certain Warrants.
3. To approve the Company's 2000 Employee Stock Purchase Plan.
Proxies representing 5,133,595 shares, 53.23% of the 9,634,096 shares
outstanding, were received prior to the vote. Proposition 1 to increase the
number of authorized shares passed by a vote of 4,793,139 for, 320,287 against
and 20,169 abstaining. Proposition 2 to approve the issuance of Common Stock
upon conversion of the Series B Preferred Stock passed by a vote of 4,658,398
for, 396,804 against and 78,393 abstaining. Proposition 3 to approve
-16-
<PAGE> 17
the Company's Employee Stock Purchase Plan passed by a vote of 4,873,650 for,
161,794 against and 98,151 abstaining.
Item 5. Other Information
On April 24, 1998, the Company agreed to reimburse MACTEC, Inc ("MACTEC") for
decreases in market value of the Company's common stock issued as part of the
acquisition of International Isotopes Idaho, Inc. from MACTEC. Under the
agreement, one-half of the reimbursement was made at April 24, 1999 and on April
24, 2000 the Company advanced to MACTEC $1,586,908, for final reimbursement for
decreases in the market value of the common stock. William Nicholson, chairman
of the board of directors, made a loan to the Company in the amount of
$1,500,000 with which to fund the reimbursement. MACTEC sold on open market the
79,708 shares of common stock and paid the net proceeds of $320,466 to the
Company in August of 2000.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
27.1 Financial Data Schedule
Reports on Form 8-K:
The Company filed a form 8-K on June 27, 2000 regarding the issuance of Series B
redeemable convertible preferred stock through a private placement and the
resulting adjustments to the Series A redeemable convertible preferred stock
conversion price and warrant exercise price.
The Company filed form 8-K on February 11, 2000 regarding the issuance of equity
securities through a private placement of common stock and warrants.
-17-
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
International Isotopes Inc.
(Registrant)
By: /s/ Paul E. Landers
--------------------------------------
Paul E. Landers
Chief Financial Officer
By: /s/ David M. Camp, Ph.D.
--------------------------------------
David M. Camp, Ph.D.
President and Chief Executive Officer
Date: November 20, 2000
-18-
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
