UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal period ended December 31, 2003
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.
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(Exact name of registrant as specified in its charter)
Texas 74-2763837
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(State of incorporation) (IRS Employer Identification Number)
4137 Commerce Circle
Idaho Falls, Idaho 83401
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(Address of principal executive offices) (zip code)
(208) 524-5300
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(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:
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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-KSB or any amendment to
this Form 10-KSB. (X)
The Company's revenue for 2003 was $2,070,592.
The aggregate market value of the shares of common stock held by non-affiliates
of the Company at March 18, 2004 was $6,963,494.
As of March 18, 2004 the number of shares outstanding of common stock, $.01 par
value was 141,424,502 shares.
INTERNATIONAL ISOTOPES INC.
FORM 10-KSB
PRELIMINARY STATEMENT
International Isotopes Inc., a Texas corporation, (together with its wholly
owned subsidiary, International Isotopes Idaho Inc. ("I4") hereafter referred to
as "we" or the "Company" or "I3") was initially formed as a Texas corporation in
1995 to produce, market, and distribute a broad range of products used in
diagnostic and therapeutic nuclear medicine, research, and industry. In 2001,
the Company changed its mission and business strategy somewhat to focus upon
other radioisotope products, manufacture calibration and reference standards for
nuclear medicine, and provide general radiological measurement capability for
processed gemstones. In 2003, the Company put two new supply agreements in place
for Lu-177 and I-131 radioisotopes and expanded their processing facility to
include processing and distribution capability for these isotopes in 2004.
Documents Incorporated by Reference
The information called for in Part III is incorporated by reference to the
definitive proxy statement for the annual meeting of shareholders of the
Company, which will be filed with the Securities and Exchange Commission not
later than 120 days after December 31, 2003.
2
INTERNATIONAL ISOTOPES INC.
FORM 10-KSB
TABLE OF CONTENTS
Page No.
Part I.
Item 1. Business ..................................................... 4
Item 2. Properties ................................................... 7
Item 3. Legal Proceedings ............................................ 7
Item 4. Submission of Matters to a Vote of Securities-Holders ........ 7
Part II.
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters ............................... 8
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 9
Item 7. Financial Statements.......................................... 14
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ....................... 15
Item 8A Controls and Procedures....................................... 15
Part III.
Item 9. Directors and Executive Officers of Registrant ............... 15
Item 10. Executive Compensation ....................................... 15
Item 11. Security Ownership of Certain Beneficial Owners
and Management ............................................ 15
Item 12. Certain Relationships and Related Transactions ............... 15
Item 13. Exhibits, Financial Statement Schedule
and Reports on Form 8-K ................................... 16
Item 14. Principal Accountant Fees and Services ....................... 16
Power of Attorney ...................................................... 17
Signatures ............................................................. 17
3
PART I
Item 1. BUSINESS
General Business and Products Description
International Isotopes Inc., a Texas corporation, (together with its wholly
owned subsidiary, International Isotopes Idaho Inc. ("I4") hereafter referred to
as "we" or the "Company" or "I3") was initially formed as a Texas corporation in
1995 to produce, market, and distribute a broad range of products used in
diagnostic and therapeutic nuclear medicine, research, and industry. In 2001, we
changed our mission and business strategy somewhat to focus upon other
radioisotope products, manufacture calibration and reference standards for
nuclear medicine, and provide general radiological measurement capability for
processed gemstones. In 2003, we put two new supply agreements in place for
Lu-177 and I-131 radioisotopes and expanded our processing facility to include
processing and distribution capability for these new isotopes. The following
paragraphs provide some additional details on our various business areas.
Radioisotope Products
We offer a selection of radioisotopes and radiochemicals for various
applications including clinical research, life sciences, and industrial
applications. In the past these isotopes have included Cobalt-60 (Co-60),
Cobalt-57 (Co-57), Cesium-137 (Cs-137), and Barium-133 (Ba-133), which were
typically sold as radiochemicals to be used in the manufacture of various
reference or calibration standards for industry or medicine. The Cobalt-60
isotope produced by the Company is unique in that it is very high specific
activity material. This high specific activity material can only be produced in
a few nuclear reactors around the world such as the Department of Energy
Advanced Test Reactor at the Idaho National Laboratory, to which we currently
have access. This high activity cobalt is sold in bulk to General Electric
Nuclear who in turn fabricates sealed sources for the Leksell gamma knife.
During 2003 we put two new supply agreements in place with two independent
producers to supply the additional isotopes of Lutetium-177 (Lu-177) and
Iodine-131 (I-131) radiochemical. Lutetium-177 is currently being investigated
in several different clinical applications including treatment of colon cancer,
metastic bone cancer, Non-Hodgkin's Lymphoma, and lung cancer. In published
cancer statistics, it is estimated that there are over half a million new cases
of these cancers occurring each year in the U. S. and nearly two million cases
worldwide. Clinical research with Lutetium-177 has been ongoing for several
years and the isotope has demonstrated certain chemical and radiological
properties which make it potentially very well suited as a cancer therapy
product. We are obtaining our Lutetium-177 through an agreement with the
University of Missouri Research Reactor (MURR), which has been a leading
developer of radioisotopes suitable for patient trials and has also been a very
reliable production source for these isotopes.
Also in 2003, we entered into a distribution agreement with a major global
supplier of Iodine-131 radiochemical and plan on starting distribution within
all 50 states beginning in the first quarter of 2004. Iodine-131 is currently
being used on a large commercial scale within the U.S. for the treatment and
diagnosis of various diseases of the thyroid such as Graves disease, thyroid
cancer, and hyperthyroidism. Iodine-131 is also being used in a host of
investigational and clinical trials such as for the treatment of breast, lung,
prostate, and ovarian cancers.
Calibration and Reference Standards
We are a contract manufacturer for a wide range of NIST traceable calibration
standards and Quality Assurance check sources for various nuclear pharmacy and
SPECT related equipment. These items include flood sources, dose calibrators,
rod sources, flexible and rigid rulers, spot markers and penpoint markers. I3 is
an exclusive contract manufacturer for Radqual LLC for these products. There are
over 5,000 nuclear medicine centers around the country that require these types
of products on a regular basis.
4
General Measurement and Radiological Services
The Company provides a host of analytical, measurement, and processing services
on a contract basis to clients. Some of these services offered include detailed
radioactivity analysis, gamma assay, ICP analysis, Type A package development
and testing, and Health Physics consulting. The largest single product service
in this area involves our packaging and post irradiation examination process for
gemstone that has undergone irradiation for color enhancement. We have had an
exclusive contract with Quali-Tech Inc. since 2001 to provide this service.
Fluorine products
We initiated evaluation and acquisition in 2003 of seven patents related to an
entirely new product line for the Company - fluorine extraction process (FEP).
We closed this acquisition on January 30, 2004. The FEP patents and intellectual
property will be used for production of several high purity fluorine products
and we will establish a new fluorine products division to capitalize upon this
technology.
High purity fluorine gases are in ever-increasing demand for ion-implantation or
chemical vapor deposition processes for microelectronics components and
high-speed silicon chip manufacture. The FEP fluorine product is equal to or
greater than 99.99% pure with no detectable uranium in the product gas. This
makes our FEP products ideally suited to these specialty applications where
ultra high purity gases are required. In addition, we anticipate that the
production costs of FEP products will be low in comparison with ultra pure
fluorine products manufactured by other common commercial methods enabling us to
effectively compete with existing high purity fluorine product suppliers both on
cost and purity.
To support the start-up of FEP we have entered into a marketing and technology
consulting agreement with individuals knowledgeable and experienced with the
processing technology and market applications for FEP products and leased an
additional industrial facility for production of FEP gases. We believe that the
market size and growth outlook for high purity fluorine products is excellent
and should provide the Company an opportunity to grow our revenue substantially
in coming years.
We believe that revenues generated from these business activities can be
expected to have a positive effect upon our projections for continued growth in
2004 and should produce sufficient cash to meet our operational needs. However,
prospective investors are cautioned regarding the speculative nature of any
forward-looking projections. Also see "Item 6, Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion of
these and other risk factors relating to the Company when considering an
investment in our securities.
Company Licensing, Capabilities, and Qualifications
We are a participating member of the National Institute of Standards and
Technology/ Nuclear Energy Institute's (NIST/NEI) Measurement Assurance Program
(MAP) for the radiopharmaceutical industry. This program participation ensures
that we can provide analytical methods and standards necessary for accurate
radioactivity measurement and is a requirement for most of the products
manufactured for nuclear medicine reference and calibration standards. We are
also a registered Food and Drug Administration (FDA) medical device manufacturer
for Class I medical devices, including Nuclear Sealed Calibration Sources
(892.1400) and Nuclear Flood Source Phantoms (892.1380), and have a fully
implemented Quality Assurance program which meets the requirements of ANSI/ASME
NQA-1 and 10 CFR 830.120.
We have an operating license issued from the Nuclear Regulatory Commission which
defines the types and amounts of radioactive materials permitted within our
facility. In 2003 the Company completed two additional revisions to this
licensing to allow expanded production of our new radioisotopes, Lutetium-177
and Iodine-131.
5
Industry Overview, Target Markets, and Competition
The industries and markets that require or involve the use of radioactive
material are diverse. Our current operations involve products that are used in a
wide variety of applications and in various markets.
Radioisotope products are supplied typically in a bulk form and are highly
competitive. The target market's for these products are customers who 1)
incorporate them into finished industrial or medical devices 2) use these
products in clinical trials for various medical applications, or 3) further
process and include the material into a pharmaceutical product for FDA approved
therapy or imaging.
Calibration and Reference Standards are required for the daily operational
checks and calibration of the measurement or SPECT imaging devices frequently
used in nuclear medicine. This calibration and quality assurance testing is
required as a routine part of the normal operations of this equipment to ensure
its reliability and accuracy. We exclusively manufacture these products for
Radqual LLC, which in turn sells the products to several distributors around the
U.S. We directly ship these products to all 50 states and Canada. There are two
other major producers of these products within the U.S. and that directly
compete with us for these products.
Most of our general measurement and radiological services are performed in
support of gemstone processing. This material has undergone color enhancement by
irradiation at the University of Missouri Research reactor. The gemstones are
used in commercial jewelry manufactured by other companies in overseas
locations. The color enhancement process is a highly competitive industry and
there are several alternatives to irradiation treatment. There are also other
reactors located in other regions of the world that also offer this irradiation
service capability. The jewelry manufacturing industry is also a highly
competitive industry.
We are developing our fluorine products in 2004 to address an opportunity we see
in the increased market demand for certain high purity fluorine compounds in the
microelectronics industry. Emerging technologies such as the increased use of
silicon germanium processing chips for the wireless industry will require the
use of high purity fluorine compounds such as germanium tetra fluoride. We plan
to establish some manufacturing capacity for at least one of these compounds in
2004. Several of these fluorine compounds are already under production by other
businesses. Since the cost of the FEP process is low we anticipate being able to
be very price competitive with our fluorine products. However, this price
advantage may initially be our only competitive advantage in this market.
Government Regulation
The Company has obtained a license from the Nuclear Regulatory Commission,
Region IV that permits use and possession of by-product material. The scope of
this license includes calibration and reference standard manufacturing and
distribution, radioisotope processing and distribution, radioactive gemstone
processing, environmental sample analysis, and various research and development
activities. The existing license and permit's are adequate to allow all of the
business operations. Expansion into FEP production will require additional
permitting both through the NRC, State of Idaho, and the EPA. We will make every
effort to prepare well planned and detailed applications for these additional
permits, however, there can be no assurance of the time frame required for the
various governmental agencies to review and approve these permits.
Regulation of Radioisotope Production Radioactive Waste
All of our manufacturing processes result in the generation of some radioactive
waste. We must handle these wastes pursuant to the Low Level Radioactive Waste
Policy Act of 1980, which states we are required to assure the safe disposal of
mildly radioactive materials. The estimated costs for storage and disposal of
these materials have been included into the manufacturing and sales price of our
products. However, actual disposal costs are subject to change at the discretion
of the disposal site and are ultimately applied at the time of disposal.
The operating permit from the NRC also requires that we maintain an adequate
cash reserve, in the form of a certificate of deposit and irrevocable letter of
credit to the NRC to support our estimated decommissioning and disposal costs
for the facility. We do not handle "special nuclear materials" (i.e. nuclear
fuels and weapons grade uranium, thorium and plutonium) and, therefore, our
facility is not designated as a "nuclear" facility.
6
Other Regulations
Our sale of the isotopes Lutetium-177 and Iodine -131 for medical applications
could cause us to be subject to additional regulations of the Food and Drug
Administration (FDA). The Company is registered as a medical device manufacturer
through the U.S. FDA for several of our nuclear medicine reference and
calibration standards.
Employees
As of December 31, 2003 we had twelve full time employees. The employees of the
Company possesses a significant depth of radiological safety and Health Physics
professionals and technicians with experience in both government and commercial
operating sectors. In addition, we have developed a wide array of capabilities
directly related to manufacture and distribution of our products and
miscellaneous service work for the nuclear industry and have increased our
number of employees during the course of 2003 to support the growth of
additional products.
Item 2. PROPERTIES
During 2003 we completed a 3,500 square foot expansion of our current
manufacturing facility and entered into a new five-year lease with purchase
options on what is now a 12,000 square foot manufacturing facility in Idaho
Falls. In early 2004 we also leased an additional adjacent 8,500 square foot
facility, which we plan to use for manufacture of our fluorine products. The
additional facility is also under a 5-year lease with purchase options similar
to our existing facility.
Item 3. LEGAL PROCEEDINGS
On February 20, 2004 a lawsuit was filed by Iso-Science Laboratories, Inc. dba
Isotope Products Laboratories in the Superior Court of the State of California
for the County of Los Angeles against International Isotopes; International
Isotopes of Idaho; Steve Laflin, an individual; Keith Allberg, an individual;
Randall O'Kane, an individual; Radqual, a business form unknown and Does 1
through 100. The Case Number of the Suit is PCO34499. Mr. Laflin is the
President and CEO of International Isotopes Inc. Mr. Allberg and Mr. O'Kane are
principals of Radqual, a significant customer of International Isotopes Inc. The
petition that was filed with the court contains numerous allegations against the
defendants relating to the defendants manufacture and sale of products that
incorporate radioactive isotopes. The petition alleges violation of the Uniform
Trade Secrets Act and Conversion by the defendants by use of information that
the plaintiff alleges it purchased or acquired from a previous employer of Mr.
Allberg. The petition also contains allegations of unfair trade practices,
interference with prospective business relationships, conspiracy, and violation
of the RICO statute alleged to have occurred by the defendants engaging in a
pattern of racketeering activity in interstate commerce. The Company believes
the allegations of the petition are totally without merit and the Company
intends to vigorously defend itself in the lawsuit. The Company has a
manufacturing agreement with Radqual which indemnifies and holds harmless
International Isotopes and its officers, agents, employees, and Affiliates from
any loss, claim, action, damage, expense or liability arising from this suit.
Therefore, the Company does not expect that the ultimate costs to resolve these
matters will have a material adverse effect on our consolidated financial
position, results of operations, or cash flow.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
An annual meeting of stockholders was conducted on April 29, 2003. The purpose
of the meeting was to review Company performance and present 3 propositions for
stockholder approval. The three propositions were 1) to elect three directors to
serve until the next succeeding annual meeting and until their respective
successors are elected and qualified; 2) to ratify the appointment by the Board
of Directors of Hansen Barnett & Maxwell as independent certified public
accountants of the Company for the fiscal year ending December 31, 2003; and 3)
to approve an amendment to the Company's Articles of Incorporation to provide,
in accordance with Texas law, that shareholder actions may be taken by written
consent of the requisite percentage of shareholders without a shareholder
meeting or a vote of all shareholders. A Proxy Statement, form of Proxy and a
copy of the Annual Report on Form 10K as filed with the Securities and Exchange
Commission were distributed to all stockholders on March 28, 2003. A total of
90% of the common shares voted and to approve propositions 1 and 2 and 76% of
the shares outstanding voted in favor of proposition #3.
7
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Prior to the completion of our IPO in August 1997, there was no established
public trading market for our Common Stock. At that time the Company's Common
Stock commenced trading on the NASDAQ Small Cap Market under the symbol of
"INIS". The Company was also listed on the Boston Stock Exchange under the
symbol "ITL". Since the second quarter of 2001 the Company's stock has not been
listed on Nasdaq and has been traded solely over the counter in the Pink Sheets.
High and low sales prices reported by the respective trading sectors during the
periods indicated are shown below:
Fiscal Year Quarter High Low
2002 1st $0.15 $0.02
2002 2nd $0.13 $0.05
2002 3rd $0.09 $0.05
2002 4th $0.06 $0.03
2003 1st $0.05 $0.04
2003 2nd $0.08 $0.03
2003 3rd $0.14 $0.03
2003 4th $0.10 $0.03
On December 31, 2003, there were 335 holders of record of the Common Stock. The
closing price on December 31, 2003 , of a share of common stock was $ 0.10. We
have never paid any cash dividends on our common stock. In the future, and based
upon Company profit performance, the Board of Directors of the Company will
evaluate and determine whether to issue dividends or retain funds for research
and development and expansion of our business. It is unlikely that we will pay
any dividends to shareholders for the foreseeable future.
Recent Registrations and Sales of Securities through Company Rights Offer
On September 12, 2003, the Company filed an S-8 Registration statement with the
Securities and Exchange Commission in order to register up to 20,000,000 shares
of common stock in relation to the Company's 2002 long term incentive program.
On August 12, 2003 we commenced a rights offering under which we offered
38,229,157 Units (each Unit includes (i) one share of common stock, (ii) one
warrant to purchase another share of common stock for $.04, and (iii) one
warrant to purchase an additional share of common stock for $.05) to our
shareholders. The Securities and Exchange Commission had declared the
registration statement for the rights offering effective on July 28, 2003.
Shareholders received one Right for each share owned and were entitled to
purchase one Unit for every 2.5 Rights owned at a subscription price of $.03 per
Unit. Shareholders who exercised all of their Rights in full were entitled to
the additional privilege of over subscribing for and purchasing, subject to
certain limitations and subject to allocation, any Units not acquired by other
holders of Rights, plus up to an additional 14,500,000 Units if the Rights offer
was over-subscribed. Complete information, subscription certificates, and a
prospectus were mailed to all shareholders commencing on August 12, 2003 and
were made available for viewing on our website. We completed the rights offering
on September 12, 2003.
8
The total amount raised from the rights offer was $1,313,679, which corresponds
to 100% of the basic shareholder subscription and an additional 38% of the over
subscription amount permitted under the offering. Of the total amount received
by the Company, $906,811 was subscribed through shareholder conversion of debt
to equity and an additional $406,868 was provided as cash. Under the terms of
the rights offering we issued 43,790,153 shares of common stock to participants,
bringing the total number of outstanding common shares to 139,363,046. In
addition, the participants of the rights offer received an aggregate of
43,790,153 Series A warrants and 43,790,153 Series B warrants, which can be used
to purchase additional shares of common stock for $0.04 and $0.05 respectively.
We invested the majority of net proceeds from the rights offer into equipment,
hardware, and facilities in order to further expand production capability as
evidenced by our start of Lutetium-177 and Iodine-131 sales.
Item 6. 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, our expectations regarding future financial condition and operating
results, product development, business and growth strategy, market conditions
and competitive environment. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors disclosed in this document.
I3 was initially formed as a Texas corporation in 1995 to produce, market, and
distribute a broad range of products used in diagnostic and therapeutic nuclear
medicine, research, and industry. In 2001, we changed our mission and business
strategy somewhat to focus upon other radioisotope products, manufacture
calibration and reference standards for nuclear medicine, and provide general
radiological measurement capability for processed gemstones. In 2003, we put two
new supply agreements in place for Lu-177 and I-131 radioisotopes and expanded
our processing facility to include processing and distribution capability for
these new isotopes.
In 2003, we offered a selection of radioisotopes and radiochemicals for various
applications including clinical research, life sciences, and industrial
applications. These isotopes have included , Cobalt-57 (Co-57), Cesium-137
(Cs-137), Barium-133 (Ba-133), and most significantly Cobalt-60 (Co-60). We
produce the cobalt in the Department of Energy Test Reactor at the Idaho
National Laboratory. As a consequence, the production rate of the material and
delivery schedules are effected by the operating schedule of that reactor and
the support of the DOE prime operating contractor. Fortunately, the radiological
half-life of Cobalt-60 is long enough that time delays do not normally present
quality problems with our customer. However, these delays can result in
significant changes to the times we complete sales and realize revenue from
those sales. Such was the case in 2003 when numerous delays in the DOE
reactor-operating schedule delayed our scheduled cobalt sale from November 2003
until February 2004. This delay significantly reduced our operating revenues for
2003.
During 2003, we entered into a new supply agreement with the University of
Missouri Research Reactor (MURR) to supply the additional isotope Lutetium-177
(Lu-177). MURR has been a leading developer of radioisotopes suitable for
patient trials and has also been a very reliable production source for this type
of isotope. Lutetium-177 is currently being investigated in several different
clinical applications including treatment of colon cancer, metastic bone cancer,
Non-Hodgkin's Lymphoma, and lung cancer. Published cancer statistics estimate
that there are over half a million new cases of these cancers occurring each
year in the U. S. and nearly two million cases worldwide. Clinical research with
lutetium-177 has been ongoing for several years and the isotope has demonstrated
certain chemical and radiological properties which make it potentially very well
suited as a cancer therapy product. We are actively marketing this radioisotope
and attempting to cater to the research community that could require this
product to support their trials in the coming years. Should clinical trials be
successful one or more sponsors could be expected to begin phased trials
necessary to eventually have FDA approval of products containing this isotope.
That FDA approval process takes years to complete and requires extensive
financial support by a sponsoring pharmaceutical company throughout that period.
We will not be supporting the cost of this FDA approval process but hope to
realize significant commercial revenues by supplying the isotope for clinical
and investigational use customers.
9
Also in 2003, we entered into a distribution agreement with a major global
supplier of Iodine-131 radiochemical. During the last half of 2003, we have
purchased the necessary hot cell and process equipment and put two distribution
agreements in place to facilitate sales of the isotope. We will launch
distribution of this isotope within all 50 states beginning in the first quarter
of 2004. Iodine-131 is currently being used on a large commercial scale within
the U.S. for the treatment and diagnosis of various diseases related to the
thyroid such as Graves disease, thyroid cancer, and hyperthyroidism. Iodine-131
is also being used in a host of investigational and clinical trials such as for
the treatment of breast, lung, prostate, and ovarian cancers.
We continued the contract manufacturing relationship with RadQual LLC in 2003,
and this business area exhibited excellent growth. While competition in this
business industry remains severe, we have been able to keep pace with the price
discounts offered by our competitors and gain additional market share by
offering what be believe is the best quality product in the market.
General measurement and radiological services in 2003 remained weak largely
attributable to weakness in the gemstone markets and effects of global
competition in the gemstone industry. We are not anticipating significant growth
in this industry in the coming year and have, therefore, directed future
resources towards the development of our other products and expansion into new
business areas.
We completed an evaluation of a business opportunity involving the fluorine
extraction process (FEP) and made a determination during 2003 to acquire from
the current owner seven FEP related patents thus giving us exclusive U.S. rights
to this technology. We believe there is an excellent market potential for the
high purity fluorine products and we will spend considerable effort in 2004
working to put some initial production capability in place. Also to support the
start-up of FEP, we have entered into a marketing and technology consulting
agreement with individuals knowledgeable and experienced with the processing
technology and market applications for FEP products and leased an additional
facility for production of FEP gases.
We believe that revenues generated from these business activities can be
expected to have a positive effect upon our projections for continued growth in
2004 and should produce sufficient cash to meet our operational needs. However,
prospective investors are cautioned regarding the speculative nature of any
forward-looking projections. Also see "Item 6, Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion of
these and other risk factors relating to the Company when considering an
investment in our securities.
Liquidity and Capital Resources
On December 31, 2003 we had cash and cash equivalents of $310,789 compared to
$441,904 at December 31, 2002. For the year ended December 31, 2003, our cash
flows included net cash used in operating activities of $788,924, net cash
provided by financing activities of $572,418 and cash provided by investing
activities of $81,976.
The Company incurred a loss applicable to common shareholders of $578,485 for
the year ended December 31, 2003 and has an accumulated deficit of $87,968,650
since inception. Prior to 2003 the Company principally funded operations and
plant and equipment expenditures from proceeds from public and private sales of
equity as well as through asset sales.
In July 2002 we took out an additional loan with Texas State Bank for $100,000
and paid this loan in full in June 2003. As of December 31, 2003, the Company
had net borrowings of $733,595 under a revolving line of credit with Texas State
Bank that we reduced from $1,046,520 on January 1, 2003 through the sale of
excess equipment held for sale. Subsequent to December 31, 2003 the Company
converted this revolving line to a fixed term note with a maturity date of June
30, 2004 and began making regular monthly interest only payments. We anticipate
working with Texas State Bank to extend the maturity date of this note to at
least December 31, 2004. We also established a $250,000 revolving line of credit
with Texas State Bank in January 2004 to provide additional operating capital.
The maturity date of that note is also June 30, 2004 and at that time the
Company will reevaluate whether to continue or close this revolving line. As of
the submittal date of this form 10-KSB we have not withdrawn funds on this
revolving line of credit.
10
During the quarter ended June 30, 2003, as part of an agreement with certain
shareholders, the Company increased its short-term borrowing from these
shareholders to $790,000. During the quarter ended September 30, 2003, these
notes were converted to common stock as part of our rights offering.
The Company completed an unsecured note purchase agreement on January 21, 2004
with certain of the Company's Principal investors and Directors totaling
$650,000. This is an unsecured note accruing interest at 6% per year with a
maturity date of December 31, 2005. Interest is to be paid on this note on a
semi-annual basis and the Company has the option to prepay the principal balance
at any time prior to maturity. The principal of the note and any accrued
interest is convertible into shares of the Company's common stock at any time at
the option of the holder prior to maturity. The conversion price for this
conversion option was based on the market value of the common stock and was
determined to be $0.18 per share.
Results of Operations
Year ended December 31, 2003 compared to year ended December 31, 2002
Revenues
Total revenues were $2,070,592 in 2003 as compared to $2,181,704 in 2002, a
decrease of $111,112 or 5%. This decrease was primarily attributable to a delay
in a major cobalt sale originally planned for November 2003 but delayed into
2004 because of circumstances beyond our control. Had this sale taken place as
planned our revenues for 2003 would have totaled approximately 2,444,592 and
represented a 12% increase over 2002. Other contributing factors to revenue in
2003 were a 24% increase in the revenue from sales of nuclear medicine reference
and calibration standards and a 30% decline in gemstone processing revenues.
Increased revenues from nuclear medicine reference and calibration standards
came through increased sales of existing products and sales from several new
products added during 2003. The decline in gemstone revenues came as our
exclusive customer came under increasing competition in the color enhancement
and costume jewelry industry.
Cost of revenues
Cost of revenue for 2003 was $1,151,161 compared to $1,071,690 in 2002, an
increase of $79,471 or 7%. Most of this increase was attributable to the
addition of several new products and costs of special contracts.
Operating costs and expenses
Total operating costs and expenses for 2003 were $1,582,512, as compared to
$1,402,664 in 2002, an increase of $179,848 or 13%. The increase was
attributable to increased staffing and efforts in research and development
related to implementation of Lutetium-177 and Iodine-131 production capability.
We also increased our expenditures in marketing and advertising related to these
new products and incurred additional investor relations expense to improve
communication with our shareholders.
Other income (expense)
The total of Other Income (expense) in 2003 was $108,332 compared to an expense
of ($57,803). The difference was principally attributable to a decrease in the
interest expense incurred in the year and the sale of certain fully impaired
assets.
11
Continuing Operations
The net loss from continuing operations was $554,749 in 2003 compared to a loss
of $350,453 in 2002. The $204,296 increase in net loss was primarily
attributable to increases in equipment depreciation, research and development,
marketing consultants, and additional labor support. All of these increased
expenses were directed toward the development of new nuclear medicine reference
and calibration standards and implementing processing and distribution
capability for the new isotopes Lutetium-177 and Iodine-131.
Forward Looking Information
The Company or its representatives may make forward looking statements, oral or
written, including statements in this Report's Management's Discussion and
Analysis of Financial Condition and Results of Operations, press releases and
filings with the Commission, regarding estimated future operating results,
planned capital expenditures (including the amount and nature thereof) and the
Company's financing plans, if any, related thereto, and other plans and
objectives for future operations. There can be no assurance that the actual
results or developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected effects on our business
or operations. Among the factors that could cause actual results to differ
materially from the Company's expectations are general economic conditions,
competition, government regulations, and other factors set forth among the risk
factors noted below or in the description of our business in Item 1 of this
Report, as well as factors contained in the Company's other securities filings.
Generally, forward-looking statements include words or phrases such as
"management believes," the "Company anticipates," the "Company expects" and
words and phrases of similar import. Forward-looking statements are made
pursuant to the Private Securities Litigation Reform Act of 1995. All subsequent
oral and written forward looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by these
factors. The Company assumes no obligation to update any of these statements.
In 2004 we will continued to offer our selection of radioisotopes and
radiochemicals for various applications including clinical research, life
sciences, and industrial applications. In 2004 we plan to expand our utilization
of the test reactor and begin producing larger quantities of lower activity
Cobalt-60 that is required for a wider range of customers and applications.
During 2003 we put a new supply agreement in place with the University of
Missouri Research Reactor (MURR) to supply Lutetium-177. Lutetium-177 is
currently being investigated in more than thirty different clinical applications
including treatment of colon cancer, metastic bone cancer, Non-Hodgkin's
Lymphoma, and lung cancer. During 2004 we will actively market this radioisotope
and attempt to cater to the research community that could require this product
to support their trials.
We will also market our newest product, Iodine-131 within all 50 states
beginning in the first quarter of 2004. Iodine-131 is currently being used on a
large commercial scale within the U.S. for the treatment and diagnosis of
various diseases related to the thyroid such as Graves disease, thyroid cancer,
and hyperthyroidism and it is being used in a host of investigational and
clinical trials for the treatment of breast, lung, prostate, and ovarian
cancers. We expect to quickly develop a wide customer base and sell product to
many of the independent pharmacy networks in the U.S.
The contract manufacturing relationship with RadQual LLC will continue through
2004 and we expect this business area to continue to exhibit excellent growth in
2004. Several new products were introduced in 2003 and some additional products
will be introduced in 2004.
General measurement and radiological services in 2003 remained weak largely
attributable to weakness in the gemstone markets and effects of global
competition in the gemstone industry. We are not anticipating significant growth
in this industry in the coming year and have, therefore, directed future
resources to other product areas.
12
We will spend considerable effort in 2004 to put some initial production
capability of some FEP compounds in place. Efforts will also be directed at
initiating our licensing and permitting process for larger scale production of
these FEP gasses in subsequent years.
We believe that revenues generated from these business activities can be
expected to have a positive effect upon our projections for continued growth in
2004 and should produce sufficient cash to meet our operational needs. However,
prospective investors are cautioned regarding the speculative nature of any
forward-looking projections. Also see "Item 6, Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion of
these and other risk factors relating to the Company when considering an
investment in our securities.
Company Risk Factors
International Isotopes has incurred and may continue to incur losses. With the
exception of 2002, we have incurred net losses for most fiscal periods since our
inception. From inception (November 1995) through December 31, 2003 the Company
generated $19,316,817 in revenues and had an accumulated deficit (including
preferred stock dividends and returns) in the amount of $87,968,650. However,
although we cannot provide any assurance we believe the Company's continued
growth and our new business products will produce sufficient revenue to meet our
2004 cash flow and operational needs.
We may need additional financing to continue operations. As of December 31, 2003
we have an outstanding debt of $733,595 on short term note with Texas State
Bank. That note matures on June 30, 2004 and is secured with our accounts
receivable and fixed assets. We will have to negotiate an extension of terms on
this note at the maturity date. The Company also has a ten-year note for
$840,753 at 7% interest to our former Chairman of the Board. Principal and
interest payments on this note are to be paid annually based upon net profits of
the Company (annual principal payment to equal 30% of net pre-tax profits).
Remaining Company Obligations on the Texas State Bank Loan for the Waxahachie
Property. In 2002 the Company and Texas State Bank agreed to have our loan
assumed by an individual in consideration of our sale of the Waxahachie
property. As of December 31, 2003 the remaining outstanding balance on this loan
was $329,357. Should this individual default on the assumed note, the liability
for the loan would revert to the Company.
We will continue to be dependent upon our remaining 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.
There is no long-term contract in place with the DOE Contractor for continued
HSA Cobalt production. The Company has put short term specific "work for
non-government sponsor agreements" in place with the DOE contractor to continue
sales of HSA cobalt irradiated at the Idaho reactor facility. We expect that
these agreements will continue, however, there is no assurance these contracts
will be equitable or continuing.
Operational hazards (i.e., spills, faults, ventilation failure, etc.) could
result in the spread of contamination within our facility and require additional
funding to correct. An irrevocable, automatic renewable letter of credit against
a $150,000 Certificate of Deposit at Texas State Bank has been used to provide
the financial assurance required by the Nuclear Regulatory Commission for our
Idaho facility license. If a contamination event resulted in greater liability
to us we would have to borrow money or fund the liability from our future
revenue.
Government regulation could adversely affect our business. Operations within our
Idaho facility are subject to the U.S. Nuclear Regulatory Commission and Food
and Drug Administration regulations. Nuclear medicine calibration and reference
standards are licensed and regulated. To the extent these regulations are or
become burdensome, our business development could be adversely affected.
13
We are dependent upon key personnel. Our ongoing operations are dependent on
Steve T. Laflin, President and Chief Executive Officer. The Company is highly
dependent upon this person and the loss of this individual could have a material
adverse effect on us. We have a $2 million dollar key man life insurance policy
on Mr. Laflin and a 5-year employment agreement with him extending through
February 2007. The Company has revised our employee stock options to assist with
offering incentives and retaining key personnel. In addition, there is no
assurance the Company will be able to retain our existing personnel or attract
additional qualified employees. Loss of any of these relationships would result
in a significant decline in revenue.
We are dependent on various third parties in connection with our business
operations. The production of HSA Cobalt is dependent upon the Department of
Energy, and its prime-operating contractor, who controls the Idaho reactor and
laboratory operations. Our gemstone production is tied to an exclusive agreement
with Quali Tech Inc. and this current agreement expires in November 2004.
Nuclear medicine calibration and reference standard manufacturing is conducted
under an exclusive contract with RadQual, LLC, which in turn has agreements in
place with several companies for marketing and sales.
We are subject to competition from other companies. Each of the business areas
of the Company has direct competition from other businesses. HSA cobalt is
supplied by other reactor facilities around the world. Nuclear medicine
calibration and reference standards are being produced by several other
manufacturers in the U.S. and overseas, and there is at least one other gemstone
processor in Europe. Lutetium-177 and I-131 isotope is manufactured by several
other companies in the world, and there are also other suppliers of high purity
fluorine products. Each of our competitors has significantly greater financial
resources than us and that could create a competitive advantage for them over
us.
We are named as Defendant in a lawsuit filed by Iso-Science Laboratories Inc. A
lawsuit has been filed by Iso-Science Laboratories, Inc. dba Isotope Products
Laboratories against International Isotopes Inc. and others. The Company
believes the allegations of the petition are totally without merit. However,
there can be no guarantee of the outcome of this suit and an unfavorable outcome
could result in the loss of a major line of revenues and require substantial
payments to the Plaintiff.
New Accounting Standards
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", which requires
that certain financial instruments be presented as liabilities that were
previously presented as equity or as temporary equity. Such instruments include
mandatory redeemable preferred and common stock, and certain options and
warrants. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and is generally effective at the beginning of the
first interim period beginning after June 15, 2003.
In November 2002, the FASB issued Financial Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 sets forth the disclosures
required by a guarantor in its financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee.
Item 7. FINANCIAL STATEMENTS
The following financial statements are included herewith:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Operations for the years ended December 31,
2003 and 2002
Consolidated Statement of Stockholders' Equity (Deficit) for the years
ended December 31, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended December 31,
2003 and 2002
Notes to Consolidated Financial Statements
14
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
Item 8A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation,
the principal executive officer and principal financial officer concluded that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
There was no change in the Company's internal control over financial reporting
during the Company's most recently completed fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART III.
Item 9. 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 2004 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, 2003, the
close of our fiscal year.
Item 10. EXECUTIVE COMPENSATION
The information set forth under the captions "Executive Compensation and Other
Matters" 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, 2003, the close of our fiscal year.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Outstanding Capital Stock and
Stock Ownership of Directors, Certain Executive Officers and Principal
Shareholders" 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, 2003, the close of our fiscal
year.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the captions "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, 2003, the close of our fiscal year.
15
Item 13. 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)).
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)).
10.1 Copy of the Company's 2002 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)).
21. International Isotopes Idaho Inc. is the sole subsidiary of the
Company.
23. Power of Attorney (included as part of signature page).
31.1 Certification under section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification under section 906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
The Company filed a Form 8K on September 17, 2003 reporting the Company had
completed its previously announced rights offering to existing shareholders
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Hansen, Barnett & Maxwell served as our independent accountants for the years
ended December 31 2002 and 2003, and is expected to serve in that capacity for
the current year. Principal accounting fees for professional services rendered
for us by Hansen, Barnett & Maxwell for the years ended December 31, 2002 and
2003 are summarized as follows:
2002 2003
------- -------
Audit $49,758 $65,496
Audit Related - -
Tax - -
All Other - -
------- -------
Total $49,758 $65,496
Audit Fees. Audit fees were for professional services rendered in connection
with the company's annual financial statement audits and quarterly reviews of
financial statements and review of and preparation of consents for registration
statements for filing with the Securities and Exchange Commission.
Audit Committee Pre-Approval Policies and Procedures. At its regularly scheduled
and special meetings, the Audit Committee of the Board of Directors, which is
comprised of independent directors knowledgeable of financial reporting,
considers and pre-approves any audit and non-audit services to be performed by
the Company's independent accountants. The Audit Committee has the authority to
grant pre-approvals of non-audit services.
16
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 Steve Laflin 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: /s/ Steve T. Laflin
-------------------------------
Steve T. Laflin
President and Chief Executive Officer
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 24, 2004 By: /s/ Dr. Ralph Richart
----------------------------
Dr. Ralph Richart
Chairman of the Board of Directors
March 24, 2004 By: /s/ Steve T. Laflin
----------------------------
Steve T. Laflin
President, Chief Executive Officer,
Director, Chief Financial Officer, and
Principal Accounting Officer
March 24, 2004 By: /s/ Christopher Grosso
----------------------------
Christopher Grosso
Director, Audit Committee Chairman
17
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page No.
Report of Independent Certified Public Accountants.................... 19
FINANCIAL STATEMENTS
Consolidated Balance Sheets
as of December 31, 2003 and 2002.................................... 20
Consolidated Statements of Operations for the years ended
December 31, 2003 and 2002......................................... 21
Consolidated Statements of Stockholders' Deficit for the
years ended December 31, 2003 and 2002.............................. 22
Consolidated Statements of Cash Flows for the years ended
December 31, 2003 and 2002.......................................... 23
Notes to Consolidated Financial Statements ............................ 25
18
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS Registered with the Public Company
5 Triad Center, Suite 750 Accounting Oversight Board
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200 An Independent member of
Fax: (801) 532-7944 Baker Tilly
www.hbmcpas.com International
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and the Stockholders
International Isotopes Inc
We have audited the accompanying consolidated balance sheets of International
Isotopes Inc and subsidiaries as of December 31, 2003 and 2002 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2003 and 2002 and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
February 6, 2004
19
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
-----------------------------
Assets 2003 2002
----------------------------------------------- ------------ ------------
Current assets:
Cash and cash equivalents $ 160,216 $ 294,746
Accounts receivable 203,152 218,923
Assets held for sale (Note 2) -- 607,531
Inventories (Note 3) 2,283,752 2,279,828
Prepaids and other current assets 190,979 128,830
------------ ------------
Total current assets 2,838,099 3,529,858
------------ ------------
Long-term assets
Restricted certificate of deposit 150,573 147,158
Property, plant and equipment, net (Note 4) 617,287 236,053
Capitalized lease disposal costs, net of accumulated
amortization of $35,604 (Note 10) 113,728 --
------------ ------------
Total long-term assets 881,588 383,211
------------ ------------
Total assets $ 3,719,687 $ 3,913,069
============ ============
Liabilities, Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit)
-----------------------------------------------
Current liabilities
Accounts payable $ 320,554 $ 257,776
Accrued liabilities 150,475 342,091
Note payable related to assets held for sale
(Notes 2 and 5) -- 345,295
Current installments of mortgage and notes
payable (Note 5) 756,725 1,226,520
------------ ------------
Total current liabilities 1,227,754 2,171,682
------------ ------------
Long-term liabilities
Obligation for lease disposal costs (Note 10) 149,332 --
Mortgage and notes payable, excluding current
installments (Note 5) 898,664 909,738
Mandatorily redeemable preferred stock, $0.01
par value; 850 shares (Note 6) 850,000 --
------------ ------------
Total long-term liabilities 1,897,996 909,738
------------ ------------
Total liabilities 3,125,750 3,081,420
Mandatorily redeemable preferred stock, $0.01 par
value; 850 shares -- 850,000
------------ ------------
Stockholders' equity (deficit) (Note 6)
Common stock, $0.01 par value; 250,000,000 shares
authorized; 139,363,046 and 95,581,135 shares
issued and outstanding, respectively 1,393,630 955,812
Additional paid-in capital 87,168,957 86,416,002
Retained earnings/(deficit) (87,968,650) (87,390,165)
------------ ------------
Total stockholders' equity (deficit) 593,937 (18,351)
------------ ------------
Total liabilities, redeemable convertible
preferred stock and stockholders'
equity (deficit) $ 3,719,687 $ 3,913,069
============ ============
See accompanying notes to consolidated financial statements.
20
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31,
-------------------------------
2003 2002
------------- -------------
Sales of product $ 2,070,592 $ 2,181,704
Cost of products 1,151,161 1,071,690
------------- -------------
Gross profit 919,431 1,110,014
------------- -------------
Operating costs and expenses:
Salaries and contract labor 495,724 469,704
General, administrative and consulting 1,029,602 594,405
Research and development 57,186 --
Restructuring charges -- 338,555
------------- -------------
Total operating expenses 1,582,512 1,402,664
------------- -------------
Operating loss (663,081) (292,650)
Other income (expense):
Other income 35,996 115,485
Gain from sale of assets held for sale 212,200 --
Interest income 3,626 7,909
Interest expense (143,490) (181,196)
------------- -------------
Total other income (expense) 108,332 (57,803)
------------- -------------
Loss from continuing operations (554,749) (350,453)
Gain on disposal of discontinued operations
(less applicable taxes of $0) -- 500,000
------------- -------------
Income (loss) before cumulative effect
of change in accounting principle (554,749) 149,547
Cumulative effect of change in accounting
principle (23,736) --
------------- -------------
Net income (loss) (578,485) 149,547
Preferred stock dividends from accretion
of discount -- (349,242)
------------- -------------
Net loss applicable to common shareholders $ (578,485) $ (199,695)
============= =============
Basic and diluted loss per share amounts
from continuing operations $ (0.01) $ (0.01)
Gain on disposal of discontinued operations -- 0.01
------------- -------------
Net loss per common share - basic and diluted $ (0.01) $ (0.00)
============= =============
Weighted average common shares outstanding -
basic and diluted 108,346,738 86,654,052
============= =============
See accompanying notes to consolidated financial statements.
21
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Consolidated Statement of Stockholders' Deficit
Years ended December 31, 2003 and 2002
Common Stock Additional Total
---------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity/(Deficit)
------------ ------------ ------------ ------------ ---------------
Balance January 1, 2002 26,581,135 $ 265,812 $ 70,575,834 $(87,190,470) $ (16,348,824)
Preferred stock dividends from accretion of
insurance costs on redeemable convertible
preferred stock -- -- -- (349,242) (349,242)
Conversion of 10,000 shares Series A redeemable
convertible preferred stock for common stock
valued at $.20 per share 50,000,000 500,000 9,500,000 -- 10,000,000
Redemption of 2,817 shares Series B redeemable
convertible preferred stock at $30.82 per
share, total redemption $86,832 -- -- 2,730,168 -- 2,730,168
Conversion of 3,800 shares Series B redeemable
convertible preferred stock for common stock
valued at $.20 per share 19,000,000 190,000 3,610,000 -- 3,800,000
Net income -- -- -- 149,547 149,547
------------ ------------ ------------ ------------ ---------------
Balance December 31, 2002 95,581,135 955,812 86,416,002 (87,390,165) (18,351)
Cancellation of 8,242 shares of common stock
as part of a licensing agreement (8,242) (82) 82 -- --
Common stock issued as part of rights offering
net of offering costs of $122,906 43,790,153 437,900 752,873 -- 1,190,773
Net loss -- -- -- (578,485) (578,485)
------------ ------------ ------------ ------------ ---------------
Balance December 31, 2003 139,363,046 $ 1,393,630 $ 87,168,957 $(87,968,650) $ 593,937
============ ============ ============ ============ ===============
See accompanying notes to consolidated financial statements.
22
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31,
-----------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net income (loss) $(578,485) $ 149,547
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 112,753 80,166
Gain from sale of assets held for sale (212,200)
Gain on release foregiveness of debt of
discontinued operations -- (500,000)
Cumulative effect of change in accounting principle 23,736 --
Changes in operating assets and liabilities:
Restricted certificate of deposit (3,415) (14,544)
Accounts receivable 15,771 (80,392)
Prepaids and other current assets (62,149) 158,244
Inventories (3,924) 257,691
Accounts payable and accrued liabilities (81,011) 102,380
--------- ---------
Net cash (used in) provided by operating activities (788,924) 153,092
--------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (392,460) (36,183)
Proceeds from assets held for sale 474,436 122,000
--------- ---------
Net cash provided by investing activites 81,976 85,817
--------- ---------
Cash flows from financing activities:
Cash paid for redemption of convertible preferred stock -- (86,832)
Proceeds from issuance of common stock 406,868 --
Payments for offering costs (122,906) --
Checks written in excess of cash in bank -- (101,714)
Proceeds from issuance of debt 760,000 232,257
Principal payments on notes payable (471,544) (149,229)
--------- ---------
Net cash provided by (used in) financing activities 572,418 (105,518)
--------- ---------
Net change in cash and cash equivalents (134,530) 133,391
Cash and cash equivalents at beginning of year 294,746 161,355
--------- ---------
Cash and cash equivalents at end of year $ 160,216 $ 294,746
========= =========
(Continued)
23
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Continued
Years ended December 31,
---------------------------
2003 2002
----------- -----------
Supplemental disclosure of cash flow activities:
Cash paid for interest $ 113,462 $ 101,748
=========== ===========
Supplemental disclosure of noncash financing and
investing transactions:
Common stock issued on conversion of preferred stock $ -- $13,800,000
Difference in redemption value and liquidation value of
preferred stock redeemed for cash -- 2,730,168
Accretion of issuance costs on preferred stock -- 349,242
Conversion of accrued interest to note payable -- 132,736
Acquisition of equipment for note payable 89,660 --
Sale of assets held for sale through assumption of debt 345,295 --
Conversion of debt and accrued interest to common stock 906,811 --
See accompanying notes to consolidated financial statements
24
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
International Isotopes Inc (the Company) was incorporated in Texas in
November 1995. The Company owns 100% of the outstanding common shares
of Gazelle Realty, Inc. and International Isotopes Idaho, Inc. (I4).
Gazelle Realty was dissolved in December 2003 and I4 holds the
remaining assets of the Company and conducts its operations.
Nature of Operations - The Company is a manufacturer of calibration and
reference standards for nuclear medicine, provides general radiological
measurement capability for processed gemstones, offers a selection of
radioisotopes and radiochemicals for various applications such as
clinical research or industrial applications, and supplies cobalt-60
isotope for use in the Leksell Gamma Knife. With the exception of
cobalt-60, the Company's normal operating cycle is considered to be one
year. Due to the time required to produce high specific activity (HSA)
cobalt-60, the Company's operating cycle for the cobalt-60 is
considered to be three years. All assets expected to be realized in
cash or sold during the normal operating cycle of business are
classified as current assets.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary
International Isotopes Idaho, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Significant Accounting Policies
(a) Financial Instruments and Cash Equivalents
The carrying value of notes payable approximates fair value
because they bear interest at rates which approximate market
rates.
Cash, cash equivalents and restricted certificate of deposit of
$310,789 and $441,904 at December 31, 2003 and 2002,
respectively, consist of operating accounts, money market
accounts and certificates of deposit. 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.
At December 31, 2003 the Company has pledged a certificate of
deposit in the amount of $150,573. The certificate of deposit is
pledged as security on a letter of credit. The letter of credit
is required as part of the licensing agreement with the Nuclear
Regulatory Commission ("NRC"). Among other things, the licensing
agreement calls for a letter of credit to provide a level of
financial assurance to maintain licensing with the NRC.
Accordingly, withdrawal of the certificate is restricted over
the remaining life of the license.
At December 31, 2003, the Company had $110,639 of cash deposits
in excess of federally insured limits.
25
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(b) Property, Plant and Equipment
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
Furniture & fixtures 3-5
Plant and improvements 5
Production equipment 5-10
Depreciation expense was $112,753 and $80,166 for the years
ended December 31, 2003 and 2002, respectively.
(c) Inventories
Inventories are carried at the lower of cost or market. Cost is
determined using the first in, first out method. Work in
progress inventory contains product that is undergoing
irradiation. This irradiation process can take up to three years
to reach high specific activity (HSA) levels.
(d) 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.
(e) 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 accounting principles generally accepted in the United
States of America. Actual results could differ from those
estimates.
(f) Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of
Long-lived assets are reviewed for impairment yearly.
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 that 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. Based on the evaluation, no impairment was
considered necessary during the years ended December 31, 2003 or
2002.
26
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(g) Cumulative Effect of Change in Accounting Principle
The Company adopted SFAS No. 143, Accounting for Asset
Retirement Obligations, on January 1, 2003. In accordance with
the transition provisions of SFAS No. 143, on that date the
Company recorded asset retirement costs and liabilities and
recorded an adjustment for the cumulative effect on prior years
of adopting SFAS No. 143 in the amount of $23,736 as a reduction
in earnings, which had no effect on basic or diluted income per
common share.
(h) Revenue Recognition
Revenue is recognized when products are shipped. No warranty
coverage or right of return provisions are provided to
customers.
The Company has three significant customers and relies heavily
on a limited number of suppliers. Management believes other
suppliers and other marketing/customer opportunities could be
pursued and has taken steps in 2003 to explore alternative
vendors and expand its limited customer base through the
addition of new products such as I-131 and Lu-177.
At December 31, 2003, sales to these three significant customers
accounted for $1,222,788, $377,309 and $345,698 of total sales.
At December 31, 2002, sales to these same three customers
accounted for $977,055, $659,866 and $491,587 of total sales.
(i) Research and Development Costs
The Company had research and development expenses totaling
$57,186 in 2003. These expenses were associated with initial
development of the processing opportunities for the lu-177 and
I-131 isotopes and for development work associated with addition
of several new products in the nuclear medicine reference and
calibration business including several measurement devices,
calibrated vials and various markers.
(j) Shipping and Handling Costs
The Company expenses all shipping and handling costs incurred.
For the years ended December 31, 2003 and 2002, the Company
expensed $108,751 and $139,616 as shipping and handling costs.
These costs are reported as general, administrative and
consulting costs on the statements of operations.
(k) Stock Option Plan
The Company accounts for stock options issued to directors,
officers and employees under Accounting Principles Board Opinion
No. 25 and related interpretations ("APB 25"). The Company
accounts for options and warrants issued to non-employees at
their fair value in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123").
27
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
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, 2003 and 2002:
2003 2002
---------- ----------
Net loss applicable to common
shareholders, as reported $ (578,485) $ (199,695)
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (95,319) (168,911)
---------- ----------
Pro forma net loss per common share $ (673,804) $ (368,606)
========== ==========
Loss per share, basic and diluted:
As reported $ (0.01) $ -
========== ==========
Pro forma $ (0.01) $ -
========== ==========
(l) 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
issuable common shares outstanding during the year. Net loss per
common share is calculated for both continuing and discontinued
operations.
As of December 31, 2003 and 2002, there were 103,580,306 and
17,027,326 options and warrants and 850 shares of Series B
redeemable convertible preferred stock outstanding,
respectively, that were not included in the computation of
diluted net loss per common share as their effect would have
been anti-dilutive, thereby decreasing the net loss per common
share.
(m) Recent Accounting Pronouncements
In May 2003 the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity", which requires that certain financial
instruments be presented as liabilities that were previously
presented as equity or as temporary equity. Such instruments
include mandatory redeemable preferred and common stock, and
certain options and warrants. The Company adopted the
requirements of SFAS 150 on July 1, 2003. This adoption had no
effect on reported net loss.
In November 2002, the FASB issued Financial Interpretation No.
45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 sets forth the disclosures required by a
guarantor in its financial statements about its obligations
under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company adopted the
requirements FIN 45 in the accompanying financial statements.
This adoption had no effect on net loss for the year ended
December 31, 2003 and increased the loss applicable to common
shareholders $10,000 during the year ended December 31, 2002.
28
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(n) Reclassifications
Certain 2002 amounts have been reclassified to conform with the
2003 presentation. These reclassifications had no effect on the
previously reported net loss.
NOTE 2 - BUSINESS CONDITION AND LIQUIDITY
Business Condition - The Company has a history of recurring losses to
common shareholders with an accumulated deficit of $87,968,650 at
December 31, 2003 and a net loss applicable to common shareholders of
$578,485 for the year then ended. The Company's working capital has
increased by $252,169 from the prior year and the Company has used cash
flows from operations of $788,924.
During the year ended December 31, 2003 the Company put in place two
new isotope supply agreements for Lu-177 and I-131, increased the range
of products offered in the nuclear medicine reference and calibration
business area, purchased patents for exclusive rights to a fluorine
extraction process, and submitted for regulatory approval an additional
nuclear medicine reference standard. Management anticipates revenues to
result from these new products and business activities in 2004,
although not assured. In an effort to get these projects started and
provide additional operating capital, the Company has also received
$650,000 in convertible debt subsequent to December 31, 2003.
As discussed in note 8, during February 2004, the Company was served
with a lawsuit that if settled in a manner unfavorable to the Company
could result in the loss of its major line of revenues and require
substantial payments to the plaintiff. The Company intends to
vigorously defend itself in this lawsuit.
NOTE 3 - INVENTORIES
Included in inventory are the various pellet holders and housings
involved in target fabrication, raw cobalt, nickel and other raw
elements, and completed flood sources and irradiated cobalt.
Inventories consisted of the following at December 31, 2003 and 2002:
2003 2002
---------- ----------
Raw materials $ 268,265 $ 294,662
Work in progress 2,007,066 1,971,551
Finished goods 8,421 13,615
---------- ----------
$2,283,752 $2,279,828
Work in progress includes cobalt-60 isotopes that are located in the
Federal Governments Advanced Test Reactor located outside Idaho Falls,
Idaho. These isotopes are at various stages of irradiation with some
isotopes near completion and others could require up to three years to
complete. At December 31, 2003 and 2002, these isotopes had a carrying
value of $1,889,003 and $1,924,550, respectively.
29
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows at December 31,
2003 and 2002:
2003 2002
--------- ---------
Furniture and fixtures $ 49,931 $ 39,641
Plant and improvements 48,507 21,270
Production equipment 791,444 349,240
--------- ---------
889,882 410,151
Less accumulated depreciation (272,595) (174,098)
--------- ---------
Property, plant & equipment, net $ 617,287 $ 236,053
========= =========
NOTE 5 - MORTGAGE AND NOTES PAYABLE
During the year ended December 31, 2002, certain shareholders advanced
the Company $80,000 of short term financing. This financing bore
interest at 5% and was due by December 31, 2003. During the year ended
December 31, 2003, these shareholders advanced an additional $710,000
under the same terms. In connection with the rights offering completed
in September 2003, these shareholders converted the total funds
advanced of $790,000 plus accrued interest of $14,326 to common stock.
At the date the conversion was granted, the conversion rate was not
beneficial to these shareholders, based on the market value of the
common stock.
At December 31, 2002, the Company had a note payable to the former
chairman of the board in the amount of $909,737. In connection with the
rights offering completed in September 2003, this individual converted
$68,985 of principal and $33,500 of accrued interest to common stock.
At the date the conversion was granted, the conversion rate was not
beneficial to this individual, based on the market value of the common
stock.
30
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
Mortgage and notes payable as of December 31, 2003 and 2002, consist of
the following:
2003 2002
----------- -----------
Revolving line of credit with a bank, bearing interest
at 7%; interest payments due monthly; secured by
equipment, accounts receivable and inventory; settled
during 2003. $ - $ 100,000
Short-term note payable to certain investors, bearing
interest at 5%; converted to equity during 2003. - 80,000
Note payable to a finance company accrues interest at
8.7%; due in monthly installments of $1,488; secured
by equipment; due in 2008. 69,161 -
Note payable to a company, accrues interest at 0%;
payable in quarterly installments of $2,970; secured
by equipment; due in 2005. 11,880 -
Promissory note to a bank, bearing interest at 7.5%
due monthly; converted from a revolving line of credit
on January 15, 2004 (Note 11); secured by equipment,
accounts receivable and inventory; due July 2004. 733,595 1,046,520
Note payable to a bank bearing interest at 9.5%;
secured by Waxahachie real estate; settled during 2003
(Note 9). - 345,295
Note payable to the former chairman of the board,
interest accrues at 7%; payable annually on April 1;
principal payments are due annually on April 1
consisting of 30% of prior year net income, with
remaining balance due April 2012; unsecured. 840,753 909,738
----------- -----------
Total mortage and notes payable to banks 1,655,389 2,481,553
Less: current maturities (756,725) (1,571,815)
----------- -----------
Mortgage and notes payable to banks, excluding
current installments $ 898,664 $ 909,738
=========== ===========
The aggregate annual maturities of mortgage and notes payable as of December 31,
2003 for the next five years are as follows:
Years Ending December 31:
_________________________
2004 $ 756,725
2005 853,984
2006 14,528
2007 15,849
2008 14,303
-----------
Total $ 1,655,389
===========
NOTE 6 - STOCKHOLDERS' EQUITY, REDEEMABLE CONVERTIBLE PREFERRED STOCK, OPTIONS
AND WARRANTS
Stock Rights Offering
On August 12, 2003, the Company completed a rights offering to its
common shareholders. Under the terms of the offering, the Company
issued one Right for each 2.5 common shares outstanding and, in
addition, common shareholders who fully subscribed were collectively
issued 14,500,000 additional Rights. Each Right issued was exercisable
at $0.03 in exchange for the issuance of one common share, a Series A
warrant to purchase one common share at $0.04 and a Series B warrant to
purchase one common share at $0.05. Common shareholders exercised
43,790,153 Rights in exchange for cash proceeds totaling $406,868 and
through the conversion of $906,810 of notes payable and accrued
interest, before $122,906 of offering costs. The warrants are
exercisable through July 2007.
31
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
Redeemable Convertible Preferred Stock
The Company has authorized the issuance of up to 5,000,000 shares of
Preferred Stock, par value $0.01 per share. 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 and October 1999, the Company completed a private placement of
10,000 shares of 5% cumulative mandatorily redeemable convertible $0.01
par value $1,000 face value preferred stock ("Series A Preferred
Stock"). In June 2000, the Company completed a private placement of
10,000 shares of 7% cumulative mandatorily redeemable convertible $0.01
par value $1,000 face value preferred stock ("Series B Preferred
Stock").
In January 2002, the Company reacquired 2,817 shares (or 37.7%) of the
Company's Series B 7% Convertible Redeemable Preferred Stock for
$86,832. Prior to January 1, 2002, 2,533 shares of the Series B
Preferred Stock were converted into 820,750 shares of common stock.
In February and March 2002 the Company gained approval from 100% of the
holders of Series A and 80% of the holders of Series B Preferred Stock
to eliminate the Series A 5% dividend and the Series B 7% dividend,
change the mandatory redemption date for all the Preferred Stock to May
2022, and remove certain default and penalty provisions. In addition,
the Company's Board of Directors approved a purchase offer of the
Series A and B Preferred Stock (5,000 common shares for each one share
of Series A or B Preferred Stock). During 2002, all of the holders of
the Series A Preferred Stock and certain holders of the Series B
Preferred Stock agreed to exchange a total of 13,800 preferred shares
for 69,000,000 shares of common stock of the Company at $0.20 per
share, which was above market value on the date of exchange. At
December 31, 2003 there are 850 shares of the Series B Preferred Stock
outstanding.
The Company adopted SFAS 150 at July 1, 2003, that required the Company
to reclassify its 850 shares of mandatorily redeemable preferred stock
with a redemption value and carrying amount of $850,000 from temporary
equity to long-term liabilities. The adoption of this standard had no
effect on net loss.
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 was
amended in 2000 to authorize grants of options to purchase up to
1,000,000 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. Effective March
2002, the Company amended and restated the 2000 Stock Incentive Plan.
The 2002 Long-Term Incentive Plan (the Plan) authorizes grants of
options to purchase up to 20,000,000 shares of authorized and unissued
shares or issued and outstanding shares of common stock. The maximum
number of options that can be granted to each employee in one year is
10,000,000.
32
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
In February 2002, the Company granted an additional 13,000,000 options
to key employees to purchase shares of common stock with an exercise
price of $0.02 per share, which was equal to the closing market price
of the common stock on the date of grant. These options vest through
February 2005. In June 2003, the Company granted 2,000,000 options to
certain directors to purchase shares of common stock with an exercise
price of $0.03 per share, which was equal to the closing market price
of the common stock on the date of grant.
A summary of the stock options issued under the Company's Plan is as
follows:
Weighted-Average
Fixed Options Shares Exercise Price
---------------------------------------------------------------------
Outstanding at January 1, 2002 1,000,000 $ 0.08
Granted 13,000,000 0.02
---------- ------------
Outstanding at December 31, 2002 14,000,000 0.03
Granted 2,000,000 0.03
---------- ------------
Outstanding at December 31, 2003 16,000,000 $ 0.02
========== ============
Exercisable at December 31, 2002 4,000,000 $ 0.03
========== ============
Exercisable at December 31, 2003 8,000,000 $ 0.03
========== ============
The following table summarizes information about fixed stock options
under the Plan outstanding at December 31, 2003:
Options Weighted- Weighted Number Weighted-
Outstanding at Average Average Exercisable at Average
Range of Exercise December 31, Remaining Exercise December 31, Exercise
Price 2003 Contractual Life Price 2003 Price
----------------- -------------- ---------------- -------- -------------- ---------
$ .02 -.08 16,000,000 8.27 years $ 0.02 8,000,000 $ 0.03
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:
2003 2002
-------- --------
Expected dividend yield - -
Risk-free interest rate 3.4% 4.8%
Expected volatility 159% 148%
Expected life 10 years 10 years
Weighted average fair value
per share $ 0.03 $ 0.02
33
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
Warrants
The following summarizes warrants granted and expired for the years
ended December 31, 2003 and 2002:
Weighted-Average
Exercise
Fixed Warrants Shares Price
-------------------------------- ----------- ----------------
Outstanding at January1, 2002 5,390,376 $ 5.01
Expired (2,363,050) 5.97
----------- ----------------
Outstanding at December 31, 2002 3,027,326 4.26
Granted 87,580,306 0.05
Expired (3,027,326) 4.26
----------- ----------------
Outstanding at December 31, 2003 87,580,306 $ 0.05
=========== ================
The following table summarizes information about warrant outstanding at
December 31, 2003:
Outstanding and Exerciseable at December 31, 2003
------------------------------------------------------
Weighted Average
Remaining
Exercise Prices Warrants Contractual Life
------------------------------------------------------
$0.04 43,790,153 3.58 years
$0.05 43,790,153 3.58 years
----------
87,580,306
==========
NOTE 7 - INCOME TAXES
The Company paid no federal or state income taxes during 2003 or 2002.
Income tax expense (benefit) on income (loss) before cumulative effect
of change in accounting principle 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:
34
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
2003 2002
------------ ------------
Income tax expense (benefit) $ (188,615) $ 50,846
Nondeductible expenses 38 695
Loss of NOL due to change in ownership - 22,585,251
State taxes net of federal benefit (28,961) 7,815
Change in valuation allowance 217,538 (22,644,607)
------------ ------------
Total income tax expense $ - $ -
============ ============
The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets (liabilities) as of
December 31, 2003 and 2002 are presented below:
2003 2002
----------- -----------
Deferred income tax asset
Net operating loss carryforward $ 1,050,377 $ 681,628
Impairment charge - 140,587
----------- -----------
Total deferred income tax asset 1,050,377 822,215
Deferred income tax liability -
depreciation (9,718) (8,403)
Valuation allowance (1,040,659) (813,812)
----------- -----------
Deferred tax asset (liability) $ - $ -
=========== ===========
Unused net operating losses will begin expiring in 2023. The valuation
allowances for 2003 and 2002 have been applied to offset the deferred
tax assets in recognition of the uncertainty that such benefits will be
realized.
The Internal Revenue Code contains provisions which reduce or limit the
availability and utilization of net operating loss carryforwards in the
event of a more than 50% change in ownership. If such an ownership
change occurs with the Company, the use of these net operating losses
could be limited.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Litigation
During February 2004, a lawsuit was filed by Iso-Science Laboratories,
Inc. dba Isotope Products Laboratories in the Superior Court of the
State of California for the County of Los Angeles against the Company,
the Company's President and CEO, a significant customer of the Company
and certain officers of this significant customer. The petition
contains numerous allegations against the defendants relating to the
manufacture and sale of calibration and reference standards for nuclear
medicine. The petition alleges the defendants are using information and
equipment that the plaintiff acquired from a previous employer of one
of the defendants. The petition also alleges unfair trade practices,
interference with prospective business relationships and conspiracy.
The plaintiff seeks an injunction to restrain the Company from
manufacturing, marketing or selling any of the products in question; a
55% royalty of the price of all related products sold by the Company;
the return of all equipment and information in question; disgorgement
of profits received for the manufacture and sale of the products in
question; and general and punitive damages in an amount to be shown at
the time of trial. This lawsuit is in the preliminary stage and the
Company is trying to determine the proper response to be filed. The
Company intends to vigorously defend itself in the lawsuit; however, an
outcome favorable to the Company is not determinable at this time.
Should this lawsuit be settled in a manner unfavorable to the Company,
the Company could lose its major line of revenues and could be required
to make substantial payments to the plaintiff. The Company has a
manufacturing agreement in place with this significant customer which
indemnifies the Company and its officers from any loss arising from
this suit. However, there is no guarantee that this significant
customer can bear the financial burden arising from defending and
possible settlement of this lawsuit.
35
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
Lease Commitments
The Company leases office space, certain office equipment and
production equipment under operating leases expiring at various dates
through 2009. Rental expense under such leases for the years ended
December 31, 2003 and 2002 was $82,242 and $69,180.
Future minimum lease payments under noncancelable operating leases
(with initial or remaining lease terms in excess of one year) as of
December 31, 2003 are:
Operating
Years ending December 31 Leases
---------
2004 136,967
2005 139,107
2006 138,744
2007 138,744
2008 102,484
Thereafter 4,310
---------
Total minimum lease payments $ 660,356
=========
Employment Contract
The Company has a five-year employment contract with the Company's
president. The employment agreement extends through February 2007.
Dependence on Third Parties
The production of HSA Cobalt is dependent upon the Department of
Energy, and its prime operating contractor, who controls the reactor
and laboratory operations. The revenue associated with the sale of HSA
Cobalt is largely dependent on General Electric, the Company's sole
customer of this product. The gemstone production is tied to an
exclusive agreement with Quali Tech Inc. who in turn has a contract
with The Topaz Group, Inc. Medical flood source manufacturing is
conducted under an exclusive contract with RadQual, LLC. who in turn
has agreement in place with several companies for marketing and sales.
A loss of any of these customers or vendors could adversely affect
operating results by causing a delay in production or a possible loss
of sales.
36
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
Contingencies
The Company conducts its operations in Idaho Falls, Idaho. Although the
medical flood source and gemstone products appear diverse they share
the common link as being radioactive materials. Therefore, the Company
is required to have an operating license from the Nuclear Regulatory
Commission ("NRC") and specially trained staff to handle these
materials. The Company has an NRC operating license and has, in fact,
continued to amend this license several times during 2003 and 2002 to
increase the amount of material permitted within the facility.
Additional processing capabilities and license amendments could be
implemented that would permit processing of other reactor produced
radioisotopes by the Company but at the present time this license does
not restrict the volume of business operation performed or projected to
be performed in the coming year. An irrevocable, automatic renewable
letter of credit against a $150,572 Certificate of Deposit at Texas
State Bank has been used to provide the financial assurance required by
the Nuclear Regulatory Commission for the Idaho facility license.
In 2003 the Company signed a contract obligating them to purchase a
total of $195,250 worth of a certain isotope from one of their
suppliers. The Company purchased a total of $40,345 of material under
that contract in 2003 leaving a remaining obligation of $154,250.
NOTE 9 - SALE OF ASSETS
Sale of Assets
At December 31, 2002, the balance of excess components and equipment
held for sale that had not been sold or written down through an
impairment charge was $262,236. During 2003, excess components carried
at $262,236 were sold. The total amount paid for these assets was
$474,436. The Company recognized a gain of $212,200 from the sale of
fully impaired assets.
Sale of Waxahachie Real Estate
At December 31, 2002, the Company carried as an asset held for sale its
Waxahachie real estate at $345,295. In January 2003, the Company
entered into an agreement to sell the Waxahachie real estate for the
assumption of the $345,295 debt associated with the property. As a
result of the debt assumption, the Company remains contingently liable
on the note with Texas State Bank for the remainder of the term should
the purchaser default on this note.
In accordance with Financial Accounting Standards Board Interpretation
No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others,
the Company has recognized a $10,000 obligation under the guarantee
that consists of the obligation to stand ready to reassume the note
held at Texas State Bank in the event the purchaser defaults on the
note. The obligation is based on the cost necessary for the purchaser
to refinance the note, which would release Company from the guarantor
position. Should the purchaser default on the note and the Company
reassumes the liability, they would also regain the real estate.
NOTE 10 - ASSET RETIREMENT OBLIGATION
Effective January 1, 2003, the Company adopted SFAS No. 143, Accounting
for Asset Retirement Obligations, which requires entities to record the
fair value of a liability for an asset retirement obligation when it is
incurred. The standard applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition,
construction, development or normal use of the asset. The Company's
asset retirement obligations relate primarily to the decommissioning of
the manufacturing facility at the conclusion of operations in that
facility.
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INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is
incurred, if a reasonable estimate of fair value can be made. When the
liability is initially recorded, the related cost is capitalized by
increasing the carrying amount of the related asset, in the case of a
leased facility the cost is capitalized as capitalized lease disposal
costs. Over time, the liability is accreted upward for the change in
its present value each period until the obligation is settled.
The implementation of SFAS No. 143 on January 1, 2003 resulted in a net
increase in property and equipment of $125,596. Liabilities increased
by $149,332 which represents the establishment of an asset retirement
obligation liability. The cumulative effect on prior years of the
change in accounting principle of $23,736 was shown as a reduction in
earnings. The effect of adopting this accounting principle was a
$11,868 increase in net loss during the year ended December 31, 2003.
Had the effects of SFAS 143 been applied retroactively for the year
ended December 31, 2002, net loss would have been $137, 679 with no
effect to prior recorded earnings per share.
The pro forma amount of the liability for the asset retirement
obligation was $149,332 at December 31, 2002. The asset retirement
obligation is adjusted for any liabilities incurred or settled during
the period, accretion expense and any revisions made to the estimated
cash flows. Every year the liability amount is approved by the Nuclear
Regulatory Commission. Any increase to the liability, assuming no
additional decommissioning items are added, is recorded as accretion
expense; however, accretion expense during the year ended December 31,
2003 was not material.
NOTE 11 - SUBSEQUENT EVENTS
In January 2004, the Company completed the purchase of certain assets,
patents and intellectual property related to the fluorine extraction
process. The patents were acquired for $105,000 and the equipment for
$10,000. The Company also entered into a marketing and consulting
agreement with another company for technology and marketing assistance
regarding the fluorine extraction process and the production facility.
In January 2004, the Company entered into a lease agreement to lease a
warehouse in which to locate the fluorine extraction production
facility. The term of the lease is five years with monthly payments of
$4,310. This lease has been included with the lease commitments.
In January 2004, the Company renegotiated the terms of a line of credit
with the Bank and fixed the terms of the line of credit into a note.
The new terms other than fixing the line into a note, extend the due
date of the note to July 1, 2004 and fixed the interest rate at 7.5%.
The Company also negotiated an additional $250,000 revolving line of
credit with a due date of July 1,2004. The Company anticipates
renegotiating the revolving line of credit to extend the due date to
December 31, 2004. Both lines are secured by inventory, accounts
receivable and equipment.
The Company completed an unsecured note purchase agreement on January
21, 2004 with certain of the Company's Principal investors and
Directors totaling $650,000. This is an unsecured note accruing
interest at 6% per year with a maturity date of December 31, 2005.
Interest is to be paid on this note on a semi-annual basis and the
Company has the option to prepay the principal balance at any time
prior to maturity. The principal of the note and any accrued interest
is convertible into shares of the Company's common stock at any time at
the option of the holder prior to maturity. The conversion price for
this conversion option was based on the market value of the common
stock and was determined to be $0.18 per share.
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