PART I.
FORWARD LOOKING STATEMENTS
Except for statements of historical fact, certain information described in this Form 10-K report contains “forward-looking statements” that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will,” “would” or similar words. The statements that contain these or similar words should be read carefully because these statements discuss our future expectations, including our expectations of our future results of operations or financial position, or state other “forward-looking” information. Advanced Medical Isotope Corporation believes that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able accurately to predict or control. Further, we urge you to be cautious of the forward-looking statements which are contained in this Form 10-K report because they involve risks, uncertainties and other factors affecting our operations, market growth, service, products and licenses. The factors listed below in the section captioned “Risk Factors” in Item 1A, as well as other cautionary language in this Form 10-K report, describe such risks, uncertainties and events that may cause our actual results and achievements, whether expressed or implied, to differ materially from the expectations we describe in our forward-looking statements. The occurrence of any of the events described as risk factors could have a material adverse effect on our business, results of operations and financial position.
ITEM 1. BUSINESS.
General Development of Business
Advanced Medical Isotope Corporation (“we” or the “Company”) was incorporated under the laws of Delaware on December 23, 1994 as Savage Mountain Sports Corporation (“SMSC”) for the purpose of acquiring or investing in businesses which were developing and marketing active sports products, equipment, and apparel. In April 2000, Earth Sports Products, Inc (“ESP”), a corporation registered in Washington, merged with SMSC. In April 2000, HHH Entertainment, Inc (“HHH”), a Nevada corporation, merged with SMSC. As of the date of merger, HHH was the only stockholder of SMSC.
SMSC had limited activity from inception and was considered dormant from the period May 1, 2000 through December 31, 2005. On September 6, 2006, SMSC changed its name to Advanced Medical Isotope Corporation.
On September 27, 2006, the Company acquired the assets of Neu-Hope Technologies, Inc (“NHTI”), a Florida corporation and a subsidiary of UTEK Corporation (“UTEK”), a Delaware corporation, and $310,000 from UTEK in exchange for 100,000 shares of Series A Preferred Stock (which Series A Preferred Stock was later converted to shares of the Company’s common stock in March 2009). The Company conducted the acquisition in order to obtain cash and NHTI’s technology.
On June 13, 2007, the Company acquired the assets of the life sciences business segment of Isonics Corporation (Isonics), a California corporation. The Company acquired the assets in exchange for $850,000 cash payment for the purpose of combining the assets into our business of marketing medical isotopes. The assets acquired consist of intellectual property, agreements with third party companies for purchase and marketing of isotopes, customer lists, and equipment located in Buffalo, New York.
On August 1, 2007, the Company began renting office and warehouse space, known as the Production Facility located in Kennewick, Washington. Through this facility and the use of a proton linear accelerator, on June 30, 2008 we began offering regional distribution of F-18 (FDG).
On October 28, 2010, the Company received $1,215,000 net proceeds from the Department of Energy grant for the Proposed Congressionally Directed Project entitled “Research to Develop and Test an Advanced Resorbable Brachytherapy Seed Research for Controlled Delivery of Yttrium-90 Microspheres in Cancer Treatment.” This grant reimburses the Company for anticipated expenditures related to the development of its Brachytherapy project over the period April 1, 2010 through March 31, 2012. The Company projects this project could cost approximately $5,500,000; however, the Company recognizes the costs could be as high as $8,000,000 before it gets to production.
On October 29, 2010, the Company received notification it had been awarded $244,479 grant funds from the Qualified Therapeutic Discovery Project Program for this same Brachytherapy Project. The $244,479 grant was received February 4, 2011. This grant reimburses the Company for eligible expenditures made during the twelve months ended December 31, 2010.
ITEM 1.
BUSINESS.
- continued
General Development of Business
- continued
On October 29, 2010, the Company received notification it had been awarded $244,479 grant funds from the Qualified Therapeutic Discovery Project Program for the Molybdenum Project. On December 3, 2010, the Company received $205,129 and the remaining $39,350 of the grant was received February 4, 2011. The grant funds received in 2010 reimburses the Company for eligible expenditures made during the twelve months ended December 31, 2009.
Based on our financial history since inception, our auditor has expressed substantial doubt as to our ability to continue as a going concern. We are a company that has a limited amount of revenue and accumulated deficits since inception. If we cannot obtain sufficient funding, we may have to delay the implementation of our business strategy.
Narrative Description of Business
We are engaged in the production and distribution of medical isotopes and medical isotope technologies that are changing the practice of medicine and ushering in a new era of improved patient care. Isotopes are a form of chemical element with the same atomic number as another element but with a different atomic mass. Medical isotopes are used in molecular imaging, therapy, and nuclear medicine to diagnose, manage and treat diseases.
Over 10,000 hospitals worldwide use radioisotopes in medicine, and about 90% of the procedures are for diagnosis. The most common radioisotope used in diagnosis is technetium-99, with some 30 million procedures per year, accounting for 80% of all nuclear medicine procedures worldwide. In developed countries (26% of world population), the frequency of diagnostic nuclear medicine is 1.9% per year, and the frequency of therapy with radioisotopes is about one tenth of this. In the United States there are some 18 million nuclear medicine procedures per year among 311 million people, and in Europe about 10 million among 500 million people. In Australia there are about 560,000 per year among 21 million people, 470,000 of these using reactor isotopes. The use of radiopharmaceuticals in diagnosis is growing at over 10% per year. All of the information in this paragraph is derived from “Radioisotopes in Medicine” (updated October 2011) posted by the World Nuclear Association at
www.world-nuclear.org/info/inf55.html
.
We employ innovative production methods to offer a wide range of reliable, domestically produced medical isotopes as well as
in vivo
delivery systems to aid medical practitioners and medical researchers in the timely diagnosis and effective treatment of diseases such as cancer, heart disease, neurological disorders, and many other medical conditions.
Our objective is to empower physicians, medical researchers, and ultimately, patients, by providing them with essential medical isotopes that, until now, have not been practical or economical to produce, in an effort to detect, manage, and cure human disease, and improve the lives of patients.
We are reviewing possible acquisition candidates as a means of achieving our objective.
Products
We currently offer the following products:
Stable Isotopes:
We currently offer worldwide distribution of O-18 enriched water and a wide range of other stable isotopes. Our product line of stable isotopes includes the following elements: Antimony, Barium, Cadmium, Calcium, Cerium, Chromium, Copper, Dysprosium, Erbium, Europium, Gadolinium, Gallium, Germanium, Hafnium, Indium, Iron, Krypton, Lanthanum, Lead, Lutetium, Magnesium, Mercury, Molybdenum, Neodymium, Nickel, Osmium, Palladium, Platinum, Potassium, Rhenium, Rubidium, Ruthenium, Samarium, Selenium, Silicon, Silver, Strontium, Sulphur, Tellurium, Thallium, Tin, Titanium, Tungsten, Vanadium, Xenon, Ytterbium, Zinc, and Zirconium.
ITEM 1.
BUSINESS.
- continued
Products
- continued
Radiopharmaceuticals:
Many of our products are used in connection with Positron Emission Tomography (“PET”). In cancer, changes in biochemistry occur before tumor mass forms. As a result, PET can often identify the presence of disease earlier than a test which looks for a tumor mass. Isotopes identified by PET include radiopharmaceutical Fluorodeoxyglucose (“FDG”), a sugar compound that is labeled with radioactive fluoride.
F-18 FDG
: We currently offer regional distribution of F-18 FDG from our Kennewick, WA production facility. Other regional production facilities are being considered throughout the U.S. and abroad.
Radio Chemicals:
F-18:
We currently offer regional distribution of F-18 from our Kennewick, WA production facility. Other regional production facilities are being considered throughout the U.S. and abroad. This is the primary PET imaging isotope. It is used for medical diagnostic purposes, such as cancer detection, heart imaging, and brain imaging.
Strontium-82:
Used as a myocardial imaging agent, early detection of coronary artery disease, PET imaging, blood flow tracers.
Germanium-68:
It is used for study of thrombosis and atherosclerosis, PET imaging, detection of pancreatic cancer, and attenuation correction.
Actinium-225:
Used for advanced research in therapy of leukemia and other cancers. We believe that it holds great promise for treating HIV/AIDS, and we are negotiating with a foreign manufacturer to commence U.S. shipments.
Generators:
Strontium-82/Rubidium-82 generators:
Used as a myocardial imaging agent, early detection of coronary artery disease, PET imaging, blood flow tracers. We have access via a foreign manufacturer and are in negotiations with a domestic source.
Germanium-68/Gallium-68 generators:
It is used for study of thrombosis and atherosclerosis, PET imaging, detection of pancreatic cancer, and attenuation correction. We have access via a foreign manufacturer.
Actinium-225/Bismuth-213 generators:
Actinium-225 is the parent of Bismuth-213, an isotope which has been used in animal trials to kill human HIV virus. Bismuth-213 has been used in human clinical trials for the treatment of Acute Myelogenous Leukemia (AML). We are negotiating with a foreign manufacturer for a new patented process to commence manufacturing in the U.S.
Status of New Products
Within the next several years, we intend to offer the following products:
A Brachytherapy seed with a Fast-dissolving Matrix for Optimized Delivery of Radionuclides; and a Brachytherapy treatment utilizing a radiogel technology.
Carbon-11:
Used in cancer diagnosis/staging. Radiotracer in PET scans to study normal/abnormal brain functions related to various drug addictions and is also used to evaluate disease such as Alzheimer’s, epilepsy, Parkinson’s and heart disease.
Cobalt-57:
Used for gamma camera calibration. Also used as radiotracer in research and a source for X-ray fluorescence spectroscopy.
Copper-64:
PET scanning, planar imaging, SPECT imaging, dosimetry studies, cerebral and myocardial blood flow. This isotope is used in stem cell research, and cancer treatments.
ITEM 1.
BUSINESS.
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Products
- continued
Iodine-123
: Used in brain, thyroid, kidney, and myocardial imaging, cerebral blood flow (ideal for imaging) and neurological disease (Alzheimer's).
Molybdenum-99 / Technitium 99:
It is the favored choice among medical professionals because its chemical properties allow it to be bonded to many different chemical materials, thus allowing use for a wide variety of diagnoses. Up to 90% of all procedures involving medical isotopes use this isotope.
Thallium-201:
Used in clinical cardiology, heart imaging, myocardial perfusion studies and cellular dosimetry.
Iodine-124
:
This is a radiotracer primarily used in PET imaging and to create images of human thyroid. Other treatment uses include apoptosis, cancer biotherapy, glioma, heart disease, mediastinal micrometastases, and thyroid cancer.
Indium-111
:
In-111 Chloride bulk solution for U.S. distribution. This radio chemical is used for infection imaging, cancer treatments, and tracer studies.
Manufacturing
The cornerstone equipment selected for our production center is a proton linear accelerator. Our proton linear accelerator is designed to replace large and demanding cyclotron systems for the production of positron emitting isotopes. Large amounts of fluorine-18, carbon-11, nitrogen-13, and oxygen-15 can be produced for synthesis into compounds used in oncology, cardiology, neurology, and molecular imaging. The radio-labeled glucose analog, FDG, can be synthesized and distributed for use in Positron Emission Tomography.
Based on our experience in the industry, it is our belief that no other accelerator in North America has sufficient flexibility to produce the full spectrum of PET imaging radioisotopes, as well as other high-demand isotopes, both short and long lived, for diagnostic and therapeutic applications.
We are also engaged in a number of collaborative efforts with U.S. national laboratories and universities, along with several international teaming partners. These collaborative effort projects include complementary isotope manufacturing technologies as well as isotope devices. We have entered into agreements to produce isotopes in conjunction with the University of Missouri at Columbia, Pacific Northwest National Laboratory, operated by Battelle, and the University of Utah.
In May 2008, we entered into a research agreement with the University of Utah related to the use of brachytherapy seeds for cancer treatments. Pursuant to the research agreement, we paid the University total project costs of $45,150 in 2008 and 2009 for that research. We plan to work with the University of Utah to develop and manufacture cancer treatments using brachytherapy seeds.
In June 2008, we entered into a research agreement with the University of Missouri related to the production of radio isotopes. Pursuant to the research agreement, we paid the University total project costs of $67,500 during 2009 and 2010. We also entered into a one year option agreement in June 2008, which was extended for another year in June 2009, with the University of Missouri. The option agreement gave us the option to enter into a licensing agreement to utilize certain intellectual property held by the University of Missouri for the production of medical, research, and industrial radioisotopes. In May 2010, we exercised our option agreement by entering into a License Agreement for the Patent Rights in the area of radioisotope production using electron beam accelerator(s) for creating short lived radioisotopes such as Molybdenum-99 and Technetium-99 with the University of Missouri. This Agreement calls for a $10,000 nonrefundable fee paid upon execution, a royalty agreement on sales, and an equipment licensing fee on equipment sales. Additionally, the Agreement calls for a milestone payment of $250,000, due and payable five years after execution of this agreement and a milestone payment of $250,000, due and payable upon reaching $50,000,000 in cumulative net sales.
In August 2010, we made a $10,000 investment for an exclusive license agreement with Battelle Memorial Institute regarding its technology for the production of a Brachytherapy seed. This license agreement calls for a $10,000 nonrefundable license fee and a royalty based on a percent of net sales for licensed products sold; the license agreement also contains a minimum royalty amount to be paid each year starting with 2012.
In February 2011, we paid $5,000 for a one year option agreement to negotiate an exclusive license agreement with Battelle Memorial Institute regarding its patents for the production of a radiogel technology. This option agreement calls for a $5,000 upfront fee for the option, which expired February 2012. Effective March 2012, we entered into an exclusive license agreement with Battelle Memorial Institute regarding the use of its patented radiogel technology. This license agreement calls for a $17,500 nonrefundable license fee and a royalty based on a percent of gross sales for licensed products sold; the license agreement also contains a minimum royalty amount to be paid each year starting with 2013.
ITEM 1.
BUSINESS.
- continued
Competitors
The suppliers of radioisotopes for diagnosis, treatment, and research for a wide variety of diseases, in particular cancer, vary in size and product offerings. Competition is limited because there are many barriers to entry, including regulatory hurdles, including licensing, government approvals and capital outlays associated with starting an isotope company. Many current competitors are international companies.
Further, competition is limited as some suppliers are closing their facilities or limiting their production. At one time, the U.S. government was supposed to be the source of medical isotopes, but over the course of the last two decades, it has either closed or failed to adequately fund its production facilities.
About 90% of all the non PET radioisotopes used in the United States are imported from two companies, Nordion Inc. (formerly MDS Inc.) and Covidien (formerly Mallinckrodt). The remaining 10% that are produced in the United States are manufactured in a fragmented, piecemeal manner with companies producing a single isotope instead of a wide variety.
Employees
As of December 31, 2011, we had ten employees, of whom three were full-time employees. At any given time, we utilize eight to ten independent contractors to assist with our operations. We do not have a collective bargaining agreement with any of our employees, and we believe our relations with our employees are good.
Raw Materials
Some of the materials used in the products we manufacture are currently available only from a limited number of suppliers, many of which are international suppliers. We obtain many of our stable isotopes from suppliers in Russia. The Company plans to expand the availability of its supplies and products utilizing manufacturing capability at reactors located at the U.S. Department of Energy's National Laboratories (“National Laboratories”) as well as production capabilities at various universities and foreign countries other than Russia. This strategy is intended to reduce the risk associated with concentrating isotope production at a single facility. We obtain supplies, hardware, handling equipment and packaging from several different U.S. and foreign suppliers.
Customers
Our customers for sales of stable isotopes have included
a broad range of hospitals, universities, research centers and national laboratories, in addition to academic and government institutions. These customers are located in essentially all major U.S. and international markets.
Our sales for 2010 consisted of F-18 (61.3% of total revenues) and Consulting Income (38.7% of total revenues). We had no sales of stable isotopes in 2010 due to the decrease in profit margins for that product; however we are looking into selling more stable isotopes in 2012 and beyond due to the possibility of obtaining lower prices from our vendors. Sales of F-18 for 2010 were 100% to Kadlec Hospital in Richland, Washington. Consulting revenues consist of providing a company with assistance in strategic targetry services, and research into production of radiophamaceuticals and the operations of radioisotope production facilities.
Our sales for 2011 consisted of F-18 (49.2% of total revenues) and Consulting Income (45.5% of total revenues) and sales of stable isotopes (5.3% of total revenues). Sales of F-18 for 2011 were 100% to Kadlec Hospital in Richland, Washington. Consulting revenues consist of providing a company with assistance in strategic targetry services, and research into production of radiophamaceuticals and the operations of radioisotope production facilities.
ITEM 1.
BUSINESS.
- continued
Licenses, Patents, and Intellectual Property
On September 27, 2006, we acquired the assets of Neu-Hope Technologies (“NHTI”) from UTEK. Included in the acquired assets was a Non-Exclusive License Agreement with the Regents of the University of California (“University”) for a neutron generator in exchange for preferred stock. NHTI paid a non-refundable fee in the amount of $25,000 in connection with the license agreement. The license fee is non-refundable unless our commercialization plan is deemed unacceptable by the University. If the plan is deemed unacceptable, the license agreement will terminate. To date, no commercialization plan has been deemed acceptable or unacceptable. In consideration for the license, we agreed to pay royalties equal to the greater of three percent of the selling price of each licensed product we sell or the maintenance fee according to the following schedule:
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2012 and each year thereafter
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* These items have not been paid to date.
The License Agreement may be cancelled by giving 90 days written notice to the University. We did not have a relationship with UTEK before the acquisition of Neu-Hope Technologies, and we do not currently have any business relationship or affiliation with UTEK. In 2008, partially due to the Company’s lack of funds to act upon the patent license for the neutron generator and develop the technology, the Company lost considerable ground towards the advantages of utilization of the patent license. Since other companies made progress towards the development of the patent license technology and management no longer had the means or interest in pursuing the development of this technology, the Company’s management determined that the patent license for the neutron generator no longer had value to the Company and wrote off the net unamortized balance of $643,917 in 2008.
Additionally the Company has made the following investments in patent licenses and intellectual property during 2010:
In May 2010 the Company entered into a License Agreement with the University of Missouri for the exclusive patent rights in the area of radioisotope production using electron beam accelerator(s) for creating short lived radioisotopes such as molybdenum-99 and technetium-99. This Agreement calls for a $10,000 nonrefundable fee paid upon execution, a royalty agreement on sales, and an equipment licensing fee on equipment sales. Additionally, the Agreement calls for a milestone payment of $250,000, due and payable five years after the May 14, 2010 effective date of this agreement and a milestone payment of $250,000, due and payable upon reaching $50,000,000 in cumulative net sales. The University has the right to either terminate or render the license non-exclusive in a licensed field or individual countries if the Company (i) has not demonstrated within 3 years after the effective date of this agreement access to $25,000,000 of available operating capital to proceed with commercialization of licensed products in such a manner as to cause the expenditure of that capital 4 years after the effective date; (ii) has not within 3 years after the effective date obtained the University’s approval of a new commercialization plan for licensed products not previously introduced by the Company into commercial use; or (iii) has not within 5 years after the effective date achieved, or does not each year thereafter maintain, sales levels of licensed products that result in specified royalties to the University. The $10,000 nonrefundable fee paid upon execution was capitalized as license fees and is amortized on the straight line basis over a three year life.
ITEM 1.
BUSINESS.
- continued
Licenses, Patents, and Intellectual Property
- continued
In August 2010, the Company entered into a License Agreement with Battelle Memorial Institute for the patent rights in the area of a Brachytherapy seed with a Fast-dissolving matrix for Optimized Delivery of Radionuclids. This Agreement calls for a $10,000 nonrefundable fee upon execution, a royalty agreement on sales and on funds received from any sublicenses. The $10,000 nonrefundable fee paid upon execution was capitalized as license fees and is amortized on the straight line basis over a three year life. Additionally, the Agreement calls for a minimum annual fee as follows:
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Calendar Year
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Minimum Royalties per Calendar Year
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$
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-
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$
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-
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$
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2,500
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$
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5,000
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$
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7,500
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$
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10,000
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2016 and each calendar year thereafter
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$
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25,000
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Additionally the Company has made the following investments in patent licenses and intellectual property during 2011:
In February 2011, the Company paid $5,000 for a one year option agreement to negotiate an exclusive license agreement with Battelle Memorial Institute regarding its patents for the production of a radiogel technology. This option agreement calls for a $5,000 upfront fee for the option, which expired February 2012. This fee was fully expensed in the twelve months ended December 31, 2011. Effective March 2012, we entered into an exclusive license agreement with Battelle Memorial Institute regarding the use of its patented radiogel technology. This license agreement calls for a $17,500 nonrefundable license fee and a royalty based on a percent of gross sales for licensed products sold; the license agreement also contains a minimum royalty amount to be paid each year starting with 2013.
Patent filing costs totaling $97,421, and $113,326, were capitalized during the twelve months ended December 31, 2011 and 2010; resulting in a total $317,224 of capitalized patents at December 31, 2011. The patents are pending and are being developed, and as such, they are not being amortized. Management has determined the economic life of the patents to be 10 years, and amortization, over such 10-year period and on a straight-line basis, will begin once the patents have been issued and the Company begins utilization of the patents through production and sales, resulting in revenues. The Company evaluates the recoverability of intangible assets, including patents on a continual basis. Several factors are used to evaluate intangibles, including, but not limited to, management’s plans for future operations, recent operating results and projected and expected undiscounted future cash flows.
ITEM 1.
BUSINESS.
- continued
Research and Development
We spent approximately $67,006 and $90,150 during the years ended December 31, 2009 and 2008, respectively, on research and development. The costs incurred in 2008 and 2009 were to a University for tests involved in the making of isotopes. The costs incurred in the twelve months ended December 31, 2010 consisted of $513,416 towards the Brachytherapy Project and $655,006 towards the Molybdenum Project, for a total cost of $1,168,422. The costs incurred in the twelve months ended December 31, 2011 were $245,727 towards the Brachytherapy Project and $235,950 towards the Molybdenum Project, for a total cost of $481,677. The costs expensed to the twelve months ended December 31, 2011 and 2010 consist of the following:
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For the twelve months ended
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December 31, 2011
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December 31, 2010
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Brachytherapy
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Molybdenum
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Brachytherapy
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Molybdenum
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Supplies
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$
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5,175
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$
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390
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$
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623
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$
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2,342
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Amortization
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3,334
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3,334
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1,666
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1,944
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Conferences & seminars
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8,338
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10,682
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639
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13,968
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Dues & subscriptions
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688
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1,335
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-
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1,395
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Marketing
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12,070
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19,441
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9,500
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314
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Office Supplies
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1,119
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942
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87
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2,927
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Payroll and benefits
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32,290
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78,739
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17,496
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19,560
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Consulting fees
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67,116
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36,832
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119,457
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77,476
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Consulting fees – stock based
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8,000
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-
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362,250
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472,402
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Legal fees
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51,794
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77,794
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-
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4,000
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Research
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54,174
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-
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-
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-
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Stock options granted
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50
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750
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950
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14,250
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Telephone
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852
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867
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508
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2,870
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Travel
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727
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4,844
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|
240
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41,558
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Total
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$
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245,727
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$
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235,950
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$
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513,416
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$
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655,006
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Agreement for Strategic Relationship
In August 2011, the Company entered into a Memorandum of Agreement for Strategic Relationship (referred to as the “MASR”) between the Company and Spivak Management, Inc. (referred to as “SMI”) setting forth the terms of a strategic relationship among the Company, SMI, and Mann Healthcare Partners, Inc. (referred to as “MHP”). The Company and SMI agreed to form a joint venture through which SMI will provide management and consulting services to the Company relating to commercial and growth strategies, acquisitions and other ventures, and SMI will introduce the Company to potential investors and investment bankers. Under the MASR, MHP is to introduce to the Company one or more entities prepared to invest $1.2 million to $2.0 million in the Company. If the Company accepts an investment, the Company must pay SMI a fee of $75,000 and must prepay $200,000 of the expenses of SMI and MHP with respect to the joint venture (subject to specified adjustments).
In consideration of SMI’s and MHP’s time, efforts and contributions to the joint venture, the Company is to issue to SMI and MHP warrants to purchase a total of 20,133,333 shares of common stock of the Company with an initial exercise price of $0.20 per share (with the exercise price subject to specified adjustments, including a weighted average anti-dilution adjustment for issuances below market, and a full ratchet anti-dilution adjustment for issuances below the then-applicable exercise price). Portions of the warrants will be forfeited pursuant to provisions in the MASR if the Company has not entered into contracts to secure (i) capital in excess of $1.2 million by a date determined under the MASR, or (ii) capital in excess of $10 million by a later date determined under the MASR, although warrants to be issued to SMI for 3,523,333 shares and warrants to be issued to MHP for 3,523,333 shares are not subject to forfeiture under the MASR. The Company may require exercise of the warrants if the Company’s stock trades above $1.00 per share (subject to adjustment). The MASR provides that SMI has the right to designate one member of the board of directors of the Company.
Under the MASR, the Company is to engage SMI as a consultant for 5 years and MHP as a consultant for 3 years, with each of SMI and MHP to be paid by the Company an annual consulting fee equal to one-third of the cash and stock compensation payable to the highest compensated executive officer of the Company in each year, except that if the Company contracts for less than $10 million of capital by a date determined under the MASR, the one-third is subject to specified reduction as provided in the MASR, but not below 20% for SMI and not below 5% for MHP. As of the date of this report, the Company is not aware that any joint venture has been formed, the Company has not met with or received any funds or any commitments for funds from any potential investors introduced by SMI or MHP, no warrants have been issued by the Company to SMI or MHP, and no fees have been paid by the Company to SMI or MHP.
ITEM 1.
BUSINESS.
- continued
Government Regulation
Significant areas of regulation and intervention include the following:
Environmental and Health Compliance.
We are committed to conducting our activities so that there is no or only minimal damage to the environment; there is no assurance, however, that our activities will not at times result in liability under environmental and health regulations.
We have spent approximately $950,000 on our facility to meet environmental regulation, including the cost of confinement of the facility, exhaust and air balance systems and waste storage facilities. As we expand our manufacturing capability, we will be subject to extensive government regulation and intervention both in the United States and in all foreign jurisdictions in which we conduct business.
The current ongoing continuing costs of compliance are immaterial. Future costs and expenses resulting from such liability may, however, materially negatively impact our operations and financial condition. Overall, environmental and health laws and regulations will continue to affect our businesses worldwide.
Import/Export Regulation.
We are subject to significant regulatory oversight of our import and export operations due to the nature of our product offerings. Penalties for non-compliance can be significant, and violation can result in adverse publicity and financial risk for the Company.
Financial Accounting Standards.
Our financial results can be impacted by new or modified financial accounting standards.
Other Regulations.
Our operations are subject to rules and regulations administered by the U.S. Nuclear Regulatory Commission, Department of Energy, Food and Drug Administration, Department of Transportation, Department of Homeland Security, and other regulatory bodies. To the extent that these regulations are or become burdensome, our business development could be adversely affected.
Available Information
The Company prepares and files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and certain other information with the United States Securities and Exchange Commission (the “SEC”). Persons may read and copy any materials the Company files with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington D.C. 20549, on official business days during the hours of 10 a.m. to 3 p.m. Eastern Time. Information may be obtained on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at
http://www.sec.gov
. Moreover, the Company maintains a website at
http://www.isotopeworld.com
that contains important information about the Company, including biographies of key management personnel, as well as information about the Company’s business. This information is publicly available (i.e., not password protected) and is updated regularly. The content on any website referred to in this Form 10-K report is not incorporated by reference into this Form 10-K report, unless (and only to the extent) expressly so stated herein.
ITEM 1A. RISK FACTORS.
Any of the risk factors described below could cause our business or financial performance to differ from any expectations or other forward-looking statements set forth in this Form 10-K report. Any of the risks described below, as well as other risks or uncertainties set forth elsewhere in this report, could materially and adversely affect our business, operations, prospects, results of operation, financial condition, or the value of our stock or other securities.
RISKS ASSOCIATED WITH OUR BUSINESS
Our independent registered public accounting firm’s report on our financial statements questions our ability to continue as a going concern.
Our independent registered public accounting firm’s report on our financial statements for the years ended December 31, 2011 and 2010 expresses doubt about our ability to continue as a going concern. The report includes an explanatory paragraph stating that we have suffered recurring losses, used significant cash in support of our operating activities and, based on our current operating levels, require additional capital or significant restructuring to sustain our operation for the foreseeable future. There is no assurance that we will be able to obtain sufficient additional capital to continue our operations and to alleviate doubt about our ability to continue as a going concern. If we obtain additional financing, such funds may not be available on favorable terms. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that restrict our ability to conduct our business. Inclusion of a “going concern qualification” in the report of our independent accountants or in any future report may have a negative impact on our ability to obtain debt or equity financing and may adversely impact our stock price.
We have generated operating losses since inception, which are expected to continue, and we have increasing cash requirements, which we may be unable to satisfy
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We have generated material operating losses since inception. We incurred a net loss of $21,194,406 from January 1, 2006 through December 31, 2011, including a net loss of $4,055,026 for the year ended December 31, 2010 and a net loss of $2,749,616 for the year ended December 31, 2011. We expect to continue to experience net operating losses for the foreseeable future. Historically, we have relied upon investor funds to maintain our operations and develop our business. We need to raise additional capital within the next 12 months from investors for working capital as well as business expansion, and there is no assurance that additional investor funds will be available on terms acceptable to us, or at all. If we are unable to unable to obtain additional financing to meet our working capital requirements, we may have to curtail or cease our operations.
Based on our current cash run rate, approximately $1,500,000 will be needed to fund operations for an additional year. We are presently taking steps to raise additional funds to continue operations for the next 12 months and beyond, but there is no assurance that we will be able to raise additional funds. We will need to raise an additional $15,000,000 in the next year to develop new isotope manufacturing centers and complete our aggressive growth plans. However, we may choose to modify our growth and operating plans to the extent of available funding, if any.
Recent economic events, including the substantial decline in global capital markets, as well as the lack of liquidity in the capital markets, could adversely impact our ability to obtain financing and our ability to execute our business plan. As a company with modest sales from our inception, we are unable to determine the effect of the recent economic crises on our business.
Our business plan is at an early stage of development, and we have a limited operating history, which may make it difficult to evaluate our business and prospects.
We have a limited operating history upon which you can base an evaluation of our business and prospects. As a start-up company in the early stage of development, there are substantial risks, uncertainties, expenses and difficulties to which our business is subject. To address these risks and uncertainties, we must do the following:
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Successfully develop and execute our business strategy;
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Respond to competitive developments; and
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Attract, integrate, retain and motivate qualified personnel.
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There is no assurance that we will achieve or maintain profitable operations or that we will obtain or maintain adequate working capital to meet our obligations as they become due. We cannot be certain that our business strategy will be successfully developed and implemented or that we will successfully address the risks that face our business. In the event that we do not successfully address these risks, our business, prospects, financial condition, and results of operations could be materially and adversely affected.
ITEM 1A.
RISK FACTORS.
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RISKS ASSOCIATED WITH OUR BUSINESS
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We are heavily dependent on our key personnel and consultants. The loss of any of these key personnel or consultants could have a material adverse effect on our business, results of operations and financial condition.
Our success is heavily dependent on the continued active participation of our current executive officers and certain consultants and collaborating scientists. Certain key employees have no written employment contracts. We do not have key-man insurance on any of our executive officers or consultants. Loss of the services of any one or more of our executive officers or consultants could have a material adverse effect upon our business, results of operations and financial condition.
If we are unable to hire and retain additional qualified personnel, our business and financial condition may suffer.
Our success and achievement of our growth plans depend on our ability to recruit, hire, train and retain highly qualified technical, scientific, regulatory and managerial employees, consultants and advisors. Competition for qualified personnel among pharmaceutical and biotechnology companies is intense, and an inability to attract and motivate additional highly skilled personnel required for the expansion of our activities, or the loss of any such persons, could have a material adverse effect on our business, results of operations and financial condition.
Our revenues have been derived from sales made to a small number of customers. We need to expand the number of customers purchasing our products and services.
Our sales of F-18 for the years ended December 31, 2009, 2010 and 2011 were made to one hospital located close to our production facility, and those sales constituted 70.3%, 61.3% and 49.2%, respectively, of our total revenues for those years. Our Consulting revenues for the years ended December 31, 2010 and 2011 were made to one customer, and those sales constituted 38.7% and 45.5%, respectively, of our total revenues for those years. We need to expand the number of customers purchasing our products and services in order to increase our revenues and implement our business strategy. There is no assurance that we will be successful in achieving an expansion of the customers purchasing our products and services.
Our future revenues depend upon acceptance of our current and future products in the markets in which they compete.
Our future revenues depend upon the successful production, marketing, and sales of the various isotopes we currently market and expect to market in the future. The rate and level of market acceptance of each of these products may vary depending on the perception by physicians and other members of the healthcare community of its safety and efficacy as compared to that of any competing products; the clinical outcomes of any patients treated; the effectiveness of our sales and marketing efforts in the United States, Europe, and Russia; any unfavorable publicity concerning our products or similar products; the price of our products relative to other products or competing treatments; any decrease in current reimbursement rates from the Centers for Medicare and Medicaid Services or third-party payers; regulatory developments related to the manufacture or continued use of our products; availability of sufficient supplies to either purchase or manufacture our products; our ability to produce sufficient quantities of our products; and the ability of physicians to properly utilize our products and avoid excessive levels of radiation to patients. Any material adverse developments with respect to the commercialization of the products we currently market or expect to market may adversely affect our revenues and may cause us to continue to incur losses in the future.
Many of our competitors have greater resources and experience than we have.
Many of our competitors have greater financial resources, longer history, broader experience, greater name recognition, and more substantial operations than we have, and they represent substantial long-term competition for us. Our competitors may be able to devote more financial and human resources than we can to research, new product development, regulatory approvals, and marketing and sales. Our competitors may develop or market products that are viewed by customers as more effective or more economical than our products. There is no assurance that we will be able to compete effectively against our current and future competitors, and such competitive pressures may adversely affect our business and results of operations.
ITEM 1A.
RISK FACTORS.
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RISKS ASSOCIATED WITH OUR BUSINESS
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Future production increases will depend on our ability to acquire larger quantities of O-18.
We currently obtain O-18 through international sources. The amount of O-18 that can be produced from a given source is limited by the power level and volume available within the reactor for irradiating targets. There is no assurance that we will have a continuing sufficient supply of O-18.
We rely heavily on a limited number of suppliers.
Some of the products we market and some of the materials used in the products we manufacture are currently available only from a limited number of suppliers, many of which are international suppliers. We plan to expand the availability of our supplies and products utilizing manufacturing capability at reactors located at National Laboratories as well as production capabilities at various universities and foreign countries other than Russia. This strategy is intended to reduce the risks associated with concentrating isotope production at a single reactor facility. Failure to obtain deliveries from these sources could have a material adverse effect on our production, and there may be a delay before we could locate alternative suppliers. We may not be able to locate alternative suppliers capable of producing the level of output at the quality standards we require. Additional factors that could cause interruptions or delays in our source of materials include limitations on the availability of raw materials or manufacturing performance experienced by our suppliers or a breakdown in our commercial relations with one or more suppliers. Some of these factors may be completely out of our control and our suppliers’ control. We do not have formal written agreements with any key supplier. Any interruption or delay in the supply of materials required to produce our products could harm our business if we were unable to obtain an alternative supplier or substitute equivalent materials in a cost-effective and timely manner.
We are in default on a financial covenant in the capital leases that finance our isotope production system. That default may adversely affect our ability to continue to use the production system, which may adversely affect our operations and financial results.
We have two capital lease obligations, initially for $1,875,000 and $631,000, secured by equipment and the personal guarantee of two of our major stockholders, which we obtained in September 2007. The purpose of the capital lease agreements was to acquire a Pulsar 10.5 PET Isotope Production System for a contracted amount of $1,875,000, plus ancillary equipment and facility for $631,000. We were in default on the capital lease obligations as of December 31, 2009 due to failure to maintain the minimum debt service coverage ratio required by the leases. We were in compliance with the minimum debt service coverage ratio as of December 31, 2010. We are in default on the capital lease obligations as of December 31, 2011 due to failure to maintain the minimum debt service ratio required by the leases. Accordingly we recorded the entire value of the leases as a current obligation for the year ended December 31, 2011. During 2009, the lessor did not take any action based on our financial covenant default. There is no assurance that the lessor will not take action under the capital leases based on the December 31, 2011 financial covenant default. That default, and any future defaults, on those leases may adversely affect our ability to continue to use the isotope production system, which may adversely affect our operations and financial results.
We may incur material losses and costs as a result of product liability claims that may be brought against us.
We face an inherent business risk of exposure to product liability claims in the event that products supplied by us fail to perform as expected or such products result, or are alleged to result, in bodily injury. Any such claims may also result in adverse publicity, which could damage our reputation by raising questions about the safety and efficacy of our products, and could interfere with our efforts to market our products. A successful product liability claim against us in excess of our available insurance coverage or established reserves may have a material adverse effect on our business. Although we currently maintain liability insurance in amounts we believe are commercially reasonable, any product liability we incur may exceed our insurance coverage.
We are subject to the risk that certain third parties may mishandle our product.
We rely on third parties, such as commercial air courier companies, to deliver our products, and on other third parties to package our products in certain specialized packaging forms requested by customers. We are subject to the risk that these third parties may mishandle our product, which could result in material adverse effects, particularly given the radioactive nature of some of our products.
ITEM 1A.
RISK FACTORS.
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RISKS ASSOCIATED WITH OUR BUSINESS
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Our operations expose us to the risk of material environmental liabilities.
We are subject to potentially material liabilities related to the remediation of environmental hazards and to personal injuries or property damages that may be caused by hazardous substance releases and exposures. We are subject to various federal, state, local and foreign government requirements regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. These laws and regulations can impose substantial fines and criminal sanctions for violations, and can require installation of costly equipment or operational changes to limit emissions and/or decrease the likelihood of accidental hazardous substance releases. We expect to incur capital and operating costs to comply with these laws and regulations. In addition, changes in laws, regulations and enforcement of policies, the discovery of previously unknown contamination or new technology or information related to individual sites, or the imposition of new clean-up requirements or remedial techniques may require us to incur costs in the future that would have a negative effect on our financial condition or results of operations. Operational hazards could result in the spread of contamination within our facility and require additional funding to correct.
We are subject to uncertainties regarding reimbursement for use of our products.
Hospitals and freestanding clinics may be less likely to purchase our products if they cannot be assured of receiving favorable reimbursement for treatments using our products from third-party payers, such as Medicare and private health insurance plans. Third-party payers are increasingly challenging the pricing of certain medical services or devices, and there is no assurance that they will reimburse our customers at levels sufficient for us to maintain favorable sales and price levels for our products. There is no uniform policy on reimbursement among third-party payers, and there is no assurance that our products will continue to qualify for reimbursement from all third-party payers or that reimbursement rates will not be reduced. A reduction in or elimination of third-party reimbursement for treatments using our products would likely have a material adverse effect on our revenues.
Our future growth is largely dependent upon our ability to develop new technologies that achieve market acceptance with acceptable margins.
Our business operates in global markets that are characterized by rapidly changing technologies and evolving industry standards. Accordingly, our future growth rate depends upon a number of factors, including our ability to (i) identify emerging technological trends in our target end-markets, (ii) develop and maintain competitive products, (iii) enhance our products by adding innovative features that differentiate our products from those of our competitors, and (iv) develop, manufacture and bring products to market quickly and cost-effectively. Our ability to develop new products based on technological innovation can affect our competitive position and requires the investment of significant resources. These development efforts divert resources from other potential investments in our business, and they may not lead to the development of new technologies or products on a timely basis or that meet the needs of our customers as fully as competitive offerings. In addition, the markets for our products may not develop or grow as we currently anticipate. The failure of our technologies or products to gain market acceptance due to more attractive offerings by our competitors could significantly reduce our revenues and adversely affect our competitive standing and prospects.
We may rely on third parties to represent us locally in the marketing and sales of our products in international markets, and our revenue may depend on the efforts and results of those third parties.
Our future success may depend, in part, on our ability to enter into and maintain collaborative relationships with one or more third parties, the collaborator’s strategic interest in our products and our products under development, and the collaborator’s ability to successfully market and sell any such products. We intend to pursue collaborative arrangements regarding the marketing and sales of our products; however, we may not be able to establish or maintain such collaborative arrangements, or if we are able to do so, our collaborators may not be effective in marketing and selling our products. To the extent that we decide not to, or are unable to, enter into collaborative arrangements with respect to the sales and marketing of our products, significant capital expenditures, management resources and time will be required to establish and develop an in-house marketing and sales force with technical expertise. To the extent that we depend on third parties for marketing and distribution, any revenues received by us will depend upon the efforts and results of such third parties, which may not be successful.
ITEM 1A.
RISK FACTORS.
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RISKS ASSOCIATED WITH OUR BUSINESS
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We may pursue strategic acquisitions that may have an adverse impact on our business.
Executing our business strategy may involve pursuing and consummating strategic transactions to acquire complementary businesses or technologies. In pursuing these strategic transactions, even if we do not consummate them, or in consummating such transactions and integrating the acquired business or technology, we may expend significant financial and management resources and incur other significant costs and expenses. There is no assurance that any strategic transactions will result in additional revenues or other strategic benefits for our business. We may issue our stock as consideration for acquisitions, joint ventures or other strategic transactions, and the use of stock as purchase consideration could dilute the interests of our current stockholders. In addition, we may obtain debt financing in connection with an acquisition. Any such debt financing could involve restrictive covenants relating to capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and pursue business opportunities, including potential acquisitions. In addition, such debt financing may impair our ability to obtain future additional financing for working capital, capital expenditures, acquisitions, general corporate or other purposes, and a substantial portion of cash flows, if any, from our operations may be dedicated to interest payments and debt repayment, thereby reducing the funds available to us for other purposes.
We will need to hire additional qualified accounting personnel in order to remediate a material weakness in our internal control over financial accounting, and we will need to expend any additional resources and efforts that may be necessary to establish and to maintain the effectiveness of our internal control over financial reporting and our disclosure controls and procedures.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. Our management is required to evaluate and disclose its assessment of the effectiveness of our internal control over financial reporting as of each year-end, including disclosing any “material weakness” in our internal control over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As a result of its assessment, management has determined that there is a material weakness due to the lack of segregation of duties and, due to this material weakness, management concluded that, as of December 31, 2011, our internal control over financial reporting was ineffective. This material weakness was first identified in our Form 10-K/A amended annual report for the year ended December 31, 2008. This material weakness has the potential of adversely impacting our financial reporting process and our financial reports. Because of this material weakness, management also concluded that our disclosure controls and procedures were ineffective as of December 31, 2011. See Item 9A of this Form 10-K report. We need to hire additional qualified accounting personnel in order to resolve this material weakness. We also will need to expend any additional resources and efforts that may be necessary to establish and to maintain the effectiveness of our internal control over financial reporting and our disclosure controls and procedures.
Our patented or other technologies may infringe on other patents, which may expose us to costly litigation.
It is possible that our patented or other technologies may infringe on patents or other rights owned by others. We may have to alter our products or processes, pay licensing fees, defend infringement actions or challenge the validity of the patents in court, or cease activities altogether because of patent rights of third parties, thereby causing additional unexpected costs and delays to us. Patent litigation is costly and time consuming, and we may not have sufficient resources to pursue such litigation. If we do not obtain a license under such patents, if we are found liable for infringement, or if we are not able to have such patents declared invalid, we may be liable for significant money damages, may encounter significant delays in bringing products to market or may be precluded from participating in the manufacture, use or sale of products or methods of treatment requiring such licenses.
Protecting our intellectual property is critical to our innovation efforts.
We own or have a license to use several U.S. and foreign patents and patent applications, trademarks and copyrights. Our intellectual property rights may be challenged, invalidated or infringed upon by third parties, or we may be unable to maintain, renew or enter into new licenses of third party proprietary intellectual property on commercially reasonable terms. In some non-U.S. countries, laws affecting intellectual property are uncertain in their application, which can adversely affect the scope or enforceability of our patents and other intellectual property rights. Any of these events or factors could diminish or cause us to lose the competitive advantages associated with our intellectual property, subject us to judgments, penalties and significant litigation costs, or temporarily or permanently disrupt our sales and marketing of the affected products or services.
ITEM 1A.
RISK FACTORS.
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RISKS ASSOCIATED WITH OUR BUSINESS
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We may not be able to protect our trade secrets and other unpatented proprietary technology, which could give our competitors an advantage over us.
We rely upon trade secrets and other unpatented proprietary technology. We may not be able to adequately protect our rights with regard to such unpatented proprietary technology, or competitors may independently develop substantially equivalent technology. We seek to protect trade secrets and proprietary knowledge, in part through confidentiality agreements with our employees, consultants, advisors and collaborators. Nevertheless, these agreements may not effectively prevent disclosure of our confidential information and may not provide us with an adequate remedy in the event of unauthorized disclosure of such information, and as a result our competitors could gain a competitive advantage.
General economic conditions in markets in which we do business can impact the demand for our goods and services. Decreased demand for our products and services could have a negative impact on our financial performance and cash flow.
Demand for our products and services, in part, depends on the general economic conditions affecting the countries and industries in which we do business. A downturn in economic conditions in a country or industry that we serve may adversely affect the demand for our products and services, in turn negatively impacting our operations and financial results. Further, changes in demand for our products and services can magnify the impact of economic cycles on our businesses. Unanticipated contract terminations by current customers can negatively impact operations, financial results and cash flow. Our earnings, cash flow and financial position are exposed to financial market risks worldwide, including interest rate and currency exchange rate fluctuations and exchange rate controls. Fluctuations in domestic and world financial markets could adversely affect interest rates and impact our ability to obtain credit or attract investors.
We are subject to extensive government regulation in jurisdictions around the world in which we do business. Regulations address, among other things, environmental compliance, import/export restrictions, healthcare services, taxes and financial reporting, and those regulations can significantly increase the cost of doing business, which in turn can negatively impact our operations, financial results and cash flow.
If we are successful in expanding our manufacturing capability, we will be subject to extensive government regulation and intervention both in the United States and in all foreign jurisdictions in which we conduct business. Compliance with applicable laws and regulations will result in higher capital expenditures and operating costs, and changes to current regulations with which we comply can necessitate further capital expenditures and increases in operating costs to enable continued compliance. Additionally, from time to time, we may be involved in proceedings under certain of these laws and regulations. Foreign operations are subject to political instabilities, restrictions on funds transfers, import/export restrictions, and currency fluctuation.
Volatility in raw material and energy costs, interruption in ordinary sources of supply, and an inability to recover from customers our unanticipated increases in energy and raw material costs could result in lost sales or could increase significantly the cost of doing business.
Market and economic conditions affecting the costs of raw materials, utilities, energy costs, and infrastructure required to provide for the delivery of our products and services are beyond our control. Any disruption or halt in supplies, or rapid escalations in costs, could adversely affect our ability to manufacture products or to competitively price our products in the marketplace. To date, the ultimate impact of energy costs increases have been mitigated through price increases or offset through improved process efficiencies; however, continuing escalation of energy costs could have a negative impact upon our business and financial performance.
If we are successful in increasing the size of our organization, we may experience difficulties in managing growth.
We are a small organization with a minimal number of employees. If we are successful, we may experience a period of significant expansion in headcount, facilities, infrastructure and overhead, and further expansion may be required to address potential growth and market opportunities. Any such future growth will impose significant added responsibilities on members of management, including the need to improve our operational and financial systems and to identify, recruit, maintain and integrate additional managers. Our future financial performance and our ability to compete effectively will depend, in part, on the ability to manage any future growth effectively.
ITEM 1A.
RISK FACTORS.
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RISKS RELATED TO OUR COMMON STOCK
There is a limited public market for our common stock. Failure to develop or maintain a more active trading market may negatively affect the value of our common stock, may deter some potential investors from purchasing our common stock or other equity securities, and may make it difficult or impossible for stockholders to sell their shares of common stock.
There is a limited public trading market for our common stock on the OTC Bulletin Board. Our average daily volume of shares traded for the years ended December 31, 2011 and 2010 was 8,430 and 8,540, respectively
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Failure to develop or maintain an active trading market may negatively affect the value of our common stock, may make some potential investors unwilling to purchase our common stock or equity securities that are convertible into or exercisable for our common stock, and may make it difficult or impossible for our stockholders to sell their shares of common stock and recover any part of their investment in us.
Our outstanding derivative securities, the stock or derivative securities that we may become obligated to issue under existing agreements, and certain provisions of those derivative securities, may cause immediate and substantial dilution to our existing stockholders and may make it more difficult for us to raise additional equity capital.
We had 74,758,899 shares of common stock outstanding on March 12, 2012. We also had outstanding on that date derivative securities consisting of options and convertible notes that if they had been exercised and converted in full on March 12, 2012, would have resulted in the issuance of a total of 23,837,967 additional shares of common stock. The issuance of shares upon the exercise of options or the conversion of convertible notes may result in substantial dilution to each stockholder by reducing that stockholder’s percentage ownership of our total outstanding common stock. One outstanding convertible note provides for conversion of principal at 50%, and the payment in shares of accrued interest at 100%, of the market price of our common stock determined over the 10 trading days preceding the date of conversion, and so the amount of dilution to other stockholders will depend upon the market price for our stock and the resulting conversion price when the note is converted by the holder. Conversion of that note on March 12, 2012 would have resulted in the issuance of 7,201,970 shares, which are included in the total above. See Item 13 of this Form 10-K report regarding our convertible notes. Additionally, we have outstanding notes that if not prepaid by specific dates entitle the holder to convert the principal and accrued interest into common stock at 61% of an average trading price of our common stock prior to conversion as provided in the notes. See Note 10 and Note 15 of the Notes to our Financial Statements included in this Form 10-K report. In addition, under an existing agreement, we may become obligated to issue additional warrants to purchase up to 20,133,333 shares of common stock with an exercise price of $0.20 per share, and those warrants would require a reduction in the exercise price if we issued stock below the then-applicable exercise price of the warrants, or if we issued stock below the market price of our stock. See the section entitled “Agreement for Strategic Relationship” in Item 1 above. The issuance of some or all of those warrants and any exercise of those warrants will have the effect of further diluting the percentage ownership of our other stockholders. That agreement also provides for stock compensation for consulting services. The existence and terms of these derivative securities and other obligations may make it more difficult for us to raise additional capital through the sale of stock or other equity securities.
Future sales of our stock, including sales following exercise or conversion of derivative securities, or the perception that such sales may occur, may depress the price of our common stock and could encourage short sales.
The sale or availability for sale of substantial amounts of our shares in the public market, including shares issuable upon exercise of options or warrants or upon the conversion of convertible securities, or the perception that such sales may occur, may adversely affect the market price of our common stock. Any decline in the price of our common stock may encourage short sales, which could place further downward pressure on the price of our common stock.
Our stock price is likely to be volatile.
For the year ended December 31, 2011, the reported low closing price for our common stock was $0.09 per share, and the reported high closing price was $0.48 per share. For the year ended December 31, 2010, the reported low closing price for our common stock was $0.09 per share, and the reported high closing price was $0.57 per share. There is generally significant volatility in the market prices, as well as limited liquidity, of securities of early stage companies, particularly early stage medical product companies. Contributing to this volatility are various events that can affect our stock price in a positive or negative manner. These events include, but are not limited to: governmental approvals, refusals to approve, regulations or other actions; market acceptance and sales growth of our products; litigation involving us or our industry; developments or disputes concerning our patents or other proprietary rights; changes in the structure of healthcare payment systems; departure of key personnel; future sales of our securities; fluctuations in our financial results or those of companies that are perceived to be similar to us; investors’ general perception of us; and general economic, industry and market conditions. If any of these events occur, it could cause our stock price to fall, and any of these events may cause our stock price to be volatile.
ITEM 1A.
RISK FACTORS.
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RISKS RELATED TO OUR COMMON STOCK
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Our common stock is subject to the “Penny Stock” rules of the SEC and the trading market in our securities is limited, which makes transactions in our common stock cumbersome and may reduce the value of an investment in our stock.
The Securities and Exchange Commission has adopted Rule 3a51-1 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires that a broker or dealer approve a person's account for transactions in penny stocks and that the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and must make a reasonable determination that the transactions in penny stocks are suitable for that person and that the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which sets forth the basis on which the broker or dealer made the suitability determination, and that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and may cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Our controlling stockholders may exercise significant control over us.
Our directors, executive officers and principal stockholders beneficially own approximately 53.7% of the outstanding shares of our common stock as of March 12, 2012. Our stockholders do not have cumulative voting rights with respect to the election of directors. If our principal stockholders vote together, they could effectively elect all of our directors, and they could determine or influence the outcome of any other matter submitted for a vote of stockholders.
If we were to issue preferred stock, the rights of holders of our common stock and the value of our common stock may be adversely affected.
Our board of directors is authorized to issue classes or series of preferred stock, without any action on the part of the stockholders. Our board of directors also has the power, without stockholder approval, to set the terms of any such classes or series of preferred stock, including voting rights, dividend rights and preferences over the common stock with respect to dividends or upon the liquidation, dissolution or winding-up of our business, and other terms. If we issue preferred stock in the future that has a preference over the common stock, with respect to the payment of dividends or upon liquidation, dissolution or winding-up, or if we issue preferred stock with voting rights that dilute the voting power of the common stock, the rights of holders of the common stock or the value of the common stock may be adversely affected.
We do not expect to pay any dividends on our common stock for the foreseeable future.
We have not paid any cash dividends on our common stock to date and do not anticipate we will pay cash dividends on our common stock in the foreseeable future.
Accordingly, stockholders must be prepared to rely on sales of their common stock after price appreciation to earn an investment return, which may never occur. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend on our results of operations, financial conditions, contractual restrictions, restrictions imposed by applicable law, and other factors that our board deems relevant.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
This item is not applicable to us because we are a smaller reporting company as defined by Rule 12b-2 under the Securities Exchange Act of 1934.
ITEM 2. PROPERTIES.
Our headquarters has office and production space which makes it adequate for the Company to conduct its ongoing business operations.
On July 17, 2007, the Company entered into a lease at 6208 West Okanogan Avenue, Kennewick, Washington, 99336 which has been used as the Company’s production center. The term of the lease was five years, commencing on August 1, 2007. Monthly rent for the first year of tenancy was $3,500. Under the terms of the lease, the monthly rent would increase 8% each year so that monthly rent for the year beginning August 1, 2008 was $3,780, monthly rent for the year beginning August 1, 2009 was $4,082, monthly rent for the year beginning August 1, 2010 was $4,408, and monthly rent for the year beginning August 1, 2011 was $4,762. The landlord of this space is a non-affiliated stockholder of the Company, who holds less than 5 percent of the total outstanding shares.
Additionally, in June 2008, the Company entered into two 12-month leases for its corporate offices with three 4-month options to renew but in no event will the lease extend beyond December 31, 2010. Subsequent to December 31, 2010, the Company is renting this space on a month to month basis. These lease agreements call for monthly rental payments of $2,733 and $2,328 per month respectively. Effective November 1, 2009, the Company terminated that portion of the lease agreements consisting of the $2,328 per month payment.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Company is a party or as to which any of its property is subject, and the Company does not know of any legal proceedings contemplated against it.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Identification of directors and executive officers
Our current directors and executive officers are as follows:
In addition, Bruce W. Ratchford served as a director of the Company during 2011 and until his resignation on March 9, 2012.
Term of Office
All of our directors hold office until the next annual meeting of the stockholders or until their successors are elected and qualified. Our executive officers are appointed by our board of directors and hold office until their resignation, removal, death or retirement.
Background and Business Experience
The business experience during the past five years of each of our directors and executive officers is as follows:
James C. Katzaroff
,
the Chief Executive Officer and Chairman of the Board, is the founder of Advanced Medical Isotope Corporation. Initially a financial consultant with Wall Street firms Bateman Eichler, Smith Barney and EF Hutton, Mr. Katzaroff has been responsible for senior-level corporate strategy, fostering investment banking relationships, and served as a senior financial advisor for numerous start-ups and development-stage companies. From 1998 to 2001, Mr. Katzaroff held senior positions including Chief Financial Officer, Senior Vice President of Finance, Senior Vice President, and Corporate Secretary of Telemac Corporation, an international communications company active in the wireless telephony market. In 2001 he became Chairman and CEO of Apogee Biometrics, and in 2004 became President of Manakoa Services Corporation, serving as its interim CEO. He holds a Bachelor’s Degree in Business Economics from the University of California, Santa Barbara, and has completed advanced management courses at the University of Washington.
Leonard Bruce Jolliff
,
the Chief Financial Officer, joined Advanced Medical Isotope Corporation as chief financial officer in 2006. For nine years prior to joining the Company, Mr. Jolliff was a sole practitioner in the role of CFO for Hire and as a Forensic Accountant, working with companies ranging from Fortune 500 to small family operations. Mr. Jolliff is a CPA and a member of the Washington Society of CPAs. He is also a CFE and a member of the Association of Certified Fraud Examiners. Mr. Jolliff has held CFO and Controller positions in an array of industries and has worked as a CPA in public practice.
Carlton M. Cadwell
,
a Director, joined Advanced Medical Isotope Corporation as a director in 2006. Dr. Cadwell brings over 30 years of experience in business management, strategic planning, and implementation. He co-founded Cadwell Laboratories, Inc. in 1979 and has served as its President since its inception. Cadwell Laboratories, Inc. is a major international provider of neurodiagnostic medical devices. After receiving his bachelor’s degree from the University of Oregon in 1966 and a doctoral degree from the University of Washington in 1970, he began his career serving in the United States Army as a dentist for 3 years. From 1973 to 1980, Dr. Cadwell practiced dentistry in private practice and since has started several businesses.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
- continued
Identification of Significant Employees
Fu-Min Su, Ph.D
.
,
Chief RadioChemist, was appointed as Advanced Medical Isotope Corporation’s Chief RadioChemist and Radiation Safety Officer in 2007. With over 20 years experience in medical isotope R&D and manufacture, Dr. Su is also knowledgeable in the area of coordinating and conducting clinical trials. He has worked as a senior scientist for a several bio-technology firms, including NeoRx Corporation from 1987 through 1998, Nycomed-Amersham Imaging in 1999, Bristol-Myers Squibb from 2000 to 2006, and Cellectar, LLC in 2007, during which time he developed various radiopharmaceuticals, isotope production methods and generator systems. Dr. Su has authored a number of scientific papers, and has written numerous abstracts for the Journal of Nuclear Medicine. He also holds several patents relating to radionuclide production and preparation. Dr. Su received his Ph.D. from the University of Washington.
Robert E. Schenter, Ph.D
.
,
Chief Science Officer, with over 25 years experience in the area of radioisotope production for applications in the treatment and diagnostics of major diseases, such as cancer, heart disease, and arthritis. With more than 35 years experience in the use and production of nuclear data as applied to fission reactor systems, Dr. Schenter brings a legacy of successful application to nuclear technology projects. Dr. Schenter has been the site manager for production of medical isotopes at Westinghouse Hanford and at The Department of Energy’s Pacific Northwest National Laboratory
.
Dr. Schenter has been the Chief Science Officer of the Company since 2006.
Michael K. Korenko, Ph.D.,
Dr. Korenko was the Westinghouse Vice President in charge of the 300 and 400 areas, including the Fast Flux Testing Facility (FFTF) and all the engineering, safety analysis, and projects for the Hanford site. He was also the Executive Vice President of Closure for Safe Sites of Colorado at Rocky Flats. His most previous assignment was Chief Operating Officer for Curtiss-Wright, who produces the nuclear components for all the United States submarine and aircraft carriers as well as components for commercial nuclear power companies. During the last five years, Dr. Korenko led the business development activities for Curtiss-Wright EMD, covering the west coast of the US. This entailed visiting over one hundred small businesses to determine strategic business relationships with the parent company. This ranged from qualifying new vendors, establishing new customer, to locating acquisition targets. Three years ago he started the company Kor Ideas, LLC that focuses on improving small commercial businesses.
Dr. Korenko has a Doctor of Science from MIT, was a NATO Postdoctoral Fellow at Oxford University, and was selected as a White House Fellow for the Department of Defense, reporting to Secretary Cap Weinberger. Mike Korenko currently is the author of 28 patents and has received many awards, including the National Energy Resources Organization Research and Development Award, the U.S. Steelworkers Award for Excellence in Promoting Safety, and the Westinghouse Total Quality Award for Performance Manager of the Year.
Most relevant to AMIC, Dr. Korenko is the co-inventor with AMIC Chief Science Officer Dr. Robert Schenter, of a patent-pending process converting nuclear waste into medical isotopes.
Alan E. Waltar, Ph.D.,
Chairman of
Scientific Advisory Board
.
Dr. Waltar served as director of Nuclear Energy for the Pacific Northwest National Laboratory (PNNL) in Richland, Wash. Since 2004, he has continued his affiliation with PNNL as a Senior Advisor. Waltar's other professional appointments include director of International Programs at Advanced Nuclear Medical Systems; manager of various Fast Reactor Safety and Fuels Organizations of Westinghouse Hanford Company; and as professor and department head of Nuclear Engineering at Texas A&M University.
His other teaching experience includes stints at the Joint Center for Graduate Study in Richland Wash., the University of Virginia, and Los Alamos National Laboratory. Formerly the president of the American Nuclear Society, Waltar has served on a number of international nuclear science and radiation panels, societies, and committees. He is the author of three books: Fast Breeder Reactors, America the Powerless: Facing Our Nuclear Energy Dilemma, and Radiation and Modern Life: Fulfilling Marie Curie's Dream, and has penned over 70 open literature papers.
Dr. Waltar earned his M.S. in Nuclear Engineering from M.I.T. and his PhD in Engineering Science from the University of California, Berkeley.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
- continued
Identification of Significant Employees
- continued
Nigel R. Stevenson, Ph.D.,
Scientific Advisory Committee
.
Dr. Nigel Stevenson is a world renowned expert in the production of medical isotopes. He holds a Ph.D. in Nuclear Physics from the University of London and has directed many corporate innovations for imaging and therapeutic nuclide agents. For the past five years he has served as Chief Operating Officer for Clear Vascular Inc. and was previously Chief Operating Officer of Trace Life Sciences, which produced a range of medical radiochemicals and radiopharmaceuticals. Prior to this, he had been VP Production and Research for Theragenics Corp. and directed operations in Atlanta for the world’s largest cyclotron facility (14 cyclotrons) that produced brachytherapy seeds. Dr. Stevenson was also Head of Isotope Production and Research at TRIUMF (Canadian National Accelerator Laboratory) where he managed the production of medical radioisotopes for MDS Nordion.
Donald A. Ludwig, Ph.D.,
Scientific Advisory Committee. Dr. Ludwig is an expert in particle accelerator applications in radiation therapy, nuclear medicine and radioisotope production. Since 1988 he has served as an advisor to numerous entities in the field, both domestic and foreign. Among these are the Atomic Energy of Canada, the U. S. Department of Energy Labs at Los Alamos, Berkeley, Fermi, Hanford and Oak Ridge, the Israel Atomic Energy Agency, the Australian Nuclear Science and Technology Organization, the Kurchatov Russian Research Institute in Moscow and the Bhabha Atomic Research Center in Mumbai, India. He holds a Ph.D. from UCLA in Medical Physics as well as an MS in Nuclear Physics from Cal Tech, a BS in Physics from the U. S. Military Academy at West Point and an MBA in Theoretical Marketing from the University of Southern California.
Family Relationships
We currently do not have any executive officers or directors who are related to each other.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers, directors and persons who own more than 10% of the Company's common stock to file with the SEC initial reports of beneficial ownership on Form 3, changes in beneficial ownership on Form 4, and an annual statement of beneficial ownership on Form 5. Such executive officers, directors and greater than 10% stockholders are required by SEC rules to furnish the Company with copies of all such forms that they have filed.
Based solely on its review of such forms filed with the SEC and received by the Company and representations from certain reporting persons, the Company believes that for the fiscal year ended December 31, 2011, all the executive officers, directors and more than 10% beneficial owners complied with the above described filing requirements, except that Mr. Cadwell filed five reports with late reporting of nine transactions, Mr. Katzaroff filed one report with late reporting of one transaction, Mr. Jolliff filed one report with late reporting of one transaction, Mr. Ratchford filed two reports with late reporting of three transactions, and the Cadwell Family Irrevocable Trust filed one late Form 3 report covering its initial beneficial ownership.
Code of Ethics
Our board of directors has not adopted a code of ethics that applies to the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, because of our limited number of executive officers and employees that would be covered by such a code and our limited financial resources. We anticipate that we will adopt a code of ethics after we increase the number of executive officers and employees and obtain additional financial resources.
Audit Committee and Audit Committee Financial Expert
As of the date of this report, we have not established an audit committee, and therefore, our board of directors performs the functions that customarily would be undertaken by an audit committee. Our board of directors during 2011 was comprised of three directors, two of whom we have determined satisfied the general independence standards of the Nasdaq listing requirements. See Item 13 of this Form 10-K report. However, under Nasdaq listing and SEC requirements, a member of an audit committee of a listed issuer, in addition to satisfying those independence standards, cannot be an “affiliated person” of the issuer, which depends in part upon the amount of beneficial ownership such member has of the issuer’s stock. We have determined that our independent directors during 2011 did not satisfy this additional requirement.
Our board of directors has determined that none of its current members qualifies as an “audit committee financial expert,” as defined by the rules of the SEC. In the future, we intend to establish board committees and to appoint such persons to those
committees as are necessary to meet the corporate governance requirements imposed by a national securities exchange, although we are not required to comply with such requirements until we elect to seek listing on a national securities exchange.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth the compensation paid to our Chief Executive Officer and those executive officers that earned in excess of $100,000 during the twelve month periods ended December 31, 2011 and 2010 (collectively, the “Named Executive Officers”):
|
Name and Principal Position
|
Year
|
|
Salary ($)
|
|
|
Bonus ($)
|
|
|
Stock Awards ($)
|
|
|
Option Awards ($)
(1)
|
|
|
Total ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James C. Katzaroff
|
2011
|
|
$
|
209,285
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
47,500
|
|
|
$
|
256,785
|
|
|
CEO and Chairman
|
2010
|
|
$
|
439,489
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
439,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L. Bruce Jolliff
|
2011
|
|
$
|
140,000
|
(2)
|
|
$
|
10,000
|
|
|
$
|
-
|
|
|
$
|
47,500
|
|
|
$
|
197,500
|
|
|
CFO
(3)
|
2010
|
|
$
|
100,000
|
|
|
$
|
121,688
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
221,688
|
|
|
|
(1)
|
The amounts shown in this column do not reflect an amount paid to or earned or realized by any executive officer, but rather reflect the aggregate grant date fair value (computed in accordance with FASB ASC Topic 718) of the stock options granted to our executive officers. There is no assurance that any executive officer will realize the value shown, or any other value, from these options. The value shown is based on 250,000 options valued at $0.19 per option. The $0.19 value per option was derived utilizing the Black-Scholes option-pricing model and consisted of a $0.30 per share stock price at the valuation date and exercise price, a three year maturity, a .99% risk free rate and a 106.53 volatility.
|
|
|
(2)
|
Of this amount, $13,267 was not paid in 2011, but was accrued as of December 31, 2011.
|
|
|
(3)
|
Mr. Jolliff received the additional $10,000 and $121,688 in 2011 and 2010, respectively, to compensate him for additional duties he performed that were not contemplated in his employment contract.
|
Narrative Disclosure to Summary Compensation Table
We have an employment agreement with our CFO, L. Bruce Jolliff, that determines the compensation paid to him. Our Chief Executive Officer, James C. Katzaroff, does not have a written employment agreement and therefore no structured amount or schedule of pay, and so no accruals are made for his compensation. In 2011 and 2010, Mr. Katzaroff received $209,285 and $439,489 respectively, in salary. During this period of limited liquidity for the Company, the CEO has taken limited compensation.
We paid bonuses to certain employees based on their performance, our need to retain such employees and funds available. All bonus payments were approved by our board of directors.
Employment Agreement with L. Bruce Jolliff
Mr. Jolliff has a May 2007 employment agreement with the Company which provides for a salary of $100,000 per year which was increased beginning January 1, 2011 to $140,000, of which $13,267 was not paid in 2011 and was accrued as of December 31, 2011. He also received options to purchase 1,500,000 shares of the Company’s common stock at an exercise price of $0.50 per share with vesting at the rate of 500,000 options per year beginning in August 2008. Mr. Jolliff received bonuses in the amount of $10,000 and $121,688 for the years ended December 31, 2011 and 2010, respectively. The Company may terminate the agreement without cause at any time upon 30 days' written notice. Upon termination, the Company will pay Mr. Jolliff a severance allowance of two month’s salary.
ITEM 11.
EXECUTIVE COMPENSATION.
- continued
Outstanding Equity Awards at Fiscal Year-End Table
The following table sets forth all outstanding equity awards held by our Named Executive Officers as of the end of last fiscal year.
|
Name
|
Option Awards
|
|
Number of Securities Underlying Unexercised Options (#) Exercisable
|
|
Number of Securities Underlying Unexercised Options (#)
Unexercisable
|
|
Option Exercise Price
($)
|
|
Option Expiration Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Narrative Disclosure
During May 2007, the Company granted L. Bruce Jolliff an option to purchase an aggregate of 1,500,000 shares of the Company’s common stock at an exercise price of $0.50 per share. The options vest at 500,000 shares August 2008, 500,000 shares August 2009, and 500,000 shares August 2010, and the options expire August 2012.
The quoted market price of the common stock at the time of issuance of the options was $0.70 per share.
During January 2011, the Company granted James C. Katzaroff and L. Bruce Jolliff, each, an option to purchase 250,000 shares of the Company’s common stock. All options issued in January 2011 have an exercise price of $0.30 per share and are fully vested and expire on January 12, 2014. The quoted market price of the common stock at the time of issuance of the options was $0.30 per share.
Retirement, Pension, Profit Sharing or Insurance Plans
No retirement, pension, profit sharing, or insurance programs or other similar programs have been adopted by the Company for the benefit of its employees.
Employment Agreement with Significant Employee
Employment Agreement with Dr. Fu Min-Su
In January 2008, the Company entered into a five-year employment agreement with Dr. Fu Min-Su pursuant to which the Company agreed to pay Dr. Fu Min-Su an annual salary equal to $90,000, which was increased to $95,000 on January 1, 2010 and $110,000 on January 1, 2011.
In the
event the employment is terminated by the Company without cause, by Dr. Fu Min-Su for good reason or a change in control, the Company will have to provide Dr. Fu Min-Su with one month of his base salary and any portion of an annual bonus allocated by the board of directors, disability and other welfare plan benefits for a period of one year from the date of termination and pro-rated vesting of all
outstanding options, stock grants, shares of restricted stock and any other equity incentive compensation; provided, that the stock options shall be exercisable only until the earlier to occur of (i) two years from the date of the termination, or (ii) the date the option would have otherwise expired if Dr. Fu Min-Su had not terminated
employment.
During the term of the employment agreement, including any extension thereof, and for a period of one year thereafter, Dr. Fu Min-Su shall not provide services that he provides for the Company for a business in the production, import for resale, and distribution of radioisotopes for use in the medical industries.
ITEM 11.
EXECUTIVE COMPENSATION.
- continued
Compensation of Directors
The following table sets forth information regarding compensation earned by our non-employee directors for the year ended December 31, 2011. Mr. Ratchford served as a director during 2011 and until his resignation on March 9, 2012. Mr. Katzaroff is not included in this table because he is an employee and he received no compensation for his service as a director. His compensation as an employee is shown in the Summary Compensation Table above.
|
Name
|
|
Fees Earned or Paid in Cash ($)
|
|
|
Stock Awards ($)
|
|
|
Option Awards ($)
(1)(2)
|
|
|
Total ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The amounts shown in this column do not reflect an amount paid to or earned or realized by any director, but rather reflect the aggregate grant date fair value (computed in accordance with FASB ASC Topic 718) of the stock options granted to our non-employee directors for 2011. There is no assurance that any director will realize the value shown, or any other value, from these options. The value shown is based on 250,000 options, for each of Mr. Cadwell and Mr. Ratchford, valued at $0.19 per option. The $0.19 value per option was derived utilizing the Black-Scholes option-pricing model and consisted of a $0.30 per share stock price at the valuation date and exercise price, a three year maturity, a .99% risk free rate and a 106.53 volatility. The value shown is based on an additional 1,000,000 options for Mr. Ratchford valued at $0.05 per option. The $0.05 value per option was derived utilizing the Black-Scholes option-pricing model and consisted of a $0.20 per share stock price at the valuation date and exercise price, a one year maturity, a .37% risk free rate and a 59.04 volatility.
|
|
|
(2)
|
The following table sets forth, for each of our non-employee directors who served during 2011, the aggregate number of stock awards and the aggregate number of stock option awards that were outstanding as of December 31, 2011:
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Name
|
|
|
Awards (#)
|
|
|
Options (#)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During January 2011, the Company granted Mr. Cadwell and Mr. Ratchford options to purchase 250,000 shares, each, of common stock at an exercise price of $0.30 per share. The options are fully vested and expire January 12, 2014. During July 2011, the Company granted Mr. Ratchford options to purchase 1,000,000 shares of common stock at an exercise price of $0.20 per share. The options are fully vested and expire July 6, 2012. As of December 31, 2011, Mr. Ratchford also held options to purchase 50,000 shares of common stock at an exercise price of $0.40 per share, which were granted in November 2010. The options are fully vested and expire November 16, 2013.
There are no employment contracts or compensatory plans or arrangements with respect to any director that would result in payments by the Company to such person because of his or her resignation as a director or any change in control of the Company.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Beneficial Ownership of Our Common Stock
The following table sets forth, as of March 12, 2012, the number of shares of Common Stock beneficially owned by the following persons: (i) all persons we know to be beneficial owners of at least 5% of our Common Stock, (ii) our directors, (iii) our executive officers, both of whom are named in the Summary Compensation Table above, and (iv) all current directors and executive officers as a group. As of March 12, 2012, there were 74,758,899 shares outstanding, and 23,837,967 shares issuable upon exercise of outstanding options and conversion of outstanding convertible securities, assuming exercise and conversion occurred as of that date, for a total of 98,596,866 shares.
|
Name and
Address of
Beneficial
Owner
(1)
|
Amount and
Nature of
Beneficial
Ownership
(2)
|
Percent of
Class
|
|
Cadwell Family Irrevocable Trust
|
21,529,907
|
28.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Current Directors and Executive Officers as a group (3 individuals)
|
|
|
|
(1)
|
The address of each of the beneficial owners above is c/o Advanced Medical Isotope Corporation, 6208 W. Okanogan Avenue, Kennewick, WA 99336, except that the address of the Cadwell Family Irrevocable Trust (the “Cadwell Trust”) is 909 North Kellogg Street, Kennewick, WA 99336.
|
|
(2)
|
In determining beneficial ownership of our common stock as of a given date, the number of shares shown includes shares of common stock which may be acquired upon exercise of options or conversion of convertible securities within 60 days of that date. In determining the percent of common stock owned by a person or entity on March 12, 2012, (a) the numerator is the number of shares of the class beneficially owned by such person or entity, including shares which may be acquired within 60 days on exercise of options and conversion of convertible securities, and (b) the denominator is the sum of (i) the total shares of common stock outstanding on March 12, 2012, and (ii) the total number of shares that the beneficial owner may acquire upon conversion of the convertible securities and upon exercise of the options. Subject to community property laws where applicable, we believe that each beneficial owner has sole power to vote and dispose of its shares, except that Mr. Cadwell under the terms of the Cadwell Trust does not have or share voting or investment power over the shares beneficially owned by the Cadwell Trust.
|
|
(3)
|
The beneficial ownership of Carlton M. Cadwell includes the shares beneficially owned by the Cadwell Trust, as such shares may also be deemed to be beneficially owned by Mr. Cadwell. The beneficial ownership of Mr. Cadwell also includes: (i) 500,000 shares issuable under options held by him; (ii) 9,550,997 shares issuable under convertible notes held by him with fixed conversion prices; and (iii) 7,201,970 shares issuable under a convertible note held by him with a conversion price that is dependent on the market price of our common stock prior to conversion, which for this purpose has been assumed to convert on March 12, 2012. See Item 13 of this Form 10-K report regarding our outstanding convertible notes.
|
|
(4)
|
Includes 500,000 shares issuable under options held by Mr. Katzaroff.
|
|
(5)
|
Includes 1,300,000 shares issuable under options held by Mr. Ratchford.
|
|
(6)
|
Includes 1,975,000 shares issuable under options held by Mr. Jolliff.
|
Changes in Control
We do not know of any arrangements, including any pledges of our securities that may result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Indebtedness from related parties
The Company had a $200,000 revolving line of credit with Washington Trust Bank that was to expire in September 2009. We had $199,908 in borrowings under the line of credit as of October 28, 2008 at which time the line of credit was paid off and replaced with a loan in the initial principal amount of $199,908 from James C. Katzaroff and Carlton M. Cadwell. Mr. Katzaroff is our chief executive officer, and Mr. Katzaroff and Mr. Cadwell are directors and beneficial owners of more than 10% of our common stock. The loan calls for $4,066 monthly payments, including 8% interest, beginning November 30, 2008, with a balloon payment for the balance at October 31, 2009, at which time the note was extended for another year to October 31, 2010, at which time the note was extended for another year to October 31, 2011, at which time the note was extended for another year to October 31, 2012 with monthly payments increasing to $4,090. There is no security held as collateral for this loan. As of December 31, 2011, all payments were current on this stockholder loan. Since January 1, 2010, the Company has paid $86,898 in principal and $18,901 in interest to the holders of this loan. As of March 1, 2012, the outstanding balance on this loan was $76,378.
Beginning in December, 2008, we have obtained financing from Carlton M. Cadwell, one of our directors and a beneficial owner of more than 10% of our common stock, in transactions which involved our issuance of convertible notes and common stock. The table below sets forth the following information as to such financing transactions that have occurred since January 1, 2010: (i) the date of the transaction, (ii) the amount invested, (iii) the initial principal amount of the note, (iv) the conversion price at which the principal amount and accrued interest may be converted into common stock, (v) the current maturity date of the note (including extensions granted by the holder), (vi) the principal balance of the note as of March 1, 2012, and (vii) the shares of our common stock issued on the transaction date. For each of the notes, the initial principal amount shown below was the largest aggregate amount of principal outstanding since January 1, 2010.
|
Transaction
Date
|
|
Amount Invested
|
|
|
Initial
Principal Amount
|
|
|
Conversion
Price
|
|
Maturity Date
|
|
Principal Balance
|
|
|
Shares Issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/20/10
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
0.50
|
|
1/20/13
|
|
$
|
100,000
|
|
|
40,000
|
|
|
2/16/10
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
0.50
|
|
2/16/13
|
|
$
|
100,000
|
|
|
40,000
|
|
|
3/17/10
|
|
$
|
225,000
|
|
|
$
|
225,000
|
|
|
$
|
0.40
|
|
3/17/12
|
|
$
|
225,000
|
|
|
90,000
|
|
|
4/27/10
|
|
$
|
50,500
|
|
|
$
|
50,500
|
|
|
$
|
0.40
|
|
4/27/12
|
|
$
|
50,500
|
|
|
20,200
|
|
|
5/19/10
|
|
$
|
57,200
|
|
|
$
|
57,200
|
|
|
$
|
0.30
|
|
5/19/12
|
|
$
|
57,200
|
|
|
22,880
|
|
|
6/21/10
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
0.18
|
|
6/21/11
|
|
$
|
0
|
|
|
40,000
|
|
|
7/19/10
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
0.13
|
|
7/19/11
|
|
$
|
0
|
|
|
40,000
|
|
|
8/20/10
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
|
$
|
0.09
|
|
8/20/11
|
|
$
|
0
|
|
|
60,000
|
|
|
9/14/10
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
|
$
|
0.12
|
|
9/14/11
|
|
$
|
0
|
|
|
60,000
|
|
|
6/9/11
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
$
|
0.22
|
|
6/9/12
|
|
$
|
50,000
|
|
|
20,000
|
|
|
6/17/11
|
|
$
|
38,500
|
|
|
$
|
38,500
|
|
|
$
|
0.20
|
|
6/17/12
|
|
$
|
38,500
|
|
|
15,400
|
|
|
6/30/11
|
|
$
|
100,866
|
|
|
$
|
100,866
|
|
|
$
|
0.20
|
|
6/30/12
|
|
$
|
100,866
|
|
|
40,346
|
|
|
8/31/11
|
|
$
|
100,700
|
|
|
$
|
100,700
|
|
|
$
|
0.25
|
|
8/31/12
|
|
$
|
100,700
|
|
|
40,280
|
|
|
9/22/11
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
|
$
|
0.28
|
|
9/22/12
|
|
$
|
25,000
|
|
|
10,000
|
|
|
9/30/11
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
$
|
0.28
|
|
9/30/12
|
|
$
|
50,000
|
|
|
20,000
|
|
|
10/21/11
|
|
$
|
15,000
|
|
|
$
|
15,000
|
|
|
$
|
0.22
|
|
10/21/12
|
|
$
|
15,000
|
|
|
6,000
|
|
|
10/31/11
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
0.24
|
|
10/31/12
|
|
$
|
100,000
|
|
|
40,000
|
|
|
11/25/11
|
|
$
|
105,500
|
|
|
$
|
105,500
|
|
|
$
|
0.23
|
|
11/25/12
|
|
$
|
105,500
|
|
|
42,200
|
|
|
12/30/11
|
|
$
|
113,600
|
|
|
$
|
113,600
|
|
|
$
|
0.10
|
|
12/30/12
|
|
$
|
113,600
|
|
|
45,440
|
|
|
1/31/12
|
|
$
|
128,500
|
|
|
$
|
128,500
|
|
|
$
|
0.15
|
|
1/31/13
|
|
$
|
128,500
|
|
|
51,400
|
|
|
2/21/12
|
|
$
|
121,500
|
|
|
$
|
121,500
|
|
|
$
|
0.16
|
|
2/21/13
|
|
$
|
121,500
|
|
|
48,600
|
|
All of the above notes bear interest at 10% per annum, with the principal and accrued interest payable on the maturity date. No principal or interest has been paid on the notes set forth in the table above. As to the notes issued in June, July, August and September, 2010, the principal and accrued interest on those notes, totaling $895,138, were converted by the holder into a total of 5,784,792 shares of our common stock at the respective conversion prices set forth above, effective December 29, 2010.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
- continued
Indebtedness from related parties
- continued
The total principal balance of all convertible notes payable to Mr. Cadwell that are outstanding as of March 1, 2012 (including convertible notes issued prior to January 1, 2010) is $2,688,266, and the total accrued interest on those notes as of March 1, 2012, is $462,213. All of the outstanding convertible notes have a fixed conversion price, except for one convertible note dated December 16, 2008, in the initial principal amount of $375,000, with interest payable at 10% per annum, and a current maturity date, as extended, of December 12, 2012. At the option of the holder, that note is convertible into common stock by taking the principal to be converted and dividing it by 50% of the volume-weighted average trading price of our common stock for the 10 consecutive trading days immediately preceding the date of conversion. That note also provides that interest may be paid in shares using a 10 day moving average at the discretion of the note holder. As of March 1, 2012, the note has a principal balance of $375,000, and accrued but unpaid interest of $495,308. The convertible notes with fixed conversion prices are in book-entry form.
For additional information on our convertible notes, see the section entitled “Common Stock Issued for Convertible Debt” in Note 12 of the Notes to our Financial Statements included in this Form 10-K report.
Independent Directors
Our common stock is traded on the OTC Bulletin Board, which does not impose any independence requirements on the board of directors or the board committees of the companies whose stock is traded on that market. We have decided to adopt the independence standards of the Nasdaq listing rules in determining whether our directors are independent. Generally, under those rules a director does not qualify as an independent director if the director or a member of the director’s immediate family has had in the past three years certain relationships or affiliations with the company, the company’s auditors, or other companies that do business with the company. Our board of directors has determined that Mr. Cadwell and Mr. Ratchford each qualified as an independent director under those Nasdaq rules, and accordingly, each would have been qualified under those rules to serve on a compensation committee or a nominating committee, if we had established such committees of our board of directors. Mr. Katzaroff is not an independent director due to his employment by the Company as an executive officer.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
The aggregate fees incurred by our principal accountant for the audit of our annual financial statements, review of financial statements included in the quarterly reports and other fees that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2011 and 2010 were $52,000 and $56,000, respectively.
Tax Fees
The aggregate fees billed for professional services rendered by our principal accountant for tax compliance, tax advice and tax planning during the fiscal years ended December 31, 2011 and 2010 were $2,000 and $4,500, respectively. These fees related to the preparation of federal income returns.
All Other Fees
There were no other fees billed for products or services provided by our principal accountant during the fiscal years ended December 31, 2011 and 2010.