General Business and Products Description
International Isotopes Inc. (the “Company”, “we”, “us” and “our”) was formed as a Texas corporation in 1995. Our wholly owned subsidiaries are International Isotopes Idaho Inc., a Texas corporation; International Isotopes Fluorine Products, Inc. an Idaho corporation; and International Isotopes Transportation Services, Inc., an Idaho corporation. Our core business consists of six reportable segments which include: Nuclear Medicine Standards, Cobalt Products, Radiochemical Products, Fluorine Products, Radiological Services, and Transportation.
Beginning in 2004, we began a major undertaking to construct the first commercial uranium de-conversion facility in the U.S. There are four reasons for our belief that this will provide an excellent commercial opportunity. First, there is a significant effort underway by several companies to construct new domestic uranium enrichment facilities in the U.S. These facilities include AREVA Inc.’s (AREVA) planned Eagle Rock Facility in Idaho Falls, ID, URENCO USA’s (UUSA) (formerly known as Louisiana Energy Services or “LES”) Eunice New Mexico facility, United States Enrichment Corporation’s (USEC) American Centrifuge project in Piketon, OH, and GE-Hitachi’s use of a Silex laser separation technology in Wilmington, NC. We anticipate that the operation of one or more of these new commercial enrichment facilities could produce more than 80 million pounds of depleted uranium hexafluoride (UF6) annually by 2018, and all of that material must eventually be processed (or de-converted) for disposal. Second, we entered into a contract with UUSA to provide de-conversion services which obligates UUSA to pay us to provide de-conversion of depleted uranium amounting to at least 50% of our initial planned plant capacity. Third, we hold the patents that give us exclusive rights for the Fluorine Extraction Process (FEP), a process that allows us to extract high-value, high-purity fluoride gases in conjunction with the uranium de-conversion process. And fourth, we should be able to obtain profitable sales agreements for the commercial sale of the various fluoride products we can produce from the planned de-conversion facility.
We have made significant progress to continue to advance the uranium de-conversion project and business plan. During 2011 we have:
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Made significant progress on the Nuclear Regulatory Commission (NRC) licensing for the project,specifically including completion of all NRC requests for additional information which has allowed NRC to complete drafts of both the Safety Evaluation Report and Environmental Impact Statement for the project;
Completed the selection process to identify the engineering team for the design and build contract for the depleted uranium project;
Completed the part 2 application to the Department of Energy Loan program to apply for debt financing of the project;
Completed the land transfer for the 640 acres granted to us under the New Mexico Project Participation agreement and completed a $72 million industrial revenue bond for the project;
Completed the application with the State of New Mexico for the Air Quality permit for the depleted uranium project;
Completed the inventory, removal, and storage of all equipment in the DUF6-DUF4 conversion facility that we acquired in 2008. This material is now staged for movement to New Mexico when construction is ready to start on the depleted uranium project; and
Initiated formal design activities for the depleted uranium project.
While our progress in 2011 was significant, a substantial amount of work and additional capital will be required in order to complete this facility. The total estimated cost for the project is estimated to be approximately $125 million. During 2011, we were able to raise more than $1.5 million through a discounted warrant exercise offering. During 2011, we spent approximately $3.8 million on the project. During 2012, we intend to control the rate of capital expenditure on the project and address our highest priority, namely working with the NRC on its license review activities. In conjunction with supporting the completion of the NRC license process we anticipate incurring additional expenses on initial formal engineering design and New Mexico state permitting. We will, however, control the rate of spending to be in line with the remaining cash reserves of the Company.
Major facility construction cannot begin until after receipt of the NRC license. However, even if we do receive the NRC license, the start of construction is dependent on our obtaining additional equity capital or other financing for the project. We expect that the NRC licensing process will be complete by the latter part of 2012 and we believe that our ability to obtain capital will be greatly enhanced as we approach this major milestone. Based upon the expected timeline for receipt of the NRC license and anticipated concurrent receipt of capital financing, along with completion of facility design and construction, we do not expect any revenue to be generated from this project until the end of 2013 at the earliest.
While the commercial uranium de-conversion business represents a significant opportunity for us, that opportunity does not change our commitment to our current core business segments. Over the course of the past several years we have continued to invest in these segments and worked to reduce production costs and expand sales in each of them. The following paragraphs provide a brief description of each of our business segments. Certain financial information with respect to each of our business segments, including revenues from customers, a measure of profit or loss, and total assets, is set forth in Note 14 in the Notes to our Consolidated Financial Statements which begin on page F-6.
Nuclear Medicine Standards
This segment consists of the manufacture of sources and standards associated with SPECT (Single Photon Emission Computed Tomography), patient positioning, and calibration or operational testing of dose measuring equipment for the nuclear pharmacy industry. These items include flood sources, dose calibrators, rod sources, flexible and rigid rulers, spot markers, pen point markers, and a host of specialty design items. We manufacture these products for RadQual, LLC, through an exclusive manufacturing agreement. The agreement provides that we will manufacture sources exclusively for RadQual, LLC and will not manufacture products that would directly compete with RadQual, LLC sources. The agreement also states that RadQual, LLC will only procure sources manufactured by us for distribution to RadQual, LLC customers. Should this agreement with RadQual, LLC terminate, we are precluded from competing with RadQual, LLC in the nuclear medicine market. For this reason, we have worked to expand revenues from other segments to decrease our risk of dependency on one specific customer. The initial term of the agreement with RadQual, LLC expired on December 31, 2008, but automatically renews each January 1st thereafter unless otherwise terminated by either party with 60 days written notice. In 2007 and 2008, we acquired 24.5% of RadQual, LLC.
There are over 5,000 nuclear medicine centers in the U.S. that require these types of products on a regular repeat basis. We have been manufacturing these products for RadQual, LLC since 2001. The majority of these sales are to U.S. customers however, recent years have seen an increase in foreign sales of many products. All of these products contain radioactive isotopes that decay at a predictable rate. Therefore, customers are required to periodically replace most of these products when they reach the end of their useful lives. Useful life varies from isotope to isotope and product to product but in most cases averages 18 months to two years. The isotopes used in manufacturing these nuclear medicine products are available from various sources world-wide. In addition to the products themselves, we have developed a complete line of specialty packaging for the safe transport and handling of these products.
RadQual, LLC has numerous distributors for direct sales of its products. The largest distributor was Technology Imaging Services Inc. (TIS). In December 2010, we formed a 50/50 joint venture with RadQual, LLC to acquire the assets of TIS and to use those assets to create TI Services, LLC. We intended that this joint venture would provide growth opportunities in existing and future RadQual, LLC product lines both domestically and internationally. In 2011, however, TI Services, LLC experienced a net loss due to reduced margins on certain non-nuclear medicine related products. We have implemented certain management changes and changes in cost control analyses that are intended to reduce or eliminate those losses in 2012. In addition, we continue to work closely with RadQual, LLC to examine several new products that could be added to our contract manufacturing role with RadQual, LLC and that would expand sales opportunities for TI Services, LLC as well. We expect TI Services, LLC to operate profitably in 2012.
Cobalt Products
This segment includes the production of bulk cobalt (cobalt-60), fabrication of cobalt capsules for teletherapy or irradiation devices, and recycling of expended cobalt sources. We are currently the only production source in the U.S. for the type of high activity cobalt used in most therapy devices. The sale of bulk cobalt has typically accounted for a large percentage of the total revenue from this business segment and because those sales run in non-annual cycles there are large variations in revenues for bulk sales in period-to-period comparisons.
The year-over-year demand for bulk cobalt has continued to increase as a result of the introduction of several new types of cobalt therapy units and we have continued to see robust growth in the demand for cobalt manufactured products for those devices. We continue to explore opportunities to further develop our Cobalt Product sales opportunities through increased production of finished source products. The production, use, transport, and import/export of these products are all heavily regulated, but we have developed an experienced staff of technicians, drivers, and supervisors to comply with the regulations and support cost effective and timely delivery of these products. One reason for our establishing our Transportation segment was in support of the delivery of cobalt products.
The production of cobalt is dependent upon the U.S. Department of Energy (DOE) and its prime operating contractor, which controls the Advanced Test Reactor (ATR) operations and, therefore, controls the continued production of cobalt in the government funded ATR. For more than 10 years our agreement with the prime operating contractor had been on a reactor cycle-by-cycle contract basis. In July 2010, we entered into a new a three-year Work For Others (WFO) agreement with the DOE prime operating contractor to continue cobalt production and cask handling. However, in January 2011, we were informed that the DOE intended to terminate this existing agreement and we would be required to establish a new contract with the National Isotope Development Center (NIDC) which is a subprogram of the DOE Office of Science. Negotiations on this process took place during most of 2011 and in December 2011 we were notified that the site contractor was unilaterally terminating the WFO agreement. At that point we had no other option than to contract with NIDC in order to continue cobalt production. We have three major concerns with this change in contract control. First, the contract with NIDC only covers certain specific activities and if any cobalt production requires additional activities it must be separately contracted which will cause interruptions in production. Second, the NIDC has significantly increased the cost of all charges for their activities associated with cobalt production. And third, the NIDC is only contracting for one year time periods which are not compatible with the production cycle of cobalt. We are continuing to argue against these NIDC contracting methods and plans to use all reasonable means to reduce the impact of these new charging practices and contract terms. However, if we are unable to gain relief from the NIDC contract pricing and terms and are unable to pass along significant price increases to our customers it may become cost prohibitive within several years to continue cobalt production in the DOE reactor. Should that happen we would be forced to either terminate cobalt production in the U.S. or attempt to locate an alternate source of supply of cobalt-60 from outside the U.S.
Radiochemical Products
This segment includes production and distribution of various isotopically pure radiochemicals for medical, industrial, or research applications. These products are either directly produced by us or are purchased in bulk from other producers and distributed by us in customized packages and chemical forms tailored to meet customer requirements. Iodine-131 radiochemical by far accounts for the largest portion of revenue within this segment. The iodine-131 is supplied through an agreement with NTP Radioisotopes (Pty) Ltd. (NTP) in South Africa and is imported as a radiochemical intended for medical applications. Although there are other manufacturers of iodine-131, we have entered into a three-year agreement with NTP for the supply of iodine-131 that allows us to purchase iodine at a mutually agreeable pre-determined price. Either party may terminate the agreement by giving three months notice prior to the expiration of the term.
Generally, iodine-131 is used in the treatment and diagnosis of various diseases of the thyroid such as Graves disease, thyroid cancer, and hyperthyroidism. There are also several investigational and clinical trials underway to explore the use of iodine-131 for such things as the treatment of breast, lung, prostate, and ovarian cancers. Other less significant sales of radiochemical in this segment consist of sales of isotopes such as Cobalt-57 (Co-57), Cesium-137 (Cs-137), Sodium-22 (Na-22), and Barium-133 (Ba-133).
Fluorine Products
We established the fluorine products business segment in 2004 to support production and sale of the gases produced using our Fluorine Extraction Process (FEP). The FEP is a process that produces ultra-high purity fluoride gas products through a solid to solid reaction between depleted uranium tetrafluoride (DUF4) and various solid metal oxides such as silicon. We acquired seven patents for the FEP in January 2004. High purity fluoride gases are in ever-increasing demand for processes such as ion-implantation and chemical vapor deposition and also for the manufacture of organic complexes used in a host of industrial applications and manufacturing processes. The FEP products have very high purity, which makes them ideally suited to these specialty applications. During 2011, our Idaho FEP pilot facility was not used for commercial gas production but instead focused upon production of a high purity products and examined methods of scaling up the size of the production operations in support of the new FEP facility in New Mexico. In 2012, we plan to continue to use our Idaho pilot facility to carry out additional testing of key components required for the planned uranium de-conversion and FEP facility in New Mexico. No revenue is expected to be produced in the fluorine products segment during 2012.
Radiological Services
This segment includes a wide variety of miscellaneous services, the largest of which is processing gemstones that have undergone irradiation for color enhancement. In May 2004 we entered into an exclusive contract with one customer, Quali-Tech, Inc., for gemstone processing and this contract accounts for most of our sales in this segment. This contract remains in effect until either party gives a minimum of six months notice to the other that it does not intend to continue the contract. The contract provides that we shall act as the exclusive processor of gemstones for Quali-Tech, Inc., for the term of the contract and two years beyond. Should we lose this customer, our sales in this segment would be negatively impacted. During 2007, we obtained an additional license from the NRC for exempt distribution of gemstones and we are now one of only three companies in the U.S. licensed for this activity. Other services in this segment consist of radiological engineering consultant services, contract shipping services for large quantities of radioactive materials, research and development activities, and Type A package certification testing.
This segment was established in 2006, through our subsidiary, International Isotopes Transportation Services (IITS). IITS was established to provide transportation of our products (such as cobalt sources) and to offer “for hire” transportation services of hazardous and non-hazardous cargo materials. A major factor in our determination to establish this subsidiary and business segment was the many regulations involving the security and tracking of shipments of cobalt. IITS provides us with considerable savings for the transportation of our own products and produces a small revenue stream by providing transportation of products for other companies. It is anticipated that this segment will also provide some of the transportation services for our planned depleted uranium de-conversion facility.
Industry Overview, Target Markets, and Competition
The industries and markets that require or involve the use of radioactive material are diverse. Our current core business operations involve products that are used in a wide variety of applications and in various markets. The following provides some explanation of the markets and competitive factors affecting our current business segments.
Calibration and Reference Standards are required for the daily operational checks and calibration of the measurement of SPECT imaging devices frequently used in nuclear medicine. Calibration and quality assurance testing is required as a routine part of the normal operations of this equipment to ensure its reliability and accuracy. We exclusively manufacture many of these products for RadQual, LLC, which in turn has several distributors who make direct sales around the U.S. We directly ship these products to all 50 states and several overseas locations. There is only one other producer of these products in the world that directly competes with us for these products. Most of the products manufactured by our competitor are similar in design to our products because all must meet Original Equipment Manufacturer (OEM) dimensional and performance standards. However, we attempt to differentiate our products from our competitor’s products through increased levels of quality control and customer service. With the exception of 2009 and 2010, we have historically seen a relatively constant annual growth rate of between 2% to 13% in this business segment. We also received ISO-9000 and ISO-13485 quality program certifications in 2011 that will allow us to start selling these products into several foreign countries that require this additional quality certification for manufacturers. In December 2010, we formed TI Services, LLC, a joint venture with RadQual, LLC, that is expected to be a major distributor of products in the field of nuclear medicine and nuclear cardiology. TI Services, LLC experienced a net loss in 2011, however, by implementing some price changes, cost control measures, and expanding into new markets, we hope to be able to improve its financial performance in 2012.
We sell high activity bulk cobalt to a customer that uses it to fabricate several models of sealed sources for medical and industrial applications. We also manufacture a wide range of sealed source products utilizing our cobalt. These products include applications such as radiation therapy, security examination, and blood sterilization. While there are other technologies available to provide external radiation therapy, there are several state of the art devices that use multiple cobalt sources in a highly focused manner for several specialized treatment methods. There are currently no other producers of cobalt in the U.S. However, there are at least three significant producers in other parts of the world. There is only one other company in the U.S. currently licensed to handle large quantities of cobalt.
In addition to manufacturing cobalt sources, we also recycle used cobalt sources – recovering the cobalt for re-use in the manufacture of new sealed sources for teletherapy devices, irradiators, and other source applications. We are the only company in the U.S. that provides this unique service. There has been a significant increase in regulation by the NRC in recent years that has created a significant barrier to any new entrants to this market. Growth in the demand for cobalt in several of the newer applications, coupled with an expected decline in reactors around the world that are capable of producing this type of high activity material is expected to significantly increase the demand for our cobalt products in the next 5 years. Nonetheless, we continue to remain dependent upon our contract relationship with the Department of Energy for access to its reactor in Idaho for continued cobalt production. Loss of the ability to use, or cost effectively use, these irradiation services would significantly impact our cobalt products business segment because there is not currently another reactor available in the United States that is capable of providing this type of service for us.
We typically supply radioisotope products in bulk form. The markets for most radiochemicals are highly competitive. The target markets for these products are customers who 1) incorporate them into finished industrial or medical devices; 2) use radioisotope products in clinical trials for various medical applications; or 3) further process and include the radioisotope products into a pharmaceutical product for FDA approved therapy or imaging. We are the only U.S. company supplying iodine-131 radiochemical directly to radiopharmacies. Our radiochemical sales compete directly against not only other radiochemical suppliers but also against pharmaceutical grade kits and products that are mass produced by Food and Drug Administration (FDA) approved pharmaceutical manufacturers. Continuation of business in this segment is highly dependent upon maintaining low cost. While the annual growth in sales of these products has been in the range of 2-30%, there were some factors occurring in 2011 that had an adverse impact on iodine-131 sales. These factors included some consolidation of pharmacy chains and corporate decisions made in regard to purchasing radiochemical, as opposed to finished pharmaceutical products. We expect to continue to face these market challenges in 2012 and beyond.
We are developing our fluorine products segment in conjunction with uranium de-conversion in order to take advantage of the anticipated need for depleted uranium de-conversion services. Our FEP patents provide a unique opportunity to provide certain high purity fluoride compounds while also offering a “for fee” de-conversion service to the uranium enrichment industry. We believe the results of our marketing study and discussions with prospective customers support the business model we seek to pursue and adequately justify the financial investment in this uranium de-conversion project. During 2011, our existing Idaho FEP pilot facility was used for testing certain process parameters and demonstrating the purity of the FEP products. During 2012, we expect to use this pilot facility for testing of individual components for the planned depleted uranium de-conversion facility in New Mexico. Therefore, the fluorine products segment is not projected to generate any revenue unless and until the full commercial facility comes on line in late 2013.
Most of our radiological services are performed in support of gemstone processing for Quali-Tech, Inc. There are very few companies in the U.S. that possess the mix of qualifications and licensing necessary to provide this type of service. In the U.S., for example, there is only a single reactor capable of providing irradiation services for gemstone processing. On a global scale, however, the gemstone industry is a highly competitive industry and there are several alternatives to irradiation treatment. There are also other reactors located outside the U.S. that offer irradiation service. In the current economic market, sales of luxury items such as jewelry have declined significantly. As a result of these market factors, revenue from this segment fell far below historic levels in 2010 and only recovered to a limited extent in 2011. We expect that economic conditions will improve which should result in improved retail sales of gemstones in 2012. In addition, we have identified at least one major additional service we plan to offer in the later portion of 2012 that could significantly contribute to the revenue within this segment. During 2011 we continued to work with Alpha Omega Services (AOS) on its development of a new family of Type B shipping containers, which will be used to transport hazardous materials. We have contracted with AOS to act as its exclusive worldwide distributor for these containers that are intended to replace a significant number of containers that have lost their regulatory approval for use in the U.S. There are very few alternatives for other type B packages in the U.S. and we feel that the distributor arrangement should provide significant financial opportunities for additional revenues through sales and leases of these containers in the coming years. These containers have been
undergoing development for several years and were approved by the U.S. Nuclear Regulatory Commission in February 2012. We will be working to promote the sales of these containers in 2012.
IITS was formed in order to support transportation of our own products and to provide “for hire” transportation services. IITS specializes in the transportation of hazardous, radioactive, materials including large quantity cobalt shipments. These types of shipments are under a significant amount of increased new regulation and enhanced security requirements and IITS is well suited to meeting these requirements while significantly reducing the costs of transport to us. IITS has specially trained drivers and equipped vehicles intended to meet the new standards for transportation of large cobalt shipments. Therefore, IITS is capable of providing unique transportation services that we believe only one or two other commercial carriers in the U.S. can also provide. The primary purpose of this segment is to support the sale and delivery of our cobalt products. The increase in sales expected for cobalt products in 2012 should result in a corresponding increase in transportation services revenue.
Government Regulation
Licensing
We have obtained two broad scope materials licenses from the NRC that permit use and possession of by-product material, as well as licenses that permit the exempt distribution of irradiated gemstones, import and export of certain radioactive materials, and our Type B shipments of radioactive materials. One broad scope material license covers calibration and reference standard manufacturing and distribution, radioisotope processing and distribution, large scale cobalt processing and recycle operations, radioactive gemstone processing, environmental sample analysis, and various research and development activities. The second broad scope materials license specifically covers FEP production and our subsidiary, International Isotopes Fluorine Products Inc. This license is specific to the handling of fairly large quantities of depleted uranium in various chemical forms. The exempt distribution license permits the direct release of irradiated gemstones into the U.S. without export. All of our existing licenses and permits are adequate to allow current business operations. As a condition of our NRC licenses in Idaho, we are required to provide financial assurance for decommissioning activities. We currently fulfill this license requirement with an irrevocable letter of credit which names the NRC as beneficiary and which is supported with restricted certificates of deposit in an amount equaling our estimated decommissioning and disposal costs for our facilities. We do not handle “special nuclear materials” (i.e. nuclear fuels and weapons grade uranium, thorium or plutonium), therefore, our facility is not designated as a “nuclear” facility that would require additional licensing.
In December 2009, we submitted a license application to the NRC, including an Environmental Report and Integrated Safety Analysis Summary, to possess and use source and by-product material at the proposed depleted uranium de-conversion and FEP production facility to be operated by International Isotopes Fluorine Products, Inc. facility. The facility, which is to be located in Lea County, New Mexico, is proposed to de-convert up to approximately 11 million pounds of depleted uranium hexafluoride (DUF6) annually into fluoride products and depleted uranium oxides (DUO). The NRC has completed its review of the application materials and has issued its draft Safety Evaluation Report and Environmental Impact Statement. These draft documents are undergoing further internal reviews at the NRC and the NRC estimates that it will issue the license for the facility by September 2012. While major construction of the facility must wait until the receipt of the actual NRC license, the NRC does permit some limited pre-license building and site preparation work such as preparing roadways, site civil work, and building non-safety significant structures such as warehouses. The timing of any pre-license construction request and activity, however, is limited at present by our available capital resources.