UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
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
000-22923
INTERNATIONAL ISOTOPES INC.
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(Exact name of issuer 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
(Title of Class)
Securities registered under Section 12(g) of the Exchange Act:
--------------------------------------------------------------
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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 ( )
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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 Issuer's revenue for the fiscal year ended December 31, 2004 was $2,848,844.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to be the average bid and asked price of
such common equity at March 1, 2005 was $3,464,766.
As of March 1, 2005 the number of shares outstanding of common stock, $.01 par
value was 183,315,081 shares.
Documents Incorporated by Reference
Certain information called for in Parts II and III of this Annual Report on Form
10-KSB 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,
2004.
INTERNATIONAL ISOTOPES INC.
FORM 10-KSB
TABLE OF CONTENTS
Page No.
Part I.
Item 1. Business .................................................... 3
Item 2. Properties .................................................. 6
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 ...................... 8
Item 7. Financial Statements......................................... 13
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ...................... 14
Item 8A Controls and Procedures...................................... 14
Part III.
Item 9. Directors and Executive Officers of Registrant .............. 14
Item 10. Executive Compensation ...................................... 14
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 .................................. 15
Item 14. Principal Accountant Fees and Services ...................... 16
Power of Attorney ..................................................... 16
Signatures ............................................................ 17
2
PART I
This Annual Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. This Act provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves so long as they identify these
statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements, other than statements of historical fact,
including statements regarding industry prospects and future results of
operations or financial position, made in this Annual Report are forward
looking. Words such as "anticipates," "believes," "expects," "future" and
"intends" and similar expressions identify forward-looking statements. In
particular, statements regarding: the sufficiency of our available cash and
revenues from operations to meet our operating needs; our ability to generate
revenue; improvements in our gross profit; our 2005 goals and objectives; the
improvement in our financial performance due to an anticipated decrease in
operating expenses; anticipated growth in any of our business segments; the
impact of expansion efforts on our revenues; the effect of our ability to use
our patents; the anticipated approval dates for government permits; the
improvement of our competitive position based on decreased production costs;
anticipated completion dates for our plant construction and resulting production
capabilities; the extension of the maturity date of our bank debt; the outcome
of litigation pending against us and the establishment of additional
manufacturing capacity are forward-looking. Forward-looking statements reflect
management's current expectations, plans or projections and are inherently
uncertain. Actual results could differ materially from management's
expectations, plans or projections. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this report. Certain risks and uncertainties that could cause actual results to
differ significantly from management's expectations are described in the section
entitled "Factors Affecting Future Results." That section, along with other
sections of this Annual Report, describes some, but not all, of the factors that
could cause actual results to differ significantly from management's
expectations. The company undertakes no obligation to publicly release any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Readers are urged, however, to review the factors set
forth in reports that the company files from time to time with the Securities
and Exchange Commission.
Item 1. BUSINESS
General Business and Products Description
International Isotopes Inc., a Texas corporation, (together with its wholly
owned subsidiary, International Isotopes Idaho Inc.) was formed as a Texas
corporation in 1995. Our headquarters and all operations are currently located
in Idaho Falls, Idaho. Our business consists of five reportable segments which
include; Nuclear Medicine Reference and Calibration Standards, Cobalt Products,
Radiochemical Products, Fluorine Extraction Process Products, and Radiological
Processing Services.
Nuclear Medicine Reference and Calibration Standards
This segment consists of the manufacture of sources and standards associated
with SPECT (Single Photon Emission Computed Tomography), patient positioning,
and calibration or operational testing of dose measuring equipment for the
nuclear pharmacy business. These items include flood sources, dose calibrators,
rod sources, flexible and rigid rulers, spot markers, pen point markers, and a
host of specialty design items. One customer accounts for most of our sales in
this segment. We are the exclusive contract manufacturer for this customer for
these products. There are over 5,000 nuclear medicine centers around the country
that require these types of products on a regular repeat basis. We have been
manufacturing these products since 2001 and have continued to grow this business
at an annual rate of approximately 12% per year. The nuclear pharmacy business
has been growing, and is anticipated to continue to grow, at an annual rate of
about 5%.
3
Cobalt Products
This segment includes the production of high and medium specific activity bulk
cobalt, recycling expended cobalt sources, and fabrication of a wide array of
cobalt teletherapy and experimental irradiator source capsules. In prior years
our only cobalt product revenues were from the sale of bulk cobalt metal.
However, in 2004, we made several major accomplishments, which will allow for
significant growth of this segment.
o We made a significant financial investment to install hot cells and
related processing equipment to permit on site processing of cobalt-60
isotope.
o We have been able to contract for the receipt and recycling of certain
cobalt sources utilizing these facilities.
o We have designed a series of Sealed Source and Special Form capsules,
which will allow us to recycle, re-encapsulate, and sell a variety of
new cobalt products utilizing recycled material or material we produce
in reactors.
This expanded cobalt production capability is expected to have a significant
positive impact upon our revenues in 2005 and beyond.
Radiochemical Products
This segment includes production of various isotopically pure radiochemicals for
medical, industrial, or research applications. These products are either
directly produced by us or are purchased in bulk from other producers and
distributed by us in customized packages and chemical forms tailored to meet
customer requirements. Our sales in this segment consist of Cobalt-60 (Co-60),
Cobalt-57 (Co-57), Cesium-137 (Cs-137), Iodine-131 (I-131), Sodium-22 (Na-22),
and Barium-133 (Ba-133) isotopes. We initiated fairly wide scale distribution of
Iodine-131 in 2004. Radiopharmaceuticals produced with Iodine-131 are used in
the treatment and diagnosis of various diseases of the thyroid such as Graves
disease, thyroid cancer, and hyperthyroidism and are also used in a host of
investigational and clinical trials such as for the treatment of breast, lung,
prostate, and ovarian cancers.
Fluorine Products
We acquired seven patents for the Fluorine Extraction Process (FEP) in January
2004 and plan to use this technology to produce several high purity fluorine
products, such as germanium tetrafluoride. 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 expected to be very high purity which
makes it ideally suited to these specialty applications, where ultra high purity
gas is 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.
In addition to acquiring these patents, we have undertaken several additional
steps in 2004 towards manufacturing these high purity fluoride gases.
o We have established a marketing and technology consulting agreement
with individuals knowledgeable and experienced with the processing
technology and market applications for fluorine products.
o We have leased an additional industrial facility for production of FEP
gases.
o We have hired management and laboratory process operations staff.
o We have completed a process system design and started plant
construction.
We expect to complete plant construction and begin fluorine gas production
during the second quarter of 2005. We believe that the market size and growth
outlook for high purity fluorine products is excellent and this business segment
should provide us with an excellent opportunity to grow our revenue
substantially in coming years.
4
Radiological Processing Services
This segment concerns a wide array of miscellaneous services the largest of
which is processing of gemstones which has undergone irradiation for color
enhancement. One customer accounts for most of our sales in this segment. We
have an exclusive contract with a this customer for the gemstone processing
service. Other services in this segment consist of radiological engineering
consultant services, Type A package certification testing, and waste
packaging/recycle services.
We believe that all of these business segments will perform well and should
continue to demonstrate continued growth. We expect that revenues generated from
these operations should be expected to produce sufficient cash to meet our
operational needs.
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.
Nuclear Medicine Reference and Calibration Standards
Calibration and Reference Standards are required for the daily operational
checks and calibration of the measurement of 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 many of 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 several overseas
locations. There are two other major producers of these products within the U.S.
and that directly compete with us for these products.
Cobalt Products
We sell high activity bulk cobalt to a customer that uses it to fabricate sealed
sources for the Elekta Gamma knife unit. The gamma knife is a device used for
the precise radiation treatment of certain tumors and vascular deformities of
the brain. There are over seventy-five treatment centers around the U.S that are
using the gamma knife and through 2003 it is estimated that over 80,000 patients
have been successfully treated with this device. We also accept old gamma knife
sources for recycling when they have decayed past their useful activity in the
gamma knife. This recycled cobalt, along with lower activity cobalt we produce
in a reactor, is incorporated into new sealed sources for teletherapy or
experimental irradiators.
Radiochemical Products
We typically supply radioisotope products in bulk form. The markets for most
radiochemicals are highly competitive. The target markets for these products are
customers who 1) incorporate them into finished industrial or medical devices;
2) use radioisotope products in clinical trials for various medical
applications; or 3) further process and include the radioisotope products into a
pharmaceutical product for FDA approved therapy or imaging.
Fluorine Products
We are developing our fluorine products 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 manufacturing capacity for at least one of these compounds in 2005.
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.
5
Radiological Processing Services
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 Missouri University Research Reactor (MURR). 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 offer this irradiation
service capability. The jewelry manufacturing industry is a highly competitive
industry.
Government Regulation
We have 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, large scale cobalt
processing and recycle operations, radioactive gemstone processing,
environmental sample analysis, and various research and development activities.
The existing license and permits are adequate to allow all of our current
business operations. Expansion into FEP production will require additional
permitting both through the NRC, State of Idaho, and the Environmental
Protection Agency. We started this permitting process in 2004 and expect to
complete it in 2005. 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 generate some radioactive waste. We must
handle this waste pursuant to the Low Level Radioactive Waste Policy Act of
1980, which requires the safe disposal of mildly radioactive materials. The
estimated costs for storage and disposal of these materials have been included
in 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.
Other Regulations
Registration of any of our radiochemicals into a Drug Master File (DMF) could
subject us to the additional regulations of the Food and Drug Administration
(FDA). We are registered as a medical device manufacturer through the FDA for
several of our nuclear medicine reference and calibration standards. We are
registered with the U.S. Department of Transportation for the shipment of
radioactive materials and may be subjected to additional licensing requirements
from the NRC for the import or export of radioactive materials commencing in
2005.
Employees
As of December 31, 2004 we had sixteen employees, all of whom are full-time.
Item 2. PROPERTIES
We lease two properties. The following paragraphs provide a brief summary of
these properties.
4137 Commerce Circle - The facility located on this property houses our main
corporate headquarters and all of our manufacturing operations except our FEP
operations. We hold this property pursuant to a lease that extends through
August 2008. The facility was new when leased in March 2001 and remains in
excellent condition. Our lease includes unlimited automatic five year extensions
of the lease at our sole discretion. Lease payments are adjusted annually based
upon changes in the CPI. We also have a purchase option and a right of first
refusal on this property which allows us to purchase this property at any time
for a stated amount.
6
3159 Commerce Way - The facility located on this property houses our FEP
production operations. The facility was first leased in February 2004 and is in
excellent overall condition. We hold this property pursuant to a lease that
extends through March 2009. The facility is in excellent condition. Our lease
includes unlimited automatic five year extensions of the lease at our sole
discretion. Lease payments are adjusted annually based upon changes in the CPI.
We also have a purchase option and a right of first refusal on this property
which allows us to purchase this property at any time for a stated amount.
Item 3. LEGAL PROCEEDINGS
During February 2004, a lawsuit was filed by Iso-Science Laboratories, Inc. in
the Superior Court of the State of California for the County of Los Angeles
against the company, our President and CEO, one of our customers and certain
officers of this customer. The lawsuit contains numerous allegations against the
defendants relating to the manufacture and sale of calibration and reference
standards for nuclear medicine. The lawsuit alleges the defendants are using
information and equipment that the plaintiff acquired from a previous employer
of one of the defendants. The lawsuit also alleges unfair trade practices,
interference with prospective business relationships, and conspiracy. The
plaintiff seeks (i) an injunction to restrain us from manufacturing, marketing,
or selling any of the products in question; (ii) a 55% royalty on the price of
all related products we sell; (iii) the return of all equipment and information
in question; (iv) disgorgement of profits received from the manufacture and sale
of the products in question; and (v) general and punitive damages in an amount
to be shown at the time of trial. In March 2004, we filed a response to the
lawsuit in which we denied all of the allegations. In addition, we have filed a
counterclaim against the plaintiff on the basis that the plaintiff filed the
suit against the Company and our President and CEO with the knowledge that the
plaintiff had no basis in law or fact and that the lawsuit was calculated to
interfere with the our contractual arrangements and prospective business with
our customers.
On July 29, 2004 the court granted our motion to dismiss all charges against our
President and CEO. On October 25, 2004 the court established an anticipated
trial start date of December 5, 2005. We will continue to vigorously defend
against this lawsuit; however, a favorable outcome is not determinable at this
time. Should this lawsuit be settled in a manner unfavorable to us, we could
lose our major line of revenues and could be required to make substantial
payments to the plaintiff. We have a manufacturing agreement in place with our
customer and co-defendant pursuant to which the customer will indemnify us and
our officers from any loss arising from this lawsuit. Therefore, we do 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. However, there is no guarantee that our customer can bear the
financial burden arising from defending and possible settlement of this lawsuit.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
An annual meeting of shareholders was held on June 25, 2004.
1) Election of Directors
All three incumbent directors were reelected without opposition to serve
one-year terms in office. The results of this election were as follows:
Name of Director For Withheld
---------------- ----------- --------
Dr. Ralph Richart 106,908,919 320,801
Steve T. Laflin 107,183,731 45,989
Christopher Grosso 106,908,919 320,801
7
2) Ratification of Independent Auditors
The appointment of Hansen Barnett & Maxwell as the independent certified public
accountants for fiscal year 2004 was ratified. The results of the shareholder
vote were as follows:
Broker
For Against Abstain Non-Votes
----------- ------- ------- ---------
Appointment of Hansen Barnett & Maxwell 107,197,661 29,304 2,755 -
as independent certified public accountants
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In the second quarter of 2001 our common stock was delisted from the Nasdaq
Small Cap Market and was traded solely over the counter on the Pink Sheets. On
August 13, 2004, Nasdaq approved the reporting of our common stock on the Over
the Counter Bulletin Board (OTCB) under the trading symbol "INIS." High asked
prices and low bid prices reported by the respective trading sectors during the
periods indicated are shown below:
Fiscal Year Quarter High Asked Low Bid
2004* 1st $0.19 $0.09
2004* 2nd $0.19 $0.17
2004@ 3rd $0.19 $0.16
2004# 4th $0.15 $0.08
2003* 1st $0.05 $0.04
2003* 2nd $0.08 $0.03
2003* 3rd $0.14 $0.03
2003* 4th $0.10 $0.03
* As reported on the pink sheets.
@ As reported on the Pink Sheets from the beginning of the quarter through
August 12, 2004 and as reported on the OTCBB from August 13, 2004 through
the end of the quarter.
# As reported on the OTCBB.
On December 31, 2004, there were 342 holders of record our common stock. We have
never paid any cash dividends on our common stock. In the future, and based upon
our profit performance, our Board of Directors 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.
Additional information called for by this item will be included in our Proxy
Statement for our 2005 annual meeting of shareholders, which will be filed
within 120 days after December 31, 2004.
Additional information called for by this item will be included in our Proxy
Statement for our 2005 annual meeting of shareholders, which will be filed
within 120 days after December 31, 2004.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the results of the company's operations and
financial condition should be read in conjunction with the accompanying
financial statements and the notes thereto included within this report.
8
Overview
Our business consists of five reportable segments which include; Nuclear
Medicine Reference and Calibration Standards, Cobalt Products, Radiochemical
Products, Fluorine Extraction Process Products, and Radiological Processing
Services.
Nuclear Medicine Reference and Calibration Standards
This segment consists of the manufacture of sources and standards associated
with SPECT (Single Photon Emission Computed Tomography), patient positioning,
and calibration or operational testing of dose measuring equipment for the
nuclear pharmacy business. These items include flood sources, dose calibrators,
rod sources, flexible and rigid rulers, spot markers, pen point markers, and a
host of specialty design items.
Cobalt Products
This segment includes the production of high and medium specific activity bulk
cobalt, recycling expended cobalt sources, and fabrication of a wide array of
cobalt teletherapy and experimental irradiator source capsules. In prior years
our only cobalt product revenues were from the sale of bulk cobalt metal.
However, in 2004, we made several major accomplishments, including a significant
investment to install hot cells and related processing equipment to permit on
site processing of cobalt-60 isotope.
Radiochemical Products
This segment includes production of various isotopically pure radiochemicals for
medical, industrial, or research applications. These products are either
directly produced by us or are purchased in bulk from other producers and
distributed by us in customized packages and chemical forms tailored to meet
customer requirements. Our sales in this segment consist of Cobalt-60 (Co-60),
Cobalt-57 (Co-57), Cesium-137 (Cs-137), Iodine-131 (I-131), Sodium-22 (Na-22),
and Barium-133 (Ba-133) isotopes. We initiated fairly wide scale distribution of
Iodine-131 in 2004. Radiopharmaceuticals produced with Iodine-131 are used in
the treatment and diagnosis of various diseases of the thyroid such as Graves
disease, thyroid cancer, and hyperthyroidism and are also used in a host of
investigational and clinical trials such as for the treatment of breast, lung,
prostate, and ovarian cancers.
Fluorine Products
We acquired seven patents for the Fluorine Extraction Process (FEP) in January
2004 and plan to use this technology to produce several high purity fluorine
products, such as germanium tetrafluoride. 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 99.999% pure
with no detectable uranium in the product gas. This makes our FEP products
ideally suited to these specialty applications, where ultra high purity gas is
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.
Radiological Processing Services
This segment concerns a wide array of miscellaneous services such as processing
of gemstones which has undergone irradiation for color enhancement. Other
general services in this segment consist of radiological engineering consultant
services, Type A package certification testing, and waste packaging/recycle
services.
We believe that all of these business segments will perform well and should
continue to demonstrate continued growth. We expect that revenues generated from
these operations should produce sufficient cash to meet our operational needs.
We believe that revenues generated from these business activities can be
expected to have a positive effect upon our projections for continued growth in
2005 and should produce sufficient cash to meet our operational needs.
9
Liquidity and Capital Resources
On December 31, 2004 we had cash and cash equivalents of $150,051 compared to
$160,216 at December 31, 2003. For the year ended December 31, 2004, our cash
flows included net cash used in operating activities of $621,005, net cash
provided by financing activities of $1,383,090 and cash used in investing
activities of $772,250.
We incurred a loss applicable to common shareholders of $844,736 for the year
ended December 31, 2004 and has an accumulated deficit of $88,813,386 since
inception. Prior to 2004, our operations and plant and equipment expenditures
were funded principally from proceeds from public and private sales of equity as
well as through asset sales.
As of December 31, 2004, we had net borrowings of $733,595 with Texas State
Bank. The current maturity date of this loan is February 2006. We made
interest-only payments on this loan during 2004, but have been making principal
and interest payments effective in January 2005. We anticipate working with
Texas State Bank to extend the maturity date of this loan. We also have a
$250,000 revolving line of credit with Texas State Bank. As of December 31,
2004, we had not drawn against this line of credit.
We completed an unsecured note purchase agreement on January 21, 2004 with
certain of our principal investors and Directors totaling $650,000. Pursuant to
the terms of the note purchase agreement, we issued unsecured notes, which
accrue interest at 6% per year with a maturity date of December 31, 2005.
Interest is paid on the notes 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 notes and any accrued interest is convertible into shares of
our 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 at the time the notes were issued and was determined to be $0.18
per share.
During 2004, there were a significant number of Series A warrants, and a few
Series B warrants, issued from the 2003 rights offering that were exercised by
shareholders for common stock. The total Series A and B warrant exercise in 2004
generated $802,034 and resulted in the issuance of an additional 19,714,894
shares of common stock. In January 2005, the company announced a mandatory
redemption on all remaining Series A warrants by February 25, 2005.
Consequently, shareholders exercised Series A warrants for $969,690 and the
company issued an additional 24,842,259 shares of common stock. As of March 1,
2005 there are still 42,421,483 Series B warrants outstanding, which, if
exercised would generate an additional $2,121,074 in capital and result in the
issuance of an additional 42,421,483 shares of common stock.
Results of Operations
Year ended December 31, 2004 compared to year ended December 31, 2003
Revenues
Total revenues were $2,848,844 in 2004 as compared to $2,070,592 in 2003, an
increase of $778,251 or 37.5%. The significant increase in revenues was
attributable to increases in nearly every business segment. Cobalt Product sales
and Radiochemical Products sales both approximately doubled. In our largest
business segment, Nuclear Medicine Reference and Calibration Standards, sales
increased by 11%. Only the Radiological Processing Services segment declined in
2004 (down 53.6%) primarily due to the continued decline in gemstone processing
that continues to be subject to intense competition in the color enhancement and
costume jewelry industries.
Cost of Revenues and Gross Profit
Cost of revenue for 2004 was $1,719,251 compared to $1,151,161 in 2003, an
increase of $568,090 or 49%. Gross profit for 2004 was $1,129,592 or 40% as
compared to $919,431 or 44% in 2003. The increase in cost of revenues and
decrease in gross profit is attributable to the cost of launching Radiochemical
Products in 2004 and the relatively high production costs associated with these
new products. Improvements in production efficiencies, implementation of cost
saving measures, and elimination of low margin products during the course of
2004 has lead to considerable improvements in gross profit performance which we
expect will become evident in 2005.
10
Operating Costs and Expenses
Total operating costs and expenses for 2004 were $1,828,293, as compared to
$1,582,512 in 2003, an increase of $245,781 or 15%. The increase was largely
attributable to increased salaries and contract labor resulting from increased
staffing and marketing contract consultant costs. Measured as a percentage of
total revenue, operating expense has decreased 12% from 76% in 2003 to 64% in
2004. Limiting increases in staffing and eliminating most of our marketing
consultant costs are expected to further decrease operating expenses in 2005.
Other Income (expense)
Other (expense) in 2004 was ($146,035) compared to other income of $108,332 in
2003. The difference was principally attributable to the sale of fully impaired
assets in 2003. We no longer expect to realize any significant revenues from the
sale of impaired assets.
Net Loss
The Net Loss from continuing operations was $844,736 in 2004 compared to a loss
of $578,485 in 2003. The $266,251 increase in net loss was primarily
attributable to the lack of income from sales of fully impaired assets in 2004
since all of the assets from discontinued operations have now been sold.
Enhancements in production process efficiencies, production cost saving
measures, elimination of marketing consultant expense, and elimination of low
margin radiochemical products are all expected to contribute to improved
financial performance in 2005.
Forward Looking Information
This Annual Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. This Act provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves so long as they identify these
statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements, other than statements of historical fact,
including statements regarding industry prospects and future results of
operations or financial position, made in this Annual Report are forward
looking. Words such as "anticipates," "believes," "expects," "future" and
"intends" and similar expressions identify forward-looking statements. In
particular, statements regarding: the sufficiency of our available cash and
revenues from operations to meet our operating needs; our ability to generate
revenue; improvements in our gross profit; our 2005 goals and objectives; the
improvement in our financial performance due to an anticipated decrease in
operating expenses; anticipated growth in any of our business segments; the
impact of expansion efforts on our revenues; the effect of our ability to use
our patents; the anticipated approval dates for government permits; the
improvement of our competitive position based on decreased production costs;
anticipated completion dates for our plant construction and resulting production
capabilities; the extension of the maturity date of our bank debt; the outcome
of litigation pending against us and the establishment of additional
manufacturing capacity are forward-looking. Forward-looking statements reflect
management's current expectations, plans or projections and are inherently
uncertain. Actual results could differ materially from management's
expectations, plans or projections. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this report. Certain risks and uncertainties that could cause actual results to
differ significantly from management's expectations are described in the section
entitled "Factors Affecting Future Results." That section, along with other
sections of this Annual Report, describes some, but not all, of the factors that
could cause actual results to differ significantly from management's
expectations. The company undertakes no obligation to publicly release any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Readers are urged, however, to review the factors set
forth in reports that the company files from time to time with the Securities
and Exchange Commission.
11
In 2004, we continued to build on various business segments, make investments
into facilities and infrastructure, launch new products, and improve operating
cost controls. The following is a list of some of the more significant
accomplishments in 2004.
o Significant financial investment to install cobalt hot cells and
related processing equipment to permit on site processing of cobalt-60
isotope, recycling expended cobalt sources, and fabrication of
teletherapy capsules.
o Obtained contracts for receipt and recycle of certain cobalt sources.
o Obtained transportation container to allow shipment and processing of
cobalt and other radioisotopes produced in other reactor locations.
o Designed a series of Sealed Source and Special Form capsules, which
will allow us to recycle, re-encapsulate, and sell a variety of new
cobalt products utilizing recycled material or material we produce in
reactors.
o Installed new radiochemical processing hot cells and initiated sales
of new radiochemical products.
o Acquired seven patents for the Fluorine Extraction Process (FEP) and
have established marketing and technology consulting agreements,
leased an additional industrial facility for FEP production, hired
management and laboratory process FEP operations staff, and completed
FEP process system design and initiated plant construction.
Based upon the investments we have made in our facilities and products developed
in 2004 we have the following goals and objectives for 2005:
o To continue to expand our customer base and increase cobalt revenues
through sales of cobalt sealed sources once NRC sealed source approval
is obtained.
o To explore participation in contracts for various government sponsored
source recovery and recycle programs expected to be funded through the
federal government and to which we are uniquely suited to provide
services.
o To launch at least one new radiochemical product and explore
establishing partnerships with radiopharmaceutical manufacturers.
o To complete initial Fluorine gas plant construction, begin FEP gas
production, and obtain gas supply contracts by the second quarter of
2005. We believe that the market size and growth outlook for high
purity fluorine products is excellent and this business segment should
provide the Company with an excellent opportunity to grow our revenue
substantially in coming years.
o To continue to grow market share of all products in the Nuclear
Medicine Reference and Calibration Standards business segment
o To continue to increase efficiencies and reduce production costs
necessary to achieve profitability
12
We believe that revenues generated from these business activities will have a
positive effect upon our business in 2005 and should produce sufficient cash to
meet our operational needs.
Company Risk Factors
Readers should carefully consider the following factors that may affect our
business, future operating results and financial condition, as well as other
information included in this Annual Report. The risks and uncertainties
described below are not the only ones the company faces. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial
also may impair our business operations. If any of the following risks actually
occur, our business, financial condition and operating results could be
materially adversely affected.
We have 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 through December 31, 2004, we have generated $22,165,661 in revenues
and accumulated deficit (including preferred stock dividends and returns) in the
amount of $88,813,306.
We may need additional financing to continue operations. As of December 31,
2004, we have an outstanding debt of $650,000 pursuant to short term notes with
certain major shareholders and Directors of the Company that mature on December
31, 2005. We also have a loan from Texas State Bank in the amount of $733,595 as
of December 31, 2004, which matures in February 2006 and is secured by our
accounts receivable and fixed assets. We must negotiate an extension of this
note on or before the maturity date. We also owe $840,753 to our former Chairman
of the Board pursuant to a note that matures in April, 2012. Principal and
interest payments on this note are paid annually based upon net profits (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, Texas State Bank agreed to the assumption of our loan by an
individual upon our sale of the Waxahachie property. As of December 31, 2004,
the remaining outstanding balance on this loan was $312,391.44. Should this
individual default on the assumed loan, the liability for the loan will revert
to the Company.
There is no long-term contract in place with the Department of Energy contractor
for continued HSA Cobalt production. We have put short term specific "work for
non-government sponsor agreements" in place with the Department of Energy
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 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 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 U.S. Nuclear Regulatory Commission and Food and
Drug Administration regulations. To the extent these regulations are or become
burdensome, our business development could be adversely affected.
We are dependent upon key personnel. Our ongoing operations are dependent on
Steve T. Laflin, President and Chief Executive Officer. The loss of Mr. Laflin
could have a material adverse effect on our business. We have a $2 million
dollar key man life insurance policy on Mr. Laflin and two years remaining on
Mr. Laflin's employment agreement. There is no assurance that we will be able to
retain Mr. Laflin or our existing personnel or attract additional qualified
employees. The loss of any of our key personnel or an inability to attract
additional qualified employees could 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, which controls the Idaho reactor and
laboratory operations. Our gemstone production is tied to an exclusive agreement
with Quali Tech Inc. 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.
13
We are subject to competition from other companies. Each of our business areas
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. Most of
our radiochemicals are also manufactured by several other companies in the
world, and there are other suppliers of high purity fluorine products. Each of
our competitors has significantly greater financial resources that could give
them competitive advantage 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. We believe the
allegations of the petition are without merit. However, there is no guarantee of
a favorable outcome of this suit and an unfavorable outcome could result in the
loss of major revenues and require substantial payments to the plaintiff.
Item 7. FINANCIAL STATEMENTS
The following financial statements are included herewith:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Operations for the years ended December 31, 2004 and
2003
Consolidated Statement of Shareholders' Equity (Deficit) for the years ended
December 31, 2004 and 2003
Consolidated Statements of Cash Flows for the years ended December 31, 2004 and
2003
Notes to Consolidated Financial Statements
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 our 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
material information relating to the company was made known to them by others
within the company, particularly during the period in which this Annual Report
on Form 10-KSB was being prepared.
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.
14
PART III.
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
We have adopted a Code of Ethics that applies to our principal executive
officer, principal financial officer, principal accounting officer or controller
or persons performing similar functions. Our Code of Ethics is posted on our
website and can be accessed, free of charge, at www.intisoid.com.
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 2005 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, 2004, 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, 2004, the close of our fiscal year.
15
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND
RELATED STOCKHOLDER MATTERS
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, 2004, 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, 2004, the close of our fiscal year.
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 filed on May 1, 1997 (Registration No. 333-26269)).
3.2 Articles of Amendment to the Restated Articles of incorporation of the
Company (incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-8 filed on September 12, 2003)
(Registration No. 333-108776).
3.3 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form SB-2 filed on May 1, 1997
(Registration No. 333-26269)).
4.1 International Isotopes Subscription Rights Agreement and Proxy
Statement
10.1 * 2002 Long Term Incentive Plan (incorporated by reference to Exhibit
10.1 to the Company's Annual Report on Form 10KSB for the year ended
December 31, 2002
10.2 Form of Incentive Stock Option Agreement
10.3 Series A and B Warrant Agreement and Form of Series A and B Warrant
(incorporated by reference to the Company's Registration Statement on
Form S-3 filed on June 18,2003 (Registration No. 333-106215)
10.4 *International Isotopes Employee Stock Purchase Plan
10.5 *International Isotopes Employment Agreement with Steve T. Laflin
10.6 Lease Agreement 4137 Commerce Circle
10.7 Option to Purchase and Right of First Refusal for Property located at
4137 Commerce Circle
10.8 Lease Agreement 3159 Commerce Way
10.9 Option to Purchase and Right of First Refusal for Property located at
3159 Commerce Way
10.10 Promissory Note with Texas State Bank for $250,000 Line of Credit
10.11 Promissory Note with Texas State Bank for Commercial Loan
10.12 Unsecured Note to former Chairman of the Board, Dated April 1, 2002
10.13 Form of Note Purchase Agreement and Form of Unsecured Convertible
Promissory Notes
16
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 for
Chief Executive Officer.
31.2 Certification under section 302 of the Sarbanes-Oxley Act of 2002 for
Chief Financial Officer.
32.1 Certification under section 906 of the Sarbanes-Oxley Act of 2002.
*This exhibit constitutes a management contract or compensatory plan or
arrangement.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Hansen, Barnett & Maxwell served as our independent accountants for the years
ended December 31, 2004, 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, 2004 and
2003 are summarized as follows:
2004 2003
------- -------
Audit Fees $56,939 $65,496
Audit Related Fees $0 $0
Tax Fees $0 $0
All Other Fees $0 $0
------- -------
Total $56,939 $65,496
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 about financial reporting,
considers and pre-approves all 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. All Audit, Audit-Related, Tax and
Other Fees in 2003 and 2004 were approved by the Audit Committee.
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.
17
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this 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, Chief Executive Officer
and Chief Financial Officer
SIGNATURES
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
March 30, 2005 By: /s/ Dr. Ralph Richart
----------------------------
Dr. Ralph Richart
Chairman of the Board of Directors
March 30, 2005 By: /s/ Steve T. Laflin
----------------------------
Steve T. Laflin
President, Chief Executive Officer
(Principal Executive Officer),
Chief Financial Officer (Principal
Accounting Officer) and Director
March 30, 2005 By: /s/ Christopher Grosso
----------------------------
Christopher Grosso
Director, Audit Committee Chairman
18
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page No.
Report of Independent Registered Public Accounting Firm............... 20
FINANCIAL STATEMENTS
Consolidated Balance Sheets
as of December 31, 2004 and 2003.................................. 21
Consolidated Statements of Operations for the years ended
December 31, 2004 and 2003......................................... 22
Consolidated Statements of Shareholders' Equity (Deficit) for
the years ended December 31, 2003 and 2004......................... 23
Consolidated Statements of Cash Flows for the years ended
December 31, 2004 and 2003......................................... 24
Notes to Consolidated Financial Statements ........................... 26
19
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
5 Triad Center, Suite 750
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTING FIRM
To the Board of Directors and the Shareholders
International Isotopes Inc
We have audited the accompanying consolidated balance sheets of International
Isotopes Inc and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, shareholders' 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 audit.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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, 2004 and 2003, and the results
of its operations and its cash flows for the years then ended in conformity with
U.S. generally accepted accounting principles.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
February 11, 2005
20
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
-----------------------------
Assets 2004 2003
------------------------------------------------------ ------------ ------------
Current assets:
Cash and cash equivalents $ 150,051 $ 160,216
Accounts receivable 432,750 203,152
Inventories (Note 3) 2,237,421 2,283,752
Prepaids and other current assets 91,520 190,979
------------ ------------
Total current assets 2,911,742 2,838,099
Long-term assets
Restricted certificate of deposit 152,728 150,573
Property, plant and equipment, net (Note 4) 1,123,226 617,287
Capitalized lease disposal costs, net of accumulated
amortization of $47,472 & $35,604 respectivly (Note11) 101,860 113,728
Patents, net of accumulated amortization 98,433 --
------------ ------------
Total long-term assets 1,476,247 881,588
------------ ------------
Total assets $ 4,387,989 $ 3,719,687
============ ============
Liabilities and Stockholders' Equity
------------------------------------------------------
Current liabilities
Accounts payable $ 328,589 $ 320,554
Accrued liabilities 226,338 150,475
Current installments of mortgage and notes
payable (Note 6) 1,520,570 756,725
------------ ------------
Total current liabilities 2,075,497 1,227,754
Long-term liabilities
Obligation for lease disposal costs (Note 11) 149,332 149,332
Mortgage and notes payable, excluding current
installments (Note 6) 761,775 898,664
Mandatorily redeemable preferred stock, $0.01 par value;
850 shares (Note 7) (850,000 850,000
------------ ------------
Total long-term liabilities 1,761,107 1,897,996
------------ ------------
Total liabilities 3,836,604 3,125,750
Stockholders' equity (Note 7)
Common stock, $0.01 par value; 250,000,000 shares
authorized; 159,077,940 issued 1,590,779 1,393,630
Additional paid-in capital 87,773,992 87,168,957
Accumulated deficit (88,813,386) (87,968,650)
------------ ------------
Total stockholders' equity 551,381 593,937
------------ ------------
Total liabilities and stockholders' equity $ 4,387,989 $ 3,719,687
============ ============
See accompanying notes to consolidated financial statements.
21
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31,
-------------------------------
2004 2003
------------- -------------
Sales of product $ 2,848,844 $ 2,070,592
Cost of products 1,719,251 1,151,161
------------- -------------
Gross profit 1,129,592 919,431
------------- -------------
Operating costs and expenses:
Salaries and contract labor 720,383 495,724
General, administrative and consulting 1,058,812 1,029,602
Research and development 49,098 57,186
------------- -------------
Total operating expenses 1,828,293 1,582,512
------------- -------------
Operating loss (698,701) (663,081)
------------- -------------
Other income (expense):
Other income 10,476 35,996
Gain from sale of fully impaired assets -- 212,200
Interest income 2,323 3,626
Interest expense (158,834) (143,490)
------------- -------------
Total other income (expense) (146,035) 108,332
------------- -------------
Loss before cumulative effect of change
in accounting principle $ (844,736) $ (554,749)
Cumulative effect of change in accounting principle -- (23,736)
------------- -------------
Net loss $ (844,736) $ (578,485)
============= =============
Net loss per common share - basic and diluted:
Loss before culumative effect of change
in accounting principle $ (0.01) $ (0.01)
Net loss $ (0.01) $ (0.01)
============= =============
Weighted average common shares outstanding -
basic and diluted 150,721,137 108,346,738
============= =============
See accompanying notes to consolidated financial statements.
22
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Deficit)
Years ended December 31, 2004 and 2003
Total
Common Stock Additional Stockholders'
--------------------------- Paid-in Accumulated Equity/
Shares Amount Capital Deficit (Deficit)
----------- ------------ ------------ ------------ ------------
Balance January 1, 2003 95,581,135 $ 955,812 $ 86,416,002 $(87,390,165) $ (18,351)
Cancelation 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
Exercise of 19,714,894 Series A and B warrants 19,714,894 197,149 604,885 -- 802,034
Net loss -- -- -- (844,736) (844,736)
----------- ------------ ------------ ------------ ------------
Balance December 31, 2004 159,077,940 $ 1,590,779 $ 87,773,992 $(88,813,386) $ 551,385
=========== ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
23
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31,
--------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $ (844,736) $ (578,485)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 179,364 112,753
Gain from sale of assets fully impaired -- (212,200)
Loss on disposal of property, plant and equipment 381 --
Cumulative effect of change in accounting principle -- 23,736
Changes in operating assets and liabilities:
Accrued interest on restricted certificate of deposit (2,155) (3,415)
Accounts receivable (229,597) 15,771
Prepaids and other current assets 99,459 (62,149)
Inventories 46,331 (3,924)
Accounts payable and accrued liabilities 129,948 (81,011)
----------- -----------
Net cash used in operating activities (621,005) (788,924)
----------- -----------
Cash flows from investing activities:
Purchase of patents (109,000) --
Purchase of property, plant and equipment (663,250) (392,460)
Proceeds from assets held for sale -- 474,436
----------- -----------
Net cash (used in) provided by investing activites (772,250) 81,976
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of warrants 802,184 --
Proceeds from issuance of common stock -- 406,868
Payments for offering costs -- (122,906)
Proceeds from issuance of debt 603,950 760,000
Principal payments on notes payable (23,044) (471,544)
----------- -----------
Net cash provided by financing activities 1,383,090 572,418
----------- -----------
Net change in cash and cash equivalents (10,165) (134,530)
Cash and cash equivalents at beginning of year 160,216 294,746
----------- -----------
Cash and cash equivalents at end of year $ 150,051 $ 160,216
=========== ===========
(Continued)
24
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Continued
Years ended December 31,
--------------------------
2004 2003
----------- -----------
Supplemental disclosure of cash flow activities:
Cash paid for interest $ 75,092 $ 113,462
=========== ===========
Supplemental disclosure of noncash financing and
investing transactions:
Note payable converted from interest payable $ 46,050 $ --
Renewal/renogiation of note payable 733,595 --
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 rights offering -- 906,811
See accompanying notes to consolidated financial statements.
25
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
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 International Isotopes Idaho, Inc.
Nature of Operations -The Company's business consists of five major
business segments which include: Nuclear Medicine Reference and
Calibration Standards, Cobalt Products, Radiochemical Products,
Fluorine Extraction Process Products, and Radiological Processing
Services.
With the exception of certain unique products, the Company's normal
operating cycle is considered to be one year. Due to the time required
to produce some cobalt products, the Company's operating cycle for
those products 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. As of December 31, 2004, the
Company had sixteen full time employees.
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 a restricted certificate of deposit
totaling $302,779 and $310,789 at December 31, 2004 and 2003,
respectively, consist of operating accounts, money market
accounts and a certificate 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, 2004 the Company has pledged a certificate of
deposit 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, 2004, the Company had $152,606 of cash deposits
in excess of federally insured limits.
26
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(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 and amortization expense was $179,364 and $112,753
for the years ended December 31, 2004 and 2003, 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
exceeds 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, 2004 or
2003.
27
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(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.
Sales to one major customer accounted for 49% and 60% of the
sales during 2004 and 2003 respectively.
(i) Research and Development Costs
The Company had research and development expenses totaling
$49,098 in 2004 and $57,186 in 2003. These expenses were
associated with initial development of the processing
opportunities for new radiochemical products and for development
work associated with the 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, 2004 and 2003, the Company
expensed $4,672 and $108,751, respectively of shipping and
handling costs. These costs are reported as general,
administrative and consulting costs in 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").
28
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
No compensation cost has been recognized for 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 would have been increased to the pro forma
amounts indicated below for the years ended December 31, 2004
and 2003:
2004 2003
------------ -----------
Net loss, as reported $ (844,736) $ (578,485)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects (174,561) (95,319)
------------ -----------
Pro forma net loss $ (1,019,297) $ (673,804)
============ ===========
Loss per share, basic and diluted:
As reported $ (0.01) $ (0.01)
============ ===========
Pro forma $ (0.01) $ (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 is computed on the basis of the
weighted-average number of common shares and all dilutive
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 2004, there were 103,580,306 and
85,865,412 options/warrants and 850 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.
29
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
In December 2004, the FASB issued Statement No. 123 (Revised
2004), Share-Based Payment ("Statement 123(R)"). Statement
123(R) revises Statement No. 123, Accounting for Stock-Based
Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. Statement 123(R) requires the
recognition of the cost of employee services received in
exchange for stock options and awards of equity instruments
based on the grant-date fair value of such options and awards,
over the period they vest. Under the options for adoption
available under Statement 123(R), the Company has determined to
adopt Statement 123(R) on the modified-prospective basis
beginning on July 1, 2005, which will result in the recognition
of the remaining unamortized grant-date fair value compensation
over the remaining vesting period. The effect of adopting
Statement 123(R) on options outstanding at December 31, 2004
will result in recognition of $48,688 of additional compensation
during the year ending December 31, 2005.
(n) Reclassifications
Certain 2003 amounts have been reclassified to conform to the
2004 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 with an
accumulated deficit of $88,813,386 at December 31, 2004 and a net loss of
$844,736 for the year then ended. The Company's working capital has decreased by
$774,100 from the prior year, working capital includes inventory which will not
be sold for up to three years, and the Company has used cash flows from
operations of $621,005. During 2004, the Company sought to improve future cash
flows from operating activities through significant investments into facilities
and infrastructure, launching new products and implementing and improving
operating cost control measures. The Company has been able to grow the Nuclear
Medicine Reference and Calibration Standards segment at an annual rate of
approximately 12% per year and anticipates similar growth trends over the coming
year.
During March 2005, the Company obtained approval from the Nuclear Regulatory
Commission ("NRC") to manufacture a wide range of cobalt irradiator and
teletherapy capsules and plans to expand their customer base and increase cobalt
revenues through recycling various expended sealed sources and sales of cobalt
sealed sources utilizing recycled material or material produced in reactors.
During 2005, the Company has also signed contracts for the sale of HSA Cobalt
through December 2007 and for the sale of Cobalt sealed source sets. Management
believes that this expanded cobalt production capability should increase future
revenues.
During 2004, the Company acquired seven patents for the Fluorine Extraction
Process (FEP) and began construction of a plant to use this technology to
produce several high purity fluorine products, such as germanium tetrafluoride.
The Company expects to complete plant construction and begin fluorine gas
production during the second quarter of 2005. Based on the market size and
growth outlook for high purity fluorine products, management believes this plan
and its operations should increase future revenues.
Subsequent to December 31, 2004, certain series A and B warrants were exercised
resulting in the issuance of 24,252,059 shares of common stock for proceeds of
$970,180.
Management believes these changes to operations and the additional capital
received from the exercise of warrants will be sufficient to enable the Company
to continue its operations as a going concern; however, there is no assurance
that management's plans will be fulfilled or that profitable operations will be
obtained.
30
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
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, 2004 and 2003:
2004 2003
---------- ----------
Raw materials $ 267,850 $ 268,265
Work in progress 1,968,177 2,007,066
Finished goods 1,394 8,421
---------- ----------
$2,237,421 $2,283,752
Work in progress includes cobalt-60 isotopes that are located in the
U.S. federal government's Advanced Test Reactor (ATR) located outside
Idaho Falls, Idaho. These isotopes are at various stages of
irradiation. Some isotopes are near completion and others may require
up to three years to complete. At December 31, 2004 and 2003, these
isotopes had a carrying value of $1,764,659 and $1,889,003,
respectively.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows at December 31,
2004 and 2003:
2004 2003
----------- -----------
Furniture and fixtures $ 63,062 $ 49,931
Plant and improvements 53,647 48,507
Production equipment 1,432,235 791,444
----------- -----------
1,548,944 889,882
Less accumulated depreciation (425,718) (272,595)
----------- -----------
Property, plant & equipment, net $ 1,123,226 $ 617,287
=========== ===========
31
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 5 - PATENTS
During the year ended December 31, 2004, the Company obtained certain
patents and patents pending related to a Fluorine Extraction Process
and a container to transport radioactive materials. Patents, as of
December 31, 2004, are as follows:
2004
--------
Patents $109,000
Less accumulated amortization (10,567)
--------
Patents - net $ 98,433
========
During the year ended December 31, 2004, the Company recognized $10,567
of amortization expense. Estimated amortization expense of patents for
the next five years is as follows:
Years Ending December 31:
2005 $ 10,896
2006 10,896
2007 10,896
2008 10,896
2009 10,896
Thereafter 43,953
--------
Total $ 98,433
========
NOTE 6 - MORTGAGE AND NOTES PAYABLE
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, $68,985 of principal and
$33,500 of accrued interest on this note was converted to common stock.
The conversion rate was not beneficial to the holder, based on the
market value of the common stock on the conversion date.
During 2004, the Company negotiated a line of credit with a bank. The
maximum amount available to borrow is $250,000. The line accrues
interest at the bank prime rate plus 1% not to be less than 7.5%. The
line comes due in July 2005 and is secured by equipment, accounts
receivable and inventory. As of December 31, 2004, the Company had not
drawn any funds against this line of credit.
32
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Mortgage and notes payable as of December 31, 2004 and 2003, consist of the
following:
2004 2003
----------- -----------
Unsecured note payable to certain directors
and shareholders, accrues interest at 6%,
convertible to common stock at the option
of the creditor, due December 31, 2005.
Convertible at $0.18 per share, which was
the market value on the date of the grant. $ 650,000 $ -
Note payable to a finance company accrues
interest at 8.7% due in monthly installments
of $1,488; secured by equipment; due in 2008. 57,997 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% through July 2005 then at prime plus 1%
due monthly; secured by equipment, accounts
receivable and inventory; due February 2006. 733,595 733,595
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;
secured. 840,753 840,753
----------- -----------
Total mortage and notes payable 2,282,345 1,655,389
Less: current maturities (1,520,570) (756,725)
----------- -----------
Mortgage and notes payable, excluding current
installments $ 761,775 $ 898,664
=========== ===========
The aggregate annual maturities of mortgage and notes payable as of December 31,
2004 for the next five years are as follows:
Years Ending December 31:
_________________________
2005 $ 1,520,570
2006 731,623
2007 15,849
2008 14,303
-
-----------
$ 2,282,345
===========
NOTE 7 - SHAREHOLDERS' 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.
33
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
During 2004 there were 18,356,024 Series A warrants, and 1,358,870
Series B warrants, issued from the 2003 rights offering that were
exercised by shareholders for common stock generating $802,184 and
resulted in the Company issuing an additional 19,714,894 shares of
common stock. The Series A warrant agreement contained a provision
allowing the Company to redeem the Series A warrants at any time,
provided the average closing price of the Company's common stock
equaled, or exceeded, $0.12 for 30 consecutive trading days. The
Company stock met this requirement and in January 2005, the Company
announced that the Series A warrants would be redeemed on February 25,
2005 at a redemption price of $0.001 per warrant. Prior to the
redemption date of February 25, 2005, 24,242,259 of Series A warrants
were exercised for cash proceeds of $969,690. On February 25, 2005 the
Company redeemed the remaining 1,191,870 Series A warrants for $1,192.
Subsequent to December 31, 2004, 9,800 Series B warrants were exercised
for cash proceeds of $490.
Redeemable Convertible Preferred Stock
The Company is authorized to issue 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 the payment of dividends and amounts payable in event of
liquidation, dissolution or winding up of the Company.
At December 31, 2004, there were 850 shares of the Series B Preferred
Stock outstanding with a mandatory redemption date of May 2022. 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.
Employee Stock Purchase Plan
On September 30, 2004, the Company's Board of Directors approved an
employee stock purchase plan for an aggregate of up to 2,000,000 shares
of the Company's common stock. The plan allows employees to deduct up
to 15% of their payroll each pay period to be used for the purchase of
common stock at a discounted rate. The common shares will be purchased
at the end of each three month offering period or other period as
determined by the Board. The Plan is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal
Revenue Code. Employees began making payroll deductions in January
2005. The plan is subject to shareholder approval at the next annual
shareholder meeting.
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 reported
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 common stock. The
maximum number of options that can be granted to each employee in one
year is 10,000,000.
34
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
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 were fully
vested as of 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. During 2004 the
Company granted 1,500,000 options to purchase common stock with an
exercise price of $0.17 and 500,000 options to purchase shares of
common stock at an exercise price of $0.12 which was equal to the
closing market price of the common stock on the grant dates.
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, 2003 14,000,000 $ 0.02
Granted 2,000,000 $ 0.03
------------ -----------
Outstanding at December 31, 2003 16,000,000 $ 0.03
Granted 2,000,000 $ 0.16
------------ -----------
Outstanding at December 31, 2004 18,000,000 $ 0.04
============ ===========
Exercisable at December 31, 2003 8,000,000 $ 0.03
============ ===========
Exercisable at December 31, 2004 12,250,000 $ 0.03
============ ===========
The following table summarizes information about fixed stock options
under the Plan outstanding at December 31, 2004:
Options Weighted- Weighted Number Weighted-
Range of Outstanding at Average Average Exerciseable at Average
Exercise December 31, Remaining Exercise December 31, Exercise
Prices 2004 Contractual Life Price 2004 Price
-------------------------------------------------------------------------------------------------
.02-.03 15,000,000 7.33 $ 0.02 10,750,000 $ 0.02
0.08 1,000,000 6.31 $ 0.08 1,000,000 $ 0.08
0.12 500,000 9.85 $ 0.12 125,000 $ 0.12
0.17 1,500,000 9.59 $ 0.17 375,000 $ 0.17
35
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
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:
2004 2003
-------- --------
Expected dividend yield - -
Risk-free interest rate 4.4% 3.4%
Expected volatility 150% 159%
Expected life 10 years 10 years
Weighted average fair value
per share $0.16 $0.03
Warrants
The following summarizes warrant activity for the years ended December
31, 2004 and 2003:
Weighted-Average
Exercise
Fixed Warrants Shares Price
----------------------------------------------------------------------
Outstanding at January 1, 2003 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
Exercised (19,714,894) 0.04
----------- -----------
Outstanding at December 31, 2004 67,865,412 $ 0.05
=========== ===========
The following table summarizes information about warrant outstanding at
December 31, 2004:
Outstanding and Exerciseable at December 31, 2004
----------------------------------------------------------
Weighted Average
Remaining
Exercise Prices Warrants Contractual Life
----------------------------------------------------------
$0.04 25,434,129 2.58
$0.05 42,431,283 2.58
------------
67,865,412
============
36
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 8 - INCOME TAXES
The Company paid no federal or state income taxes during 2004 or 2003.
Income tax expense on 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:
2004 2003
---------- ----------
Income tax benefit $ (287,210) $ (188,615)
Nondeductible expenses 409 38
State taxes net of federal benefit (44,100) (28,961)
Change in valuation allowance 330,901 217,538
---------- ----------
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, 2004 and 2003 are presented below:
2004 2003
----------- -----------
Deferred income tax asset
Net operating loss carryforward $ 1,397,335 $ 1,050,377
- -
----------- -----------
Total deferred income tax asset 1,397,335 1,050,377
Deferred income tax liability -
depreciation (35,084) (9,718)
Valuation allowance (1,362,251) (1,040,659)
----------- -----------
Deferred tax asset (liability) $ - $ -
=========== ===========
At December 31, 2004 the Company had net operating losses of $3,562,759
that will begin to expire in 2023. The valuation allowances for 2004
and 2003 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 9 - COMMITMENTS AND CONTINGENCIES
Litigation
During February 2004, a lawsuit was filed by Iso-Science Laboratories,
Inc. in the Superior Court of the State of California for the County of
Los Angeles against the Company, its President and CEO, one of its
customers and certain officers of this customer. The lawsuit contains
numerous allegations against the defendants relating to the manufacture
and sale of calibration and reference standards for nuclear medicine.
The lawsuit alleges the defendants are using information and equipment
that the plaintiff acquired from a previous employer of one of the
defendants. The lawsuit also alleges unfair trade practices,
interference with prospective business relationships, and conspiracy.
The plaintiff seeks (i) an injunction to restrain the Company from
manufacturing, marketing, or selling any of the products in question;
(ii) a 55% royalty on the price of all related products the Company
sells; (iii) the return of all equipment and information in question;
(iv) disgorgement of profits received from the manufacture and sale of
the products in question; and (v) general and punitive damages in an
amount to be shown at the time of trial. In March 2004, the Company
filed a response to the lawsuit in which the Company denied all of the
allegations. In addition, the Company has filed a counterclaim against
the plaintiff on the basis that the plaintiff filed the suit against
the Company and our President and CEO with the knowledge that the
plaintiff had no basis in law or fact and that the lawsuit was
calculated to interfere with our contractual arrangements and
prospective business with our customers.
37
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
On July 29, 2004 the court granted our motion to dismiss all charges
against our President and CEO. On October 25, 2004 the court
established an anticipated trial start date of December 5, 2005. The
Company will continue to vigorously defend against this lawsuit;
however, the likelihood of an unfavorable outcome is not determinable
at this time. Should this lawsuit be settled in a manner unfavorable to
the Company, the Company could lose our major line of revenues and
could be required to make substantial payments to the plaintiff. The
Company has a manufacturing agreement in place with our customer and
co-defendant pursuant to which the customer will indemnify us and our
officers from any loss arising from this lawsuit. 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 in the future.
However, there is no guarantee that our customer can bear the financial
burden arising from defending and possible settlement of this lawsuit.
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, 2004 and 2003 was $143,922 and $82,242 respectively.
Future minimum lease payments under noncancelable operating leases
(with initial or remaining lease terms in excess of one year) as of
December 31, 2004 are:
Operating
Years ending December 31 Leases
---------
2005 143,719
2006 138,744
2007 138,744
2008 102,484
2009 4,310
---------
Total minimum lease payments $ 528,001
=========
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 U.S. 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 the Company's sole customer for this
product. Nuclear Medicine Reference and Calibration Standard
manufacturing is conducted under an exclusive contract with RadQual,
LLC. who in turn has an agreement in place with several companies for
distributing the product. A loss of either of these customers could
adversely affect operating results by causing a delay in production or
a possible loss of sales.
38
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Contingencies
Because all of the Company's business segments involve radioactive
materials 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 amended this license several times a year 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 this license does not currently 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
Certificate of Deposit at Texas State Bank has been used to provide the
financial assurance required by the NRC for the Idaho facility license.
NOTE 10 - SALE OF ASSETS
Sale of Waxahachie Real Estate
In January 2003, the Company entered into an agreement to sell real
estate in Waxahachie ,Texas for the assumption of $345,295 of debt
associated with the property. The Company remains contingently liable
to Texas State Bank for the debt on the real estate for the remainder
of the term of the debt and could become liable should the purchaser
default on the note.
In accordance with FASB 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, the Company would also regain the
real estate.
NOTE 11 - 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.
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.
39
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
The following summarizes the asset retirement obligation activity for
the years ended December 31, 2004 and 2003:
Balance January 1, 2003 $ 149,332
Accretion expense 11,947
Revision to cashflow estimates (11,947)
---------
Balance December 31, 2003 149,332
Accretion expense 11,947
Revision to cashflow estimates (11,947)
---------
Balance December 31, 2004 $ 149,332
=========
NOTE 12 - SEGMENTS INFORMATION
The Company has five reportable segments which include: Nuclear
Medicine Reference and Calibration Standards, Cobalt Products,
Radiochemical Products, Fluorine Extraction Process and Radiological
Processing Services. Each of these segments is briefly described in the
following paragraphs:
o Nuclear Medicine Reference and Calibration Standards segment
consists of manufacture of sources and standards associated with
SPECT imaging, patient positioning, and calibration or
operational testing of dose measuring equipment for nuclear
pharmacy.
o Cobalt Products segment includes the production of high and
medium specific activity bulk cobalt, recycling expended cobalt
sources, and fabrication of a wide array of cobalt teletherapy
and experimental irradiator source capsules.
o Radiochemical Products segment includes production of various
isotopically pure radiochemical for medical, industrial, or
research applications. These products are either directly
produced by the company or are purchased in bulk from other
producers and distributed by the Company in customized packages
and chemical forms tailored to customer and market demands.
o Fluorine Extraction Process (FEP) segment concerns the production
of high purity fluorine gas compounds (such as germanium
tetrafluioride) for the electronics and silicon chip
manufacturing industry. The Company has acquired all patent
rights to this process and is in the process of
constructing/licensing a separate FEP production facility.
o Radiological Processing Services segment concerns a wide array of
miscellaneous services such as processing of gemstone which has
undergone irradiation for color enhancement, radiological
engineering consultant services, Type A package certification
testing, and waste packaging/recycle services.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company
evaluates performance based on profit or loss from operations before
other income or expense.
40
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
The Company's reportable segments are strategic revenue sources that offer
different products and services. They are managed separately because each
segment requires different technology and marketing strategies.
Radio- Fluorine
Reference Cobalt chemical Extraction Radiological Total
December 31, 2004 Standards Production Products Process Services Segments
-------------------------- ---------- ---------- --------- ---------- ------------ ----------
Revenues $1,377,281 $ 923,262 $ 387,983 $ - $ 160,317 $2,848,843
Depreciation and amortization 35,984 16,726 48,427 12,199 29,096 142,432
Segment profit 560,002 387,471 (284,752) (226,549) (13,379) 422,793
Segment assets 687,267 2,509,904 543,576 263,967 167,391 4,172,105
Expenditures for segment assets 4,867 398,042 76,928 263,967 - 743,804
Radio- Fluorine
Reference Cobalt chemical Extraction Radiological Total
December 31, 2003 Standards Production Products Process Services Segments
-------------------------- ---------- ---------- --------- ---------- ------------ ----------
Revenues $1,201,833 $ 377,309 $ 145,763 $ - $ 345,687 $2,070,592
Depreciation and amortization 33,769 8,910 6,527 - 30,174 79,380
Segment profit (loss) 396,233 118,946 (217,807) - 106,460 403,832
Segment assets 467,963 2,183,791 426,510 - 168,497 3,246,761
Expenditures for segment assets 12,737 17,523 409,727 - - 439,987
Segment Corporate Total
December 31, 2004 Totals Amounts Consolidated
-------------------------- ---------- ---------- ------------
Revenues $2,848,843 $ - $ 2,848,843
Depreciation and amortization 142,432 36,932 179,364
Net profit (loss) 422,793 (1,267,529) (844,736)
Total assets 4,172,105 215,884 4,387,989
Expenditures for assets 743,804 28,446 772,250
Segment Corporate Total
December 31, 2003 Totals Amounts Consolidated
-------------------------- ---------- ---------- ------------
Revenues $2,070,592 $ - $ 2,070,592
Depreciation and amortization 79,380 33,373 112,753
Net loss 403,832 (982,317) (578,485)
Total assets 3,246,761 472,926 3,719,687
Expenditures for assets 439,987 39,744 479,731
41
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 13 - SUBSEQUENT EVENTS
As discussed in Note 7, subsequent to year end 25,434,129 Series A
warrants and 9,800 Series B warrants were exercised or redeemed for
cash proceeds of $970,180.
In March 2005, the Company entered into two new multi-year agreements
with customers for various cobalt products and services.
42