VIVOS INC - Annual Report: 2016 (Form 10-K)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

 

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2016

 

or

 

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to _________

 

Commission file number: 0-53497

 

ADVANCED MEDICAL ISOTOPE CORPORATION

(Exact name of registrant as specified in its charter)

   

Delaware		80-0138937
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

1021 N. Kellogg Street ● Kennewick, WA 99336

(Address of principal executive offices) (Zip Code)

(509) 736-4000

Registrant’s telephone number, including area code

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 Par Value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.   See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large Accelerated Filer	[  ]	Accelerated Filer	[  ]
Non-Accelerated Filer	[  ]	Smaller Reporting Company	[X]
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $7,280,000. Shares of common stock held by each executive officer and director and by each person who owns 10% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be affiliates.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.  Without acknowledging that any individual director of registrant is an affiliate, all directors have been included as affiliates with respect to shares owned by them.

 

As of March 6, 2017, there were 37,541,697 shares of the registrant’s Common Stock and 3,241,802 shares of the registrant’s Series A Convertible Preferred Stock outstanding.

 

 

 

Advanced Medical Isotope Corporation

Report on Form 10-K

 

TABLE OF CONTENTS

 

PART I.
Item 1.	Business		1
Item 1A.	Risk Factors		10
Item 1B.	Unresolved Staff Comments		19
Item 2.	Properties		19
Item 3.	Legal Proceedings		19
Item 4.	Mine Safety Disclosures		19
PART II.
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		20
Item 6.	Selected Financial Data		22
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		28
Item 8.	Financial Statements and Supplementary Data		28
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure		28
Item 9A.	Controls and Procedures		29
Item 9B.	Other Information		30
PART III.
Item 10.	Directors, Executive Officers and Corporate Governance		30
Item 11.	Executive Compensation		33
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		36
Item 13.	Certain Relationships and Related Transactions, and Director Independence		38
Item 14.	Principal Accountant Fees and Services		38
PART IV.
Item 15.	Exhibits and Financial Statement Schedules		39

 

 

 

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 the Company’s future expectations, including its expectations of its future results of operations or financial position, or state other “forward-looking” information.  Advanced Medical Isotope Corporation believes that it is important to communicate its future expectations to its investors.  However, there may be events in the future that the Company is not able to accurately predict or to control.  Further, the Company urges 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 its operations, market growth, service, products and licenses.  The risk factors in the section captioned “Risk Factors” in Item 1A of the Company’s Form 10-K, as well as other cautionary language in this Form 10-K report, describe such risks, uncertainties and events that may cause the Company’s actual results and achievements, whether expressed or implied, to differ materially from the expectations the Company describes in its forward-looking statements.  The occurrence of any of the events described as risk factors could have a material adverse effect on the Company’s business, results of operations and financial position.

 

ITEM 1. BUSINESS.

 

    In September of 2006, the Company began operating as Advanced Medical Isotope Corporation (the “Company”).  The Company’s predecessor was incorporated under the laws of the state of Delaware in 1994. The Company has authorized capital of 2,000,000,000 shares of common stock, $0.001 par value per share, and 20,000,000 shares of preferred stock, $0.001 par value per share.

 

Our principal place of business is 1021 N Kellogg Street, Kennewick, Washington, 99336. Our telephone number is (509) 736-4000. Our corporate website address is http://www.isotopeworld.com. Our common stock is currently listed for quotation on the OTC Pink Marketplace under the symbol “ADMD.”

 

Overview

 

The Company is a late stage radiation oncology medical device company engaged in the development of its yttrium-90 based brachytherapy device, RadioGel™, for the treatment of non-resectable tumors. A prominent team of radiochemists, scientists and engineers, collaborating with strategic partners, including national laboratories, universities and private corporations, lead the Company’s development efforts. The Company’s overall vision is to globally empower physicians, medical researchers and patients by providing them with new isotope technologies that offer safe and effective treatments for cancer.

 

The Company’s current focus is on the development of its RadioGel™ device. RadioGel™ is an injectable particle-gel, for brachytherapy radiation treatment of cancerous tumors in people and animals. RadioGel™ is comprised of a hydrogel, or a substance that is liquid at room temperature and then gels when reaching body temperature after injection into a tumor. In the gel are small, one micron, yttrium-90 phosphate particles (“Y-90”). Once injected, these inert particles are locked in place inside the tumor by the gel, delivering a very high local radiation dose. The radiation is beta, consisting of high-speed electrons. These electrons only travel a short distance so the device can deliver high radiation to the tumor with minimal dose to the surrounding tissue. Optimally, patients can go home immediately following treatment without the risk of radiation exposure to family members. Since Y-90 has a half-life of 2.7 days, the radioactively drops to 5% of its original value after ten days.

 

 

 

The Company’s lead brachytherapy products, including RadioGel™, incorporate patented technology developed for Battelle Memorial Institute (“Battelle”) at Pacific Northwest National Laboratory, a leading research institute for government and commercial customers. Battelle has granted the Company an exclusive license to patents covering the manufacturing, processing and applications of RadioGel™ (the “Battelle License”). Other intellectual property protection includes proprietary production processes and trademark protection in 17 countries. The Company plans to continue efforts to develop new refinements on the production process, and the product and application hardware, as a basis for future patents.

 

The Company is currently focusing on obtaining approval from the Food and Drug Administration (“FDA”) to market and sell RadioGel™ as a Class II medical device. The Company first requested FDA approval of RadioGel™ in June 2013, at which time the FDA classified RadioGel™ as a medical device. The Company then followed with a 510(k) submission which the FDA responded with a request for a physician letter of substantial equivalence and a reformatted 510(k) summary, which the Company provided January 2014. In February 2014 the FDA ruled the device as not substantially equivalent due to a lack of predicate device and it was classified to Class III. The Company is currently developing test plans to address issues raised by the FDA in connection with the Company’s previous submissions regarding RadioGel™, including developing specific test plans and specific indication of use. The Company intends to request FDA approval to apply for de novo classification of RadioGel™, which would reclassify the device from a Class III device to a Class II device, further simplifying the regulatory path.

 

In previous FDA submittals, the Company proposed applying RadioGel™ for a very broad range of cancer therapies, referred to as Indication for Use. The FDA has requested that the Company reduce its Indications for Use. To comply with that request, the Company has expanded its Medical Advisory Board (“MAB”) and engaged doctors from respected hospitals who have evaluated the candidate cancer therapies based on three criteria: (1) potential for FDA approval and successful therapy; (2) notable advantage over current therapies; and (3) probability of wide spread acceptance by the medical community.

 

The MAB selected eighteen applications for RadioGel™, each of which meet the criteria described above. This large number confirms the wide applicability of the device and defines the path for future business growth. The Company intends to apply to the FDA for a single Indication for Use, followed by subsequent applications for additional Indications for Use. The initial application should facilitate each subsequent application, and the testing for many of the subsequent applications could be conducted in parallel, depending on available resources.

 

The MAB selected the treatment of basal cell and squamous cell skin cancers for the first Indication for Use to be submitted to the FDA. According to the American Cancer Society, one out of every three new cancers diagnosed in the U.S. is a cancerous skin lesion of this type, representing 5.5 million tumors diagnosed annually. The MAB believes RadioGel™ has the potential to be the preferred treatment in a reasonable number of cases in a very large market.

 

The Company’s, IsoPet Solutions division was established in May 2016 to focus on the veterinary oncology market. The Company has engaged four different university veterinarian hospitals to begin using RadioGel™ for treatment of four different cancer types in dogs and cats. Washington State University Veterinary Hospital has tested one cat to demonstrate the procedures and the absence of any significant toxicity effect. The other three centers are expected to begin therapy during the second quarter of 2017 after their internal administrative review process is completed.

 

These animal therapies will focus on creating labels that describe the procedures in detail as a guide to future veterinarians. The labels will be voluntarily submitted to the FDA for review. They will then be used as data for future FDA applications in the medical sector and as key intellectual property for licensing to private veterinary clinics. In 2018, Dr. Alice Villalobos, the Chair of our Veterinarian Advisory Board, will be the first licensee of these therapies in her private clinic to demonstrate the business model.

 

The Company anticipates that future profit will be derived from direct sales of RadioGel™ and related services, and from licensing to private medical and veterinary clinics in the U.S. and internationally.

 

 

 

Financing and Strategy

 

Research and development of RadioGel™ and other products in the Company’s brachytherapy product line has been funded with proceeds from the sale of equity and debt securities as well as a series of grants. The Company requires funding of approximately $1.5 million annually to maintain current operating activities. Over the next 12 to 24 months, the Company believes it will cost approximately $5.0 million to $10.0 million to fund: (1) the FDA approval process and initial deployment of RadioGel™ and other brachytherapy products, and (2) initiate regulatory approval processes outside of the United States. The continued deployment of RadioGel™ and the Company’s other brachytherapy products and a worldwide regulatory approval effort will require additional resources and personnel. The principal variables in the timing and amount of spending for the brachytherapy products in the next 12 to 24 months will be the FDA’s classification of the Company’s brachytherapy products, including RadioGel™, as Class II or Class III devices (or otherwise) and any requirements for additional studies which may possibly include clinical studies. Thereafter, the principal variables in the amount of the Company’s spending and its financing requirements would be the timing of any approvals and the nature of the Company’s arrangements with third parties for manufacturing, sales, distribution and licensing of those products and the products’ success in the U.S. and elsewhere. The Company intends to fund its activities through strategic transactions such as licensing and partnership agreements or additional capital raises.

 

Following receipt of required regulatory approvals and financing in the U.S., the Company intends to outsource material aspects of manufacturing, distribution, sales and marketing. Outside of the U.S., the Company intends to pursue licensing arrangements and/or partnerships to facilitate its global commercialization strategy.

 

In the longer-term, subject to the Company receiving adequate funding, regulatory approval for RadioGel™ and other brachytherapy products, and thereafter being able to successfully commercialize its brachytherapy products, the Company intends to consider resuming research efforts with respect to other products and technologies intended to help improve the diagnosis and treatment of cancer and other illnesses

 

Based on the Company’s financial history since inception, its auditor has expressed substantial doubt as to the Company’s ability to continue as a going concern. The Company has limited revenue, nominal cash, and has accumulated deficits since inception. If the Company cannot obtain sufficient additional capital, the Company will be required to delay the implementation of its business strategy and may not be able to continue operations.

 

Product Features

 

The Company’s RadioGel™ device has the following product features:

 

 

 

 

 

 

 

 

 

Steps from Production to Therapy

 

Device Production

 

During the next two years, the Company intends to outsource material aspects of manufacturing and distribution. As future product volume increases, the Company will reassess its make-buy decision on manufacturing and will analyze the cost/benefit of a centrally located facility.

 

Production of the Hydrogel

 

RadioGel™ is manufactured with a proprietary process under ventilated sterile hood by following strict Good Laboratory Practices, or GLP, procedures. It is made in large batches that are frozen for up to three months. When the product is ready to ship, a small quantity of the gel is dissolved in a sterile saline solution. It is then passed through an ultra-fine filter to ensure sterility.

 

Production of the Yttrium-90 Phosphate Particles

 

The Y-90 particles are produced with simple ingredients via a proprietary process, again following strict GLP procedures. They are then mixed into a phosphate-buffered saline solution. They can be produced in large batches for several shipments. The number of particles per shipment is determined by the dose prescribed by the doctor.

 

Shipment

 

RadioGel™ is shipped in two containers, one with a solution of the gel and the other with a solution of the particles. Before shipment they are subjected to sterility testing, again by strict procedures. The vial with the Y-90 is put through a special radiation calibrator, which measures beta particles. The vials can be shipped via FedEx or UPS by following the proper protocols.

 

At the User

 

The user receives the two vials. The solution containing the RadioGel™ is mixed with the solution containing the Y-90 particles. This is then shaken to ensure homogeneity and withdrawn into a syringe. The quantities that are mixed are calculated from the information on the product label.

 

 

 

 

The specific injection technique depends on the Indication for Use. For small tumors, one centimeter in diameter or less, the cancer is treated with a single injection. For larger tumors, the cancer is treated with a series of small injections from the same syringe.

 

Principal Markets

 

The Company is currently pursuing two synergistic business sectors, medical and veterinary, each of which are summarized below.

 

Medical Sector

 

Brachytherapy is the use of radiation to destroy cancerous tumors by placing a radiation source inside or next to the treatment area. According to the 2014 MEDraysintell report, the global market for brachytherapy reached US$ 680 million in 2013 and is projected to reach $2.4 billion by 2030. It is estimated that the U.S. market represents approximately half of the global market. The Company believes there are significant opportunities in prostate, breast, liver, pancreatic, head and neck cancers. The 2014 U.S. estimated new cases of cancer according to the American Cancer Society are 233,000 prostate, 235,030 breast, 31,190 liver, and 46,420 pancreas. 

 

RadioGel™ is currently fully developed, requiring only FDA approval before commercialization. The Company has been seeking FDA approval of RadioGel™ for almost four years. The principal issue preventing approval is that the Company attempted to obtain regulatory approval for a broad range of Indications for Use, including all non-resectable cancers, without sufficient supporting data.

 

 

 

Building on the FDA’s ruling of RadioGel™ as a device, the Company is currently developing test plans to address issues raised in the Company’s prior FDA submittal regarding RadioGel™. The Company intends to request FDA approval to submit RadioGel™ for de novo classification, which would reclassify the device from a Class III device to a Class II device, and accelerate the regulatory approval path.

 

After analyzing the Company’s data and the last four years of communication from the FDA, the Company has taken the following steps:

 

 

 

 

 

The critical path is the required testing – in vitro, animal testing, human clinical studies – all of which is resource dependent.

 

In previous submittals, the Company proposed applying a very broad range of cancer therapies, referred to as Indications for Use, to RadioGel™. The FDA has strongly advised the Company to reduce its Indications for Use. To comply with that request, the Company has expanded its MAB, consisting of Drs. Barry D. Pressman (Chairman), Albert DeNittis, Howard Sandler, and Darrell Fisher.

 

The MAB evaluated the candidate cancer therapies based on three criteria: (i) the potential for FDA approval and successful therapy; (ii) notable advantages of RadioGel™ over current therapies; and (iii) the likelihood that RadioGel™ can be widely accepted by the medical community and profitably commercialized.

 

The MAB selected eighteen Indications for Use for RadioGel™, each of which meets the above-mentioned criteria. These eighteen Indications for Use are listed below. This large number confirms the wide applicability of the device and defines the path for future growth. The Company intends to apply to the FDA for a single Indication for Use, followed by subsequent applications for additional Indications for Use. The initial application should facilitate each subsequent application, and the testing for many of the subsequent applications could be conducted in parallel, depending on available resources.

 

● Skin cancer ● Involved lymph nodes ● Bladder ● Liver ● Localized prostate ● Pancreas ● Head and neck (including sino-nasal and oropharyngeal) ● Ocular melanoma

● Non-dendritic brain ● Pediatric cancers – several types ● Rectal ● Gynecological ● Spinal ● Recurrent esophageal ● Breast cancer resection cavity ● Anaplastic thyroid

 

After thorough review to prioritize indications, the MAB has selected basal cell and squamous cell carcinoma (skin cancers) as the first Indication for Use to be presented to the FDA. According to American Cancer Society, one out of every three new cancers diagnosed in the U.S. is a cancerous skin lesion of this type, representing 5.5 million tumors annually. The MAB believes RadioGel™ will be the preferred treatment in a reasonable number of cases in a very large market.

 

 

Veterinary Sector

 

There are about 150 million pet dogs and cats in the United States. Nearly one-half of dogs and one-third of cats are diagnosed with cancer at some point in their lifetime. The Veterinary Oncology & Hermatology Center in Norwalk, Connecticut, reports that cancer is the number one natural cause of death in older cats and dogs, accounting for nearly 50 percent of pet deaths each year. The American Veterinary Medical Association reports that half of the dogs ten years or older will die because of cancer. The National Cancer Institute reports that about six million dogs are diagnosed with cancer each year, translating to more than 16,000 a day. The average cost of treating tumors in dogs using radiation is $5,000 to 7,000, according to petcarerx.com.

 

The Company’s IsoPet operating division focuses on the veterinary oncology market. Dr. Alice Villalobos, a founding member of the Veterinary Cancer Society and the Chair of our Veterinary Medicine Advisory Board, has been providing guidance to management regarding this market.

 

Since the FDA has classified RadioGel™ as a device, the Company can implement future improvements in the product and the application techniques to further benefit animals and to strengthen our intellectual property, without any further FDA approvals.

The Company currently intends to utilize university veterinary hospitals for therapy development, given that veterinary hospitals offer superior and plentiful veterinarians and students, a large number of animal patients, radioactive material handling licenses, and are respected by private veterinary centers and hospitals.

The Company has recently engaged four different university veterinarian hospitals to begin using RadioGel™ for four different cancer types in dogs and cats. Each veterinary hospital will focus on a different cancer therapy:

 

Washington State University Veterinary Hospital has tested one cat to demonstrate the procedures and the absence of any significant toxicity effect. The others typically take about two months to complete their internal review before they can begin therapy. In each case, they will treat several animals with the objective of creating a detailed therapy procedure, which will be incorporated into product information for RadioGel™, known as a Label. The Company will then voluntarily ask the FDA to review this Label, as suggested by their guidance.

These Labels will be used as part of our medical application to the FDA. A number of these animal cancers also occur in humans, so there is a direct benefit to our FDA applications when we get to that particular Indication for Use.

The Labels and the animal experience will also be used to transfer the therapies to the private clinics and hospitals. Dr. Villalobos has agreed that her private clinic will be the first to implement the Company’s veterinary therapies, and the Company intends to assist Dr. Villalobos to obtain the required radioactive material handling license.

After completing the first set of therapies, each university veterinary hospital will select additional Indications for Use.

 

 

 

Competitors

 

The Company competes in a market characterized by technological innovation, extensive research efforts, and significant competition.

The pharmaceutical and biotechnology industries are intensely competitive and subject to rapid and significant technological changes. A number of companies are pursuing the development of pharmaceuticals and products that target the same diseases and conditions that our products target. We cannot predict with accuracy the timing or impact of the introduction of potentially competitive products or their possible effect on our sales. Certain potentially competitive products to our products are possibly in various stages of development. Also, there may be many ongoing studies with currently marketed products and other developmental products, which may yield new data that could adversely impact the use of our products in their current and potential future Indications for Use. The introduction of competitive products could significantly reduce our sales, which, in turn would adversely impact our financial and operating results.

 

There are a wide variety of cancer treatments approved and marketed in the U.S. and globally. General categories of treatment include surgery, chemotherapy, radiation therapy and immunotherapy. These products have a diverse set of success rates and side effects. The Company’s products, including RadioGel™, fall into the brachytherapy treatment category. There are a number of brachytherapy devices currently marketed in the U.S. and globally. The traditional iodine-125 (I-125) and palladium-103 (Pd-103) technologies for brachytherapy are well entrenched with powerful market players controlling the market. The industry-standard I-125-based therapy was developed by Oncura, which is a unit of General Electric Company. Additionally, C.R. Bard, a major industry player competes in the I-125 brachytherapy marketplace. These market competitors are also involved in the distribution of Pd-103 based products. Cs-131 brachytherapy products are sold by IsoRay. Several Y-90 therapies have been FDA approved including SIR-Spheres by Sirtex, TheraSphere by Biocompatibles UK and Zevalin by Spectrum Pharmaceuticals.

 

Raw Materials

 

The Company currently manufactures research quantities of brachytherapy products, including RadioGel™, or components of these products. The Company obtains supplies, hardware, handling equipment and packaging from several different U.S. and foreign suppliers. Some of the products the Company currently manufactures or intends to manufacture require purchasing raw materials from a limited number of suppliers, many of which are international suppliers.

 

Customers

 

The Company anticipates that potential customers for our potential brachytherapy products likely would include those institutions and individuals that currently purchase brachytherapy products or other oncology treatment products.

 

Government Regulation

 

The Company's present and future intended activities in the development, manufacturing and sale of cancer therapy products, including RadioGel™, are subject to extensive laws, regulations, regulatory approvals and guidelines. Within the U.S., the Company's therapeutic radiological devices must comply with the U.S. Federal Food, Drug and Cosmetic Act, enforced by the FDA. The Company is also required to adhere to applicable FDA Quality System Regulations, also known as the Good Manufacturing Practices, which include extensive record keeping and periodic inspections of manufacturing facilities.

In the U.S., the FDA regulates, among other things, new product clearances and approvals to establish the safety and efficacy of these products. We are also subject to other federal and state laws and regulations, including the Occupational Safety and Health Act and the Environmental Protection Act.

The Federal Food, Drug, and Cosmetic Act and other federal statutes and regulations govern or influence the research, testing, manufacture, safety, labeling, storage, record keeping, approval, distribution, use, reporting, advertising and promotion of such products. Noncompliance with applicable requirements can result in civil penalties, recall, injunction or seizure of products, refusal of the government to approve or clear product approval applications, disqualification from sponsoring or conducting clinical investigations, preventing us from entering into government supply contracts, withdrawal of previously approved applications, and criminal prosecution.

 

 

 

In the United States, a manufacturer of medical devices and devices utilizing radioactive byproduct material are subject to extensive regulation by not only federal governmental authorities, such as the FDA, but also by state and local governmental authorities, such as the Washington State Department of Health, to ensure such devices are safe and effective. In Washington State, the Department of Health, by agreement with the federal Nuclear Regulatory Commission (“NRC”), regulates the possession, use, and disposal of radioactive byproduct material as well as the manufacture of radioactive sealed sources to ensure compliance with state and federal laws and regulations.

Moreover, any use, management, and disposal of certain radioactive substances and wastes are subject to regulation by several federal and state agencies depending on the nature of the substance or waste material.

 

Employees

 

As of December 31, 2016, the Company had three full-time personnel. The Company utilizes several independent contractors to assist with its operations. The Company does not have a collective bargaining agreement with any of its personnel, and believes its relations with its personnel are good.

 

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 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.

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this Form 10-K, including our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our securities. The occurrence of any of the events or developments described below could harm our business, financial condition, operating results, and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. 

 

RISKS ASSOCIATED WITH THE COMPANY’S BUSINESS

 

Our independent registered public accounting firms’ reports on its financial statements questions the Company’s ability to continue as a going concern.

 

The Company’s independent registered public accounting firms’ reports on the Company’s financial statements for the years ended December 31, 2016 and 2015 express doubt about the Company’s ability to continue as a going concern.  The reports include an explanatory paragraph stating that the Company has suffered recurring losses, used significant cash in support of its operating activities and, based on its current operating levels, require additional capital or significant restructuring to sustain its operation for the foreseeable future. There is no assurance that the Company will be able to obtain sufficient additional capital to continue its operations and to alleviate doubt about its ability to continue as a going concern. If the Company obtains additional financing, such funds may not be available on favorable terms and likely would entail considerable dilution to existing shareholders. Any debt financing, if available, may involve restrictive covenants that restrict its ability to conduct its business.  It is extremely remote that the Company could obtain any financing on any basis that did not result in considerable dilution for shareholders.  Inclusion of a “going concern qualification” in the report of its independent accountants or in any future report may have a negative impact on its ability to obtain debt or equity financing and may adversely impact its stock price.

 

A combination of our current financial condition and the FDA’s determinations to date regarding our brachytherapy products raise material concerns about ability to continue as a going concern.

 

The Company will not be able to continue as a going concern unless the Company obtains financing. Depending upon the amount of financing, if any, the Company is able to obtain, the Company may not receive adequate funds to continue the approval process for RadioGel™ or other brachytherapy products with the FDA.

 

The Company has generated operating losses since inception, which are expected to continue, and has increasing cash requirements, which it may be unable to satisfy.

 

The Company has generated material operating losses since inception.  The Company has had recurring net losses since inception which has resulted in an accumulated deficit of $57,869,440 as of December 31, 2016, including a net loss of $9,854,895 for the year ended December 31, 2016 and a net income of $6,232,686 for the year ended December 31, 2015.  Historically, the Company has relied upon investor funds to maintain its operations and develop its business.  The Company needs to raise additional capital within the next quarter 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 the Company, or at all.  If the Company is unable to unable to obtain additional financing to meet its working capital requirements, the Company likely would cease operations.

 

 

 

The Company requires funding of at least $1.5 million per year to maintain current operating activities. Over the next 12 to 24 months, the Company believes it will cost approximately $5.0 million to $10.0 million to fund: (1) the FDA approval process and initial deployment of the brachytherapy products and (2) initiate regulatory approval processes outside of the United States. The continued deployment of the brachytherapy products and a worldwide regulatory approval effort will require additional resources and personnel.  The principal variables in the timing and amount of spending for the brachytherapy products in the next 12 to 24 months will be the FDA’s classification of the Company’s brachytherapy products as Class II or Class III devices (or otherwise) and any requirements for additional studies, which may possibly include clinical studies.  Thereafter, the principal variables in the amount of the Company’s spending and its financing requirements would be the timing of any approvals and the nature of the Company’s arrangements with third parties for manufacturing, sales, distribution and licensing of those products and the products’ success in the U.S. and elsewhere. The Company intends to fund its activities through strategic transactions such as licensing and partnership agreements or additional capital raises.

 

Recent economic events, including the inherent instability in global capital markets, as well as the lack of liquidity in the capital markets, could adversely impact the Company’s ability to obtain financing and its ability to execute its business plan.  

 

The Company has a limited operating history, which may make it difficult to evaluate its business and prospects.

 

The Company has a limited operating history upon which one can base an evaluation of its business and prospects.  As a company in the development stage, there are substantial risks, uncertainties, expenses and difficulties to which its business is subject.  To address these risks and uncertainties, the Company must do the following:

 

 

 

  

There is no assurance that the Company will achieve or maintain profitable operations or that the Company will obtain or maintain adequate working capital to meet its obligations as they become due.  The Company cannot be certain that its business strategy will be successfully developed and implemented or that the Company will successfully address the risks that face its business.  In the event that the Company does not successfully address these risks, its business, prospects, financial condition, and results of operations could be materially and adversely affected.

 

The Company’s new products are regulated and require appropriate clearances and approvals to be marketed in the U.S. and globally.

 

There is no assurance the FDA or other global regulatory authorities will grant the Company permission to market the Company’s products, including the Company’s brachytherapy Y-90 RadioGel™ device, Y-90 Fast-Resorbable Polymer Seeds and Y-90 Polymer Topical Paste.

 

The Company has been working with the FDA to obtain clearance for its brachytherapy Y-90 RadioGel™ device, but no assurances have been received.   On December 23, 2014, the Company announced that it submitted a de novo to the FDA for marketing clearance for its patented Y-90 RadioGel™ device pursuant to Section 513(f)(2) of the U.S. Food, Drug and Cosmetic Act (the “Act”). In June 2015 the FDA notified the Company the de novo was not granted. In February 2014, the FDA found the same device under Section 510(k) of the Act not substantially equivalent, and concluded that the device is classified by statute as a Class III medical device, unless the device is reclassified. By filing the de novo, the Company is seeking reclassification of the product to Class II. If the de novo is granted, as a regulatory matter, the device could be immediately marketed in the United States, though, as a practical matter, the Company would have to secure funding and commercial arrangements before marketing could commence. If the de novo is declined and if the Company obtains funding to permit it to continue operations, the Company will explore steps toward seeking approval for the device as a Class III medical device. Generally, the time period and cost of seeking approval as a Class III medical device is materially greater than the time period and cost of seeking approval as a Class II medical device.  If the Company seeks approval as a Class III device, human clinical trials will be necessary.  Generally, human trials for Class III products are larger, of longer duration and more costly than those for Class II devices.  If human clinical trials are necessary, there will be additional cost and time to reach marketing clearance or approval.  Unless the Company obtains sufficient funding it will be unable to do the foregoing activities.  There can be no assurance that the product will be approved as either a Class II or Class III device by the FDA even if additional data is provided. There can be no assurance that the Company will receive FDA approval, or the timing thereof.

  

 

 

If the Company is successful in increasing the size of its organization, the Company may experience difficulties in managing growth.

 

The Company is a small organization with a minimal number of employees.  If the Company is successful, it 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 the Company’s operational and financial systems and to identify, recruit, maintain and integrate additional managers.  The Company’s future financial performance and its ability to compete effectively will depend, in part, on the ability to manage any future growth effectively.

 

The Company’s business is dependent upon the continued services of the Company’s Chief Executive Officer, Michael Korenko.  Should the Company lose the services of Mr. Korenko, the Company’s operations will be negatively impacted.

 

The Company’s business is dependent upon the expertise of its Chief Executive Officer, Michael Korenko. Mr. Korenko is essential to the Company’s operations. Accordingly, an investor must rely on Mr. Korenko’s management decisions that will continue to control the Company’s business affairs. The Company does not maintain key man insurance on Mr. Korenko’s life. The loss of the services of Mr. Korenko would have a material adverse effect upon the Company’s business.

 

The Company is heavily dependent on consultants for many of the services necessary to continue operations.  The loss of any of these consultants could have a material adverse effect on the Company’s business, results of operations and financial condition.

 

The Company’s success is heavily dependent on the continued active participation of certain consultants and collaborating scientists.  Certain key employees and consultants have no written employment contracts. Loss of the services of any one or more of its consultants could have a material adverse effect upon the Company’s business, results of operations and financial condition.

 

If the Company is unable to hire and retain additional qualified personnel, the business and financial condition may suffer.

 

The Company’s success and achievement of its growth plans depend on its 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 the Company’s activities, or the loss of any such persons, could have a material adverse effect on its business, results of operations and financial condition.

 

The Company’s revenues have historically been derived from sales made to a small number of customers.  The Company has discontinued prior operations related to its core business. To succeed, we will need to recommence our operations and achieve sales to a materially larger number of customers.

 

During 2014, the Company ceased all previous manufacturing and sales activities. Our sales for the year ended December 31, 2016 and 2015 consisted of only consulting revenue. The Company’s consulting revenues for the years ended December 31, 2016 and 2015 were made to one customer, and those sales constituted 100.0% of total revenues for those years. At such time as the Company recommences active operations, no assurances can be given that the Company will be successful in commercializing its products or expanding the number of customers purchasing its products and services.

 

 

 

Many of the Company’s competitors have greater resources and experience than the Company has.

 

Many of the Company’s competitors have greater financial resources, longer history, broader experience, greater name recognition, and more substantial operations than the Company has, and they represent substantial long-term competition for us.  The Company’s competitors may be able to devote more financial and human resources than the Company can to research, new product development, regulatory approvals, and marketing and sales.  The Company’s competitors may develop or market products that are viewed by customers as more effective or more economical than the Company’s products.  There is no assurance that the Company will be able to compete effectively against current and future competitors, and such competitive pressures may adversely affect the Company’s business and results of operations.

 

The Company’s future revenues depend upon acceptance of its current and future products in the markets in which they compete.

 

The Company’s future revenues depend upon receipt of financing, regulatory approval and the successful production, marketing, and sales of the various isotopes the Company might market in the future.  The rate and level of market acceptance of each of these products, if any, 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 its sales and marketing efforts in the United States, Europe, Far East, Middle East, and Russia; any unfavorable publicity concerning its products or similar products; the price of the Company’s 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 its products; availability of sufficient supplies to either purchase or manufacture its products; its ability to produce sufficient quantities of its products; and the ability of physicians to properly utilize its products and avoid excessive levels of radiation to patients.  Any material adverse developments with respect to the commercialization of any such products may adversely affect revenues and may cause the Company to continue to incur losses in the future.

 

The Company will in the future rely heavily on a limited number of suppliers.

 

Some of the products the Company might market and components thereof are currently available only from a limited number of suppliers, several of which are international suppliers.  Failure to obtain deliveries from these sources could have a material adverse effect on the Company’s ability to operate.

 

The Company may incur material losses and costs as a result of product liability claims that may be brought against it.

 

The Company faces an inherent business risk of exposure to product liability claims in the event that products supplied by the Company fail to perform as expected or such products result, or is alleged to result, in bodily injury.  Any such claims may also result in adverse publicity, which could damage the Company’s reputation by raising questions about the safety and efficacy of its products, and could interfere with its efforts to market its products.  A successful product liability claim against the Company in excess of its available insurance coverage or established reserves may have a material adverse effect on its business.  Although the Company currently maintains liability insurance in amounts it believes are commercially reasonable, any product liability the Company may incur may exceed its insurance coverage.

 

The Company is subject to the risk that certain third parties may mishandle the Company’s products.

 

If the Company markets products, the Company likely will rely on third parties, such as commercial air courier companies, to deliver the products, and on other third parties to package the products in certain specialized packaging forms requested by customers.  The Company thus would be subject to the risk that these third parties may mishandle its product, which could result in material adverse effects, particularly given the radioactive nature of some of the products.

 

 

 

The Company’s operations expose it to the risk of material environmental liabilities.

 

The Company is 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.  The Company is 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.  The Company expects 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 the Company to incur costs in the future that would have a negative effect on its financial condition or results of operations.  Operational hazards could result in the spread of contamination within the Company’s facility and require additional funding to correct.

  

The Company is subject to uncertainties regarding reimbursement for use of its products.

 

Hospitals and freestanding clinics may be less likely to purchase the Company’s products if they cannot be assured of receiving favorable reimbursement for treatments using its 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 the Company’s customers at levels sufficient for it to maintain favorable sales and price levels for the Company’s products.  There is no uniform policy on reimbursement among third-party payers, and there is no assurance that the Company’s 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 the Company’s products would likely have a material adverse effect on the Company’s revenues.

 

The Company’s future growth is largely dependent upon its ability to develop new technologies that achieve market acceptance with appropriate margins.

 

The Company’s business operates in global markets that are characterized by rapidly changing technologies and evolving industry standards.  Accordingly, future growth rates depends upon a number of factors, including the Company’s ability to (i) identify emerging technological trends in the Company’s target end-markets, (ii) develop and maintain competitive products, (iii) enhance the Company’s products by adding innovative features that differentiate the Company’s products from those of its competitors, and (iv) develop, manufacture and bring products to market quickly and cost-effectively.  The Company’s ability to develop new products based on technological innovation can affect the Company’s competitive position and requires the investment of significant resources.  These development efforts divert resources from other potential investments in the Company’s business, and they may not lead to the development of new technologies or products on a timely basis or that meet the needs of the Company’s customers as fully as competitive offerings.  In addition, the markets for the Company’s products may not develop or grow as it currently anticipates.  The failure of the Company’s technologies or products to gain market acceptance due to more attractive offerings by the Company’s competitors could significantly reduce the Company’s revenues and adversely affect the Company’s competitive standing and prospects.

 

The Company may rely on third parties to represent it locally in the marketing and sales of its products in international markets and its revenue may depend on the efforts and results of those third parties.

 

The Company’s future success may depend, in part, on its ability to enter into and maintain collaborative relationships with one or more third parties, the collaborator’s strategic interest in the Company’s products and the Company’s products under development, and the collaborator’s ability to successfully market and sell any such products.  The Company intends to pursue collaborative arrangements regarding the marketing and sales of its products; however, it may not be able to establish or maintain such collaborative arrangements, or if it is able to do so, the Company’s collaborators may not be effective in marketing and selling its products.  To the extent that the Company decides not to, or is unable to, enter into collaborative arrangements with respect to the sales and marketing of its 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 the Company depends on third parties for marketing and distribution, any revenues received by the Company will depend upon the efforts and results of such third parties, which may or may not be successful.

 

 

 

The Company may pursue strategic acquisitions that may have an adverse impact on its business.

 

Executing the Company’s business strategy may involve pursuing and consummating strategic transactions to acquire complementary businesses or technologies.  In pursuing these strategic transactions, even if the Company does not consummate them, or in consummating such transactions and integrating the acquired business or technology, the Company 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 the Company’s business.  The Company may issue the Company’s stock as consideration for acquisitions, joint ventures or other strategic transactions, and the use of stock as purchase consideration could dilute the interests of its current stockholders.  In addition, the Company may obtain debt financing in connection with an acquisition.  Any such debt financing may involve restrictive covenants relating to capital-raising activities and other financial and operational matters, which may make it more difficult for the Company to obtain additional capital and pursue business opportunities, including potential acquisitions.  In addition, such debt financing may impair the Company’s 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 the Company’s operations may be dedicated to interest payments and debt repayment, thereby reducing the funds available to the Company for other purposes.

  

The Company will need to hire additional qualified accounting personnel in order to remediate a material weakness in its internal control over financial accounting, and the Company will need to expend any additional resources and efforts that may be necessary to establish and to maintain the effectiveness of its internal control over financial reporting and its disclosure controls and procedures.

 

As a public company, the Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and the Sarbanes-Oxley Act of 2002.  The Company’s management is required to evaluate and disclose its assessment of the effectiveness of the Company’s internal control over financial reporting as of each year-end, including disclosing any “material weakness” in the Company’s 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, 2016 and 2015, the Company’s internal control over financial reporting was ineffective. This material weakness was first identified in the Company’s Form 10-K/A amended annual report for the year ended December 31, 2008. This material weakness has the potential of adversely impacting the Company’s financial reporting process and the Company’s financial reports.  Because of this material weakness, management also concluded that the Company’s disclosure controls and procedures were ineffective as of December 31, 2016 and 2015.   The Company needs to hire additional qualified accounting personnel in order to resolve this material weakness.  The Company also will need to expend any additional resources and efforts that may be necessary to establish and to maintain the effectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures.

 

The Company may be unable to make timely license and patent payments

 

Patent costs associated with existing and new technology are significant.  Existing patent and license fees must be paid for the Company to maintain rights to the technology.  The Company would forfeit its exclusive rights to licensed technologies without paying patent and rights fees in a timely fashion.  There is no assurance of sufficient capital to meet ongoing legal costs associated with the patent costs for the Company’s technology.

 

 

 

The Company’s patented or other technologies may infringe on other patents, which may expose it to costly litigation.

 

It is possible that the Company’s patented or other technologies may infringe on patents or other rights owned by others.  The Company may have to alter its 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 the Company.  Patent litigation is costly and time consuming, and the Company may not have sufficient resources to pursue such litigation.  If the Company does not obtain a license under such patents, if it is found liable for infringement, or if it are not able to have such patents declared invalid, the Company 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 the Company’s intellectual property is critical to its innovation efforts.

 

The Company owns or has a license to use several U.S. and foreign patents and patent applications, trademarks and copyrights.  The Company’s intellectual property rights may be challenged, invalidated or infringed upon by third parties, or it 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 the Company’s patents and other intellectual property rights.  Any of these events or factors could diminish or cause the Company to lose the competitive advantages associated with the Company’s intellectual property, subject the Company to judgments, penalties and significant litigation costs, or temporarily or permanently disrupt its sales and marketing of the affected products or services.

 

The Company may not be able to protect its trade secrets and other unpatented proprietary technology, which could give competitors an advantage.

 

The Company relies upon trade secrets and other unpatented proprietary technology.  The Company may not be able to adequately protect its rights with regard to such unpatented proprietary technology, or competitors may independently develop substantially equivalent technology.  The Company seeks to protect trade secrets and proprietary knowledge, in part through confidentiality agreements with its employees, consultants, advisors and collaborators.  Nevertheless, these agreements may not effectively prevent disclosure of the Company’s confidential information and may not provide the Company with an adequate remedy in the event of unauthorized disclosure of such information, and as a result the Company’s competitors could gain a competitive advantage.

 

General economic conditions in markets in which the Company does business can impact the demand for the Company’s goods and services. Decreased demand for the Company’s products and services could have a negative impact on its financial performance and cash flow.

 

Demand for the Company’s products and services, in part, depends on the general economic conditions affecting the countries and industries in which the Company does business.  A downturn in economic conditions in a country or industry that the Company serves may adversely affect the demand for the Company’s products and services, in turn negatively impacting the Company’s operations and financial results.  Further, changes in demand for the Company’s products and services can magnify the impact of economic cycles on the Company’s businesses.  Unanticipated contract terminations by current customers can negatively impact operations, financial results and cash flow.  The Company’s 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 the Company’s ability to obtain credit or attract investors.

  

 

 

The Company is subject to extensive government regulation in jurisdictions around the world in which it does 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 operations, financial results and cash flow.

 

If the Company is successful in developing manufacturing capability, the Company will be subject to extensive government regulation and intervention both in the U.S. and in all foreign jurisdictions in which it conducts business.  Compliance with applicable laws and regulations will result in higher capital expenditures and operating costs, and changes to current regulations with which the Company complies can necessitate further capital expenditures and increases in operating costs to enable continued compliance.  Additionally, from time to time, the Company 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 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 the Company’s products and services are beyond the Company’s control.  Any disruption or halt in supplies, or rapid escalations in costs, could adversely affect the Company’s ability to manufacture products or to competitively price the Company’s 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 the Company’s business and financial performance.

  

RISKS RELATED TO THE COMPANY’S COMMON STOCK

 

The Company’s common stock is listed on the OTC Bulletin Board. Failure to develop or maintain a more active trading market may negatively affect the value of the Company’s common stock, may deter some potential investors from purchasing the Company’s common stock or other equity securities, and may make it difficult or impossible for stockholders to sell their shares of common stock.

 

The Company’s average daily volume of shares traded for the years ended December 31, 2016 and 2015 was 113,034 and 403,927, respectively. Failure to develop or maintain an active trading market may negatively affect the value of the Company’s common stock, may make some potential investors unwilling to purchase the Company’s common stock or equity securities that are convertible into or exercisable for the Company’s common stock, and may make it difficult or impossible for the Company’s stockholders to sell their shares of common stock and recover any part of their investment.

 

The Company’s outstanding securities, the stock or securities that it may become obligated to issue under existing agreements, and certain provisions of those securities, may cause immediate and substantial dilution to existing stockholders and may make it more difficult to raise additional equity capital.

 

The Company had 37,541,697 shares of common stock outstanding on March 6, 2017.  The Company also had outstanding on that date derivative securities consisting of options, warrants, and convertible notes that if they had been exercised and converted in full on March 6, 2017, would have resulted in the issuance of up to 11,637,245 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 the Company’s total outstanding common stock.   Additionally, the Company has outstanding notes that if not prepaid by specific dates entitle the holder to convert the principal and accrued interest into common stock at 60% of the lowest trading price during the previous thirty day trading period of the Company’s common stock prior to conversion as provided in the notes. See Note 11 of the footnotes to the Consolidated Financial Statements for the years ended December 31, 2016 and 2015 beginning on page F-1 of this report regarding the equity issuable upon conversion. 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 the Company’s 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 the Company to raise additional capital through the sale of stock or other equity securities.

  

 

 

Future sales of the Company’s stock, including sales following exercise or conversion of derivative securities, or the perception that such sales may occur, may depress the price of common stock and could encourage short sales.

 

The sale or availability for sale of substantial amounts of the Company’s 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 the Company’s common stock.  Any decline in the price of the Company’s common stock may encourage short sales, which could place further downward pressure on the price of the Company’s common stock.

 

The Company’s stock price is likely to be volatile.

 

For the year ended December 31, 2016, the reported low closing price for the Company’s common stock was $0.07 per share, and the reported high closing price was $0.96 per share.  For the year ended December 31, 2015, the reported low closing price for the Company’s common stock was $0.03 per share, and the reported high closing price was $0.49 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 the Company’s 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 the Company’s products; litigation involving the Company or the Company’s industry; developments or disputes concerning the Company’s patents or other proprietary rights; changes in the structure of healthcare payment systems; departure of key personnel; future sales of its securities; fluctuations in its 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 the Company’s stock price to fall, and any of these events may cause the Company’s stock price to be volatile.

 

The Company’s common stock is subject to the “Penny Stock” rules of the SEC and the trading market in its securities is limited, which makes transactions in its common stock cumbersome and may reduce the value of an investment in the Company’s 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 the Company’s common stock and may cause a decline in the market value of its 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.

 

 

 

As a result of the Company issuing preferred stock, the rights of holders of the Company’s common stock and the value of the Company’s common stock may be adversely affected.

 

The Company’s board of directors is authorized to issue classes or series of preferred stock, without any action on the part of the stockholders.  The Company’s 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 its business, and other terms.  The Company has issued preferred stock that has a preference over the common stock with respect to the payment of dividends or upon liquidation, dissolution or winding-up, and with respect to voting rights.  In accordance with that and with the issuance of preferred stock the voting rights the common stockholders voting rights have been diluted and it is possible that the rights of holders of the common stock or the value of the common stock have been adversely affected. 

 

The Company does not expect to pay any dividends on common stock for the foreseeable future.

 

The Company has not paid any cash dividends on its common stock to date and does not anticipate it will pay cash dividends on its 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 the Company’s board of directors and will depend on the Company’s results of operations, financial conditions, contractual restrictions, restrictions imposed by applicable law, and other factors that the Company’s board deems relevant.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

This item is not applicable to the Company because the Company is a smaller reporting company as defined by Rule 12b-2 under the Securities Exchange Act of 1934.

 

ITEM 2. PROPERTIES.

 

The Company is headquartered in Kennewick, Washington and maintains a lease at a cost of $1,500 per month from an entity controlled by Carlton M. Cadwell, Chairman of the Company’s Board of Directors and one of the Company’s significant shareholders. This lease initially expired in December 2014, however the Company continues to rent the space on a month-to-month basis.

 

ITEM 3. LEGAL PROCEEDINGS.

 

On March 6, 2015, Robert and Maribeth Myers filed a lawsuit against the Company and BancLeasing, Inc., owner of a linear accelerator and other equipment leased by the Company, in the Superior Court of the State of Washington, in and for Benton County (Case No. 15-2-0054101), asserting various claims related to the Company’s five-year lease of production center space owned by Mr. and Mrs. Myers. The Company subsequently filed counterclaims against Mr. and Mrs. Myers, BancLeasing and Washington Trust Bank, alleging misapplication of lease payments to the principal loan amount for a linear accelerator and other equipment stored on the production center property, as well as certain building improvements made by the Company. During 2016, the Company entered into a Settlement Agreement with Robert and Maribeth Myers, pursuant to which the Company agreed to pay a settlement amount of $438,830 in exchange for the release of all claims related to the matter, which amount was paid by the Company during the year ended December 31, 2016.

 

In 2016, the Company was awarded in the Superior Court of the State of Washington a total sum of $527,876 against BancLeasing. The Company is pursuing its options for collection of the awarded amount, however there can be no assurance as to any eventual collection.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market Information

 

The Company’s common stock is traded on the OTC Pink Marketplace under the symbol “ADMD.”  The following table sets forth, in U.S. dollars the high and low closing prices for each of the calendar quarters indicated, as reported by the OTC Pink Marketplace for the past two fiscal years.  The prices in the table may not represent actual transactions and do not include retail markups, markdowns or commissions. All prices listed below reflect the Company’s 1:100 reverse stock split implemented on October 7, 2016.

 

 

 

	High	Low
2016
Quarter ended December 31	$0.24	$0.07
Quarter ended September 30	$0.40	$0.14
Quarter ended June 30	$0.96	$0.20
Quarter ended March 31	$0.96	$0.07
2015
Quarter ended December 31	$0.48	$0.11
Quarter ended September 30	$0.49	$0.05
Quarter ended June 30	$0.19	$0.03
Quarter ended March 31	$0.27	$0.03

 

Holders

 

As of March 6, 2017 there were 37,541,697 shares of common stock outstanding and approximately 200 stockholders of record.

 

Dividend Policy

 

The Company has not paid any cash dividends on its common stock to date and do not anticipate it will pay cash dividends on its common stock in the foreseeable future.  The payment of dividends in the future will be contingent upon revenues and earnings, if any, capital requirements, and its general financial condition.  The payment of any dividends will be within the discretion of the board of directors.  It is the present intention of the board of directors to retain all earnings, if any, for use in the business operations.  Accordingly, the board does not anticipate declaring any dividends on its common stock in the foreseeable future.

 

 

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table sets forth information as of December 31, 2016 with respect to the Company’s equity compensation plans previously approved by stockholders and equity compensation plans not previously approved by stockholders.

 

		Equity Compensation Plan Information
Plan Category		Number of securities to be issued upon exercise of outstanding  options, warrants  and rights				Weighted-average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
		(a)				(b)				(c)
Equity compensation plans approved by stockholders			-			$	-				3,993,868
Equity compensation plans not approved by stockholders			5,135,000			$	0.15				-
Total			5,135,000	(1)		$	0.15	(1)			-

 

 

2015 Omnibus Securities and Incentive Plan

 

               In October 2015, our Board of Directors and stockholders approved the adoption of the 2015 Omnibus Securities and Incentive Plan (the “2015 Plan”). The 2015 Plan authorizes an aggregate number of shares of common stock for issuance to all employees of the Company or any subsidiary of the Company, any non-employee director, consultants and independent contractors of the Company or any subsidiary, and any joint venture partners (including, without limitation, officers, directors and partners thereof) of the Company or any subsidiary. The aggregate number of shares that may be issued under the Plan shall not exceed twenty percent (20%) of the issued and outstanding shares of common stock on an as converted primary basis on a rolling basis. For calculation purposes, the As Converted Primary Shares shall include all shares of common stock and all shares of common stock issuable upon the conversion of outstanding preferred stock and other convertible securities, but shall not include any shares of common stock issuable upon the exercise of options, warrants and other convertible securities issued pursuant to the 2015 Plan. As of December 31, 2016 the Converted Primary Shares calculation results in 9,835,788 aggregate shares that may be issued under the 2015 Plan. The 2015 Plan is administered by the Company’s Compensation Committee, who may issue awards in the form of stock options and/or restricted stock awards. As of December 31, 2016, no awards have been issued pursuant to the 2015 Plan.

Recent Sales of Unregistered Securities

 

Below is a description of all unregistered securities issued by the Company during and subsequent to the quarter ended December 31, 2016, through the date of this report. Each of the issuances identified below were issued in transactions exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 3(a)(9) and/or 4(2) thereof.

 

Issuances During the Quarter Ended December 31, 2016

 

During October, November and December 2016, the Company issued 347,400 shares of Series A Convertible Preferred Stock (“Series A Preferred”) as a commitment fee payable on $547,500 in convertible debt.

During November 2016, the Company issued 563,523 shares of common stock in exchange for $126,640 of convertible debt, and $25,300 of accrued interest.

During November 2016, the Company issued 52,000 shares of Series A Preferred in exchange for $93,011 of convertible debt, and $23,462 of accrued interest.

 

 

 

During October 2016, the Company issued 150,000 shares of Series A Preferred as payment for certain consulting services.

 

During the months of October, November and December 2016, the Company issued 11,180,289 shares of common stock upon conversion of 1,118,024 shares of Series A Preferred.

 

Issuances Subsequent to December 31, 2016

 

During January and February, and through March 6, 2017, the Company issued 5,517,900 shares of common stock upon conversion of 531,790 shares of Series A Preferred.

 

During February 2017, the Company issued 280,000 shares of common stock in exchange for $140,000 of accounts payable.

 

ITEM 6. SELECTED FINANCIAL DATA.

 

This item is not applicable to the Company because the Company is a smaller reporting company as defined by Rule 12b-2 under the Securities Exchange Act of 1934, as amended.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion and analysis is intended as a review of significant factors affecting the Company’s financial condition and results of operations for the periods indicated.  The discussion should be read in conjunction with the Company’s financial statements and the notes presented herein.  In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ significantly from those anticipated in these forward-looking statements as a result of the risk factors set forth above in Item 1A and other factors discussed in this Annual Report on Form 10-K.

 

Results of Operations

 

Comparison for the Year Ended December 31, 2016 and December 31, 2015

 

The following table sets forth information from the Company’s statements of operations for the years ended December 31, 2016 and 2015.

 

	Year Ended December 31, 2016	Year Ended December 31, 2015
Revenues	$8,108	$24,108
Operating expense	4,444,578	2,065,371
Operating loss	(4,436,470)	(2,041,263)
Non-operating income (expense)	(5,418,425)	8,273,949
Net income (loss)	$(9,854,895)	$6,232,686

 

Revenue

 

Consulting revenue was $8,108 and $24,108 for the years ended December 31, 2016 and 2015, respectively.  Consulting revenue consists of providing the Company with assistance in strategic targetry services, and research into production of radiophamaceuticals and the operations of radioisotope production facilities.

 

 

 

Operating Expense

 

Operating expense for the twelve months ended December 31, 2016 and 2015 consists of the following:

 

	Twelve months ended December 31, 2016	Twelve months ended December 31, 2015
Cost of materials	$-	$474
Sales and marketing expense	284,138	-
Depreciation and amortization expense	2,947	5,672
Professional fees	2,068,796	741,375
Stock options and warrants granted	675,324	80,635
Payroll expense	652,877	679,259
Research and development	328,026	149,650
General and administrative expense	432,470	408,306
	$4,444,578	$2,065,371

 

Operating expense for the twelve months ended December 31, 2016 and 2015 was $4,444,578 and $2,065,371, respectively. The increase in operating expense from 2015 to 2016 is largely attributable to professional fees ($2,068,796 for the twelve months ended December 31, 2016 versus $741,375 for the twelve months ended December 31, 2015). The increase in professional fees was due to hiring consultants to assist in raising capital to pay off debt and for operating expenses.

 

The increase in operating expense from 2015 to 2016 can also be attributed to research and development ($328,026 for the twelve months ended December 31, 2016 versus $149,650 for the twelve months ended December 31, 2015), and stock options granted and warrant expense ($675,324 for the twelve months ended December 31, 2016 versus $80,635 for the twelve months ended December 31, 2015).

 

Non-Operating Income (Expense)

 

Non-Operating income (expense) for the twelve months ended December 31, 2016 and 2015 consists of the following:

 

	Twelve months ended December 31, 2016	Twelve months ended December 31, 2015
Interest expense	$(6,259,467)	$(3,196,153)
Net gain (loss) on settlement of debt	3,108,342	3,562,067
Recognized income from grants	21,010	21,010
Gain (loss) on derivative liability	(2,244,353)	7,887,025
Loss on impaired assets	(43,957)	-
	$(5,418,425)	$8,273,949

 

Non-operating income (expense) for the twelve months ended December 31, 2016 varied from the twelve months ended December 31, 2015 primarily due to the difference in the gain (loss) on derivative liability of $10,131,378 (a $7,887,025 gain on derivative liability in 2015 versus a $2,244,353 loss on derivative liability in 2016). Additionally, there was an increase in interest expense of $3,063,314, attributable to loan fees incurred ($5,098,094 for the twelve months ended December 31, 2016 versus $536,347 for the twelve months ended December 31, 2015).

 

 

 

Income from Grants

 

On September 1, 2015, the Company received notification that it had been awarded from Washington State University $42,019 grant funds from the sub-award project entitled “Optimized Injectable Radiogels for High-dose Therapy of Non-Resectable Solid Tumors”. The Company received $21,010 of the total grant award in December 2015 and $21,009 of the total grant award in October 2016.

 

Net Loss

 

The Company’s net income (loss) for the twelve months ended December 31, 2016 and 2015 was $(9,854,895) and $6,232,686, respectively, as a result of the items described above.

 

Liquidity and Capital Resources

 

At December 31, 2016, the Company had negative working capital of $3,022,417, as compared to $9,755,128 at December 31, 2015.  During the twelve months ended December 31, 2016, the Company experienced negative cash flow from operations of $1,926,713 and it expended $0 for investing activities while adding $1,775,570 of cash flows from financing activities.  As of December 31, 2016, the Company had $0 commitments for capital expenditures.

 

Cash used in operating activities increased from $1,193,105 for the twelve-month period ending December 31, 2015 to $1,926,713 for the twelve-month period ending December 31, 2016.  Cash used in operating activities was primarily a result of the Company’s non-cash items, such as loss from operations, loss on preferred and common stock and stock options and warrants issued for services and other expenses, offset by the net gain and the gain realized from derivative liabilities and settlement of debt, preferred stock converted to common stock, and the penalties resulting from short term debt. Cash provided from financing activities increased from $1,371,934 for the twelve month period ending December 31, 2015 to $1,775,570 for the twelve month period ending December 31, 2016. The increase in cash provided from financing activities was primarily a result of increase in proceeds from related party notes, shareholder advances, and sale of preferred shares.

 

The Company has generated material operating losses since inception. The Company had a net income of $6,232,686 for the twelve months ended December 31, 2015, and a net loss of $9,854,895 for the twelve months ended December 31, 2016. The Company expects to continue to experience net operating losses. Historically, the Company has relied upon investor funds to maintain its operations and develop the Company’s business. The Company anticipates raising additional capital within the next twelve months for working capital as well as business expansion, although the Company can provide no assurance that additional capital will be available on terms acceptable to the Company, if at all. If the Company is unable to obtain additional financing to meet its working capital requirements, it may have to curtail its business or cease all operations.

  

The Company requires funding of at least $1.5 million per year to maintain current operating activities. Over the next 12 to 24 months, the Company believes it will cost approximately $5.0 million to $10.0 million to fund: (1) the FDA approval process and initial deployment of RadioGel™ and other brachytherapy products and (2) initiate regulatory approval processes outside of the United States. The continued deployment of the Company’s brachytherapy products, including RadioGel™, and a worldwide regulatory approval effort will require additional resources and personnel.  The principal variables in the timing and amount of spending for the brachytherapy products in the next 12 to 24 months will be the FDA’s classification of the Company’s brachytherapy products as Class II or Class III devices (or otherwise) and any requirements for additional studies, which may possibly include clinical studies.  Thereafter, the principal variables in the amount of the Company’s spending and its financing requirements would be the timing of any approvals and the nature of the Company’s arrangements with third parties for manufacturing, sales, distribution and licensing of those products and the products’ success in the U.S. and elsewhere. The Company intends to fund its activities through strategic transactions such as licensing and partnership agreements or additional capital raises.

 

 

 

Although the Company is seeking to raise additional capital and has engaged in numerous discussions with investment bankers and investors, the Company has not received firm commitments for the required funding. Based upon its discussions, the Company anticipates that if the Company is able to obtain the funding required to retire outstanding debt, pay past due payables and maintain its current operating activities, that the terms thereof will be materially dilutive to existing shareholders.

 

Recent geopolitical events, including the inherent instability and volatility in global capital markets, as well as the lack of liquidity in the capital markets, could impact the Company’s ability to obtain financing and its ability to execute its business plan.

 

Contractual Obligations (payments due by period as of December 31, 2016)

Contractual Obligation	Total Payments Due	Less than 1 Year	1-3 Years	3-5 Years	More than 5 Years
License Agreement with Battelle Memorial Institute	$100,000	$25,000	$25,000	$25,000	$ 25,000 per year
Corporate Office Lease – begins January 1, 2014	$18,000	$18,000	$-	$-	$-

 

In January 2014, the Company entered into a new 12-month lease for its corporate offices for a monthly rent of $1,500 from an entity controlled by Carlton M. Cadwell, a significant shareholder and a Director of the Company. The Company continued to rent this facility in 2015 and 2016 on a month-to-month basis. The Company incurred $18,000 rent expense for this facility for each of the twelve months ended December 31, 2016 and 2015.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on the Company’s financial condition, revenues, results of operations, liquidity or capital expenditures.

 

Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

Fixed Assets

 

Fixed assets are carried at the lower of cost or net realizable value. Production equipment with a cost of $2,500 or greater and other fixed assets with a cost of $1,500 or greater are capitalized. Major betterments that extend the useful lives of assets are also capitalized. Normal maintenance and repairs are charged to expense as incurred. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in operations.

 

Depreciation is computed using the straight-line method over the following estimated useful lives:

 

Production equipment:	3 to 7 years
Office equipment:	2 to 5 years
Furniture and fixtures:	2 to 5 years

 

Leasehold improvements and capital lease assets are amortized over the shorter of the life of the lease or the estimated life of the asset.

 

 

 

Management of the Company reviews the net carrying value of all of its equipment on an asset by asset basis whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. These reviews consider the net realizable value of each asset, as measured in accordance with the preceding paragraph, to determine whether impairment in value has occurred, and the need for any asset impairment write-down.

 

License Fees

 

License fees are stated at cost, less accumulated amortization. Amortization of license fees is computed using the straight-line method over the estimated economic useful life of the asset.

 

The Company periodically reviews the carrying values of capitalized license fees and any impairments are recognized when the expected future operating cash flows to be derived from such assets are less than their carrying value.

 

Patents and Intellectual Property

 

The Company had a total $35,482 of capitalized patents and intellectual property costs at December 31, 2015 for the patent rights in the area of a Brachytherapy seed with a Fast-dissolving Matrix for Optimized Delivery of Radionuclides. Effective December 31, 2016 the Company agreed to terminate this non-utilized patent license for which the $35,482 of capitalized patent and intellectual costs applied and therefore the Company wrote off $35,482 of capitalized costs in the twelve months ending December 31, 2016.

 

While patents are being developed or pending, they are not being amortized.  Management has determined that the economic life of the patents to be ten 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 and intellectual property 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.

 

Revenue Recognition

 

The Company recognized revenue related to product sales when (i) persuasive evidence of the arrangement exists, (ii) shipment has occurred, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured.

 

Revenue for the fiscal years ended December 31, 2016 and 2015 consisted of consulting revenue. The Company recognizes revenue as consulting services have been performed. Prepayments, if any, received from customers prior to the services being performed are recorded as deferred revenue. In these cases, when the services are performed, the amount recorded as deferred revenue is recognized as revenue. The Company does not accrue for sales returns and other allowances as it has not experienced any returns or other allowances.

 

Income from Grants and Deferred Income

 

Government grants are recognized when all conditions of such grants are fulfilled or there is reasonable assurance that they will be fulfilled. The Company has chosen to recognize income from grants as it incurs costs associated with those grants, and until such time as it recognizes the grant as income those funds received will be classified as deferred income on the balance sheet.

 

 

 

Net Income (Loss) Per Share

 

The Company accounts for its income (loss) per common share by replacing primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings/loss per share is computed by dividing income (loss) available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period, and does not include the impact of any potentially dilutive common stock equivalents. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares had been issued.

 

Research and Development Costs

 

Research and developments costs, including salaries, research materials, administrative expenses and contractor fees, are charged to operations as incurred. The cost of equipment used in research and development activities which has alternative uses is capitalized as part of fixed assets and not treated as an expense in the period acquired. Depreciation of capitalized equipment used to perform research and development is classified as research and development expense in the year computed.

 

Income Taxes

 

To address accounting for uncertainty in tax positions, the Company clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. The Company also provides guidance on de-recognition, measurement, classification, interest, and penalties, accounting in interim periods, disclosure and transition.

 

The Company files income tax returns in the U.S. federal jurisdiction, and Delaware.

 

Interest costs and penalties related to income taxes, if any, will be classified as interest expense and general and administrative costs, respectively, in the Company’s financial statements. For the years ended December 31, 2016 and 2015, the Company did not recognize any interest or penalty expense related to income taxes. The Company believes that it is not reasonably possible for the amounts of unrecognized tax benefits to significantly increase or decrease within the next 12 months.

 

Fair Value of Financial Instruments

 

The Company adopted ASC Topic 820 (originally issued as SFAS 157, “Fair Value Measurements”) as of January 1, 2008 for financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

 

 

 

 

 

 

Stock-Based Compensation

 

The Company recognizes in the financial statements compensation related to all stock-based awards, including stock options, based on their estimated grant-date fair value. The Company has estimated expected forfeitures and is recognizing compensation expense only for those awards expected to vest. All compensation is recognized by the time the award vests.

 

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from non-employees. Costs are measured at the fair market value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of the date on which there first exists a firm commitment for performance by the provider of goods or services or on the date performance is complete.  The Company recognizes the fair value of the equity instruments issued that result in an asset or expense being recorded by the company, in the same period(s) and in the same manner, as if the Company has paid cash for the goods or services.

  

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

This item is not applicable to the Company because the Company is a smaller reporting company as defined by Rule 12b-2 under the Securities Exchange Act of 1934.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

All financial information required by this Item is included on the pages immediately following the Index to Financial Statements appearing on page F-1, and is hereby incorporated by reference.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

On, August 18, 2016 (the "Resignation Date"), Haynie & Company, Salt Lake City, Utah, resigned as the Company’s independent registered public accounting firm. On September 1, 2016, the Company engaged Fruci & Associates II, PLLC (“Fruci”), as its new independent registered public accounting firm. The change of the Company’s independent registered public accounting firm from Haynie & Company to Fruci was approved unanimously by our Board of Directors.

 

The report of Haynie & Company on the Company’s financial statements for the fiscal year ended December 31, 2015 did not contain an adverse or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles, except the report did contain an explanatory paragraph related to the Company’s ability to continue as a going concern.

 

During the two most recent fiscal years and through the Resignation Date, there were (i) no disagreements between the Company and Haynie & Company or Fruci on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreement, if not resolved to the satisfaction of Haynie & Company and Fruci, would have caused Haynie & Company or Fruci to make reference thereto in their reports on the consolidated financial statements for such years, and (ii) with the exception of material weaknesses related to our internal control over financial reporting, no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K.

 

 

ITEM 9A. CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures

 

Based on an evaluation as of the date of the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as required by Exchange Act Rule 13a-15.  Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, because of the disclosed material weaknesses in the Company’s internal control over financial reporting, the Company’s disclosure controls and procedures were ineffective as of the end of the period covered by this report to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f).  Management conducted an evaluation of the effectiveness of the internal control over financial reporting as of December 31, 2016, using the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

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 management’s assessment, management has determined that there are material weaknesses due to the lack of segregation of duties and, due to the limited resources based on the size of the Company. Due to the material weaknesses management concluded that as of December 31, 2016, the Company’s internal control over financial reporting was ineffective.  In order to address and resolve the weaknesses, the Company will endeavor to locate and appoint additional qualified personnel to the board of directors and pertinent officer positions as the Company’s financial means allow.  To date, the Company’s limited financial resources have not allowed the Company to hire the additional personnel necessary to address the material weaknesses.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

  

Changes in Internal Control Over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 

The term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, the registrant’s principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

 

 

 

ITEM 9B. OTHER INFORMATION.

 

None.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

  

The Company’s current directors and executive officers are as follows:

 

NAME		AGE		POSITION
Michael K. Korenko		71		Interim President and Chief Executive Officer
L. Bruce Jolliff		67		Chief Financial Officer
Carlton M. Cadwell		72		Chairman of the Board and Secretary
Thomas J. Clement		60		Director
James C. Katzaroff		60		Director

 

Term of Office

 

All of the Company’s directors hold office until the next annual meeting of the stockholders or until their successors is elected and qualified.  The Company’s executive officers are appointed by the Company’s 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 the Company’s directors and executive officers is as follows:

 

 

 

Dr. Michael K. Korenko, interim President and Chief Executive Officer of the Company since December 2016, joined the Company as an Advisor to the Board of the Company during 2009 and served as member of the Board from May 2009 to March 2010.  Dr. Korenko has also served on the Hanford Advisory Board since 2009. Dr. Korenko served as Business Development Manager for Curtiss-Wright from 2006 to 2009, as Chief Operating Officer for Curtiss-Wright from 2000 to 2005 and was Executive Vice President of Closure for Safe Sites of Colorado at Rocky Flats from 1994 to 2000. Dr. Korenko served as Vice President of Westinghouse from 1987 to 1994 and was responsible for the 300 and 400 areas, including the Fast Flux Testing Facility (“FFTF”) and all engineering, safety analysis, and projects for the Hanford site.  Dr. Korenko 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. 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.

 

Carlton M. Cadwell, Chairman of the Board and Secretary since December 2016, joined the Company 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 three years.  From 1973 to 1980, Dr. Cadwell practiced dentistry in private practice and since has started several businesses.

 

Mr. Cadwell brings to the Board over ten years of service on the Board and over forty-five years of experience as a successful entrepreneur, as well as medical expertise.

 

  

 James C. Katzaroff, a director, was the Chief Executive Officer of the Company from its inception in 2006 to December 2016. Mr. Katzaroff is the founder of the Company. 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 2016, Mr. Katzaroff held senior positions including Chief Executive Officer, 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.

 

Mr. Katzaroff brings to the Board experience working with Wall Street banking firms as well as experience in numerous start-ups and development-stage companies.

 

Thomas J. Clement, a director, joined the Company as a director in 2013. Mr. Clement has over 30 years experience in product development engineering, engineering management, and senior management. He has participated in two Company startups through full production. He was responsible for development of seven novel medical devices through commercial launch; one device was the leading royalty generator for the University of Washington for nearly ten years, and in another, generated revenues of more than $140 million for a leading medical device company. Mr. Clement since 2013 has held the position of Founder and CEO of Aquaduct Critical Care, Inc, a private, pre-revenue medical device company.

 

Mr. Clement brings to the Board previous experience in bringing two startups from development through production as well as substantial experience in the development of medical devices.

 

 

 

Identification of Significant Employees and Consultants

 

David J. Swanberg, M.S., P.E. Chief Technical Officer, has over 30 years’ experience in radiochemical processing, medical isotope production, nuclear waste management, materials science, regulatory affairs, and project management. He has worked in diverse organizations ranging from small start-up businesses to corporations with multi-billion dollar annual revenues. He previously served as Executive Vice President of Operations for IsoRay Medical Inc. managing day-to-day operations, R&D, and New Product Development. Mr. Swanberg was a co-founder of IsoRay and led the initial Cs-131 brachytherapy seed product development, FDA 510(k) submission/clearance, and NRC Sealed Source review and registration. He led the radiation dosimetry evaluations to meet American Association of Physicists in Medicine guidelines and is a current member of the AAPM. Mr. Swanberg served on the IsoRay Board of Directors and participated in several capital financing rounds totaling over $30.0 million. He holds a BA in Chemistry from Bethel University (MN) and an MS in Chemical Engineering from Montana State University. He has numerous technical publications and holds several patents.

 

Fu-Min Su, Ph.D. was appointed as the Company’s Chief RadioChemist and Radiation Safety Officer in 2007.  With over 20 years experience in medical isotope R&D and manufacturing, Dr. Su is also experienced 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.

 

Alan E. Waltar, Ph.D., Chairman of the Company’s Medical Advisory Board.  Dr. Waltar served as director of Nuclear Energy for the Pacific Northwest National Laboratory (“PNNL”) in Richland, Washington. 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 Washington, the University of Virginia, and Los Alamos National Laboratory. Formerly the president of the American Nuclear Society, Dr. 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. 

 

Nigel R. Stevenson, Ph.D., 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., Special Projects Manager and IsoPet Business Development Manager. 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.

 

 

 

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 each of its executive officers and directors failed to report at least one transaction during the year ended December 31, 2016.

 

Code of Ethics

 

The Company’s 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 the Company’s limited number of executive officers and employees that would be covered by such a code and the Company’s limited financial resources.  The Company anticipates that it will adopt a code of ethics after it increases 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, the Company has not established an audit committee, and therefore, the Company’s board of directors performs the functions that customarily would be undertaken by an audit committee.  The Company’s board of directors during 2016 was comprised of three directors, two of whom the Company has determined satisfied the general independence standards of the NASDAQ listing requirements.  See Item 13 of this Form 10-K.  

 

The Company’s 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, the Company intends 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 it is not required to comply with such requirements until the Company elects to seek listing on a national securities exchange.

 

ITEM 11. EXECUTIVE COMPENSATION.

 

Summary Compensation Table

 

The following table sets forth the compensation paid to the Company’s Chief Executive Officer and those executive officers that earned in excess of $100,000 during the twelve month periods ended December 31, 2016 and 2015 (collectively, the “Named Executive Officers”):

 

 

 

 

Name and Principal Position	Year	Salary ($)	Bonus ($)	Stock Awards ($)	Option Awards ($)	Total ($)
Dr. Michael K. Korenko	2016	$-  (1)	$-	$-	$-	$-
Interim CEO and President	2015	$-  (1)	$-	$-	$-	$-
James C. Katzaroff	2016	$250,000(2)	$-	$-	$408,165(3)	$658,165
Former CEO and Chairman	2015	$250,000(4)	$-	$-	$-	$250,000
L. Bruce Jolliff	2016	$180,000	$-		$110,389(5)	$290,389
CFO	2015	$180,000(6)	$11,357(7)	$-	$-	$190,357

 

 

 

 

 

  

 

 

Narrative Disclosure to Summary Compensation Table

 

L. Bruce Jolliff. Mr. Jolliff has a May 2007 employment agreement with the Company that provides for a salary of $100,000 per year, which amount was increased on January 1, 2012 to $156,000, and again adjusted beginning January 1, 2013 to $180,000. In 2015, Mr. Jolliff received $67,500, and exchanged $112,500 for 75,000 Series A Preferred shares. In 2016, Mr. Jolliff received $96,721 and an additional $83,279 was accrued as of December 31, 2016. 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.

 

James C. Katzaroff. The Company’s former Chief Executive Officer, James C. Katzaroff, did not have a written employment agreement and, therefore, no contracted amount or schedule of pay. However, his annual compensation was $250,000 and, accordingly, accruals were made for his compensation in 2016 and 2015 to bring his recorded salary to $250,000.  In 2016, Mr. Katzaroff received $43,928 and an additional $206,072 was accrued as of December 31, 2016. In 2015, Mr. Katzaroff received $24,856, exchanged $150,000 for 100,000 shares of Series A Preferred, and an additional $75,144 was accrued as of December 31, 2015.

 

The Company paid bonuses to certain employees based on their performance, the Company’s need to retain such employees, and funds available.  All bonus payments were approved by the Company’s Board of Directors.

 

 

 

Outstanding Equity Awards at Fiscal Year-End Table

 

The following table sets forth all outstanding equity awards held by the Company’s Named Executive Officers as of the end of last fiscal year.

 

	Option Awards
Name	Number of Securities Underlying Unexercised Options(#) Exercisable	Number of Securities Underlying Unexercised Options (#) Unexercisable	Option Exercise Price ($)	Option Exercise Date
James C. Katzaroff	32,500	-	$15.00	2/11/23
James C. Katzaroff	100,000	-	$1.00	6/21/19
James C. Katzaroff	1,000,000	-	$0.50	6/21/21
L. Bruce Jolliff	480,000	176,548	$0.50	6/21/21

 

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, to $110,000 on January 1, 2011, and to $125,000 effective June 1, 2016.

 

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.

 

Compensation of Directors

 

During the year ended December 31, 2016, the Company’s non-employee directors were not paid any compensation.

 

The following table sets forth, for each of the Company’s non-employee directors who served during 2016, the aggregate number of stock awards and the aggregate number of stock option awards that were outstanding as of December 31, 2016:

 

	Outstanding	Outstanding
	Stock	Stock
Name	Awards (#)	Options (#)
Carlton M. Cadwell	-	100,000
Thomas J. Clement	-	100,000

 

During June 2016, the Company granted to Messrs. Cadwell and Clement options to purchase 100,000 shares of common stock at an exercise price of $1.00 per share. The options are fully vested and expire June 21, 2019.

 

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 The Company’s Common Stock

 

The following table sets forth, as of March 6, 2017, the number of shares of common stock beneficially owned by the following persons: (i) all persons the Company knows to be beneficial owners of at least 5% of the Company’s common stock, (ii) the Company’s directors, (iii) the Company’s 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 6, 2017, there were 37,541,697 shares outstanding and up to 11,637,245 shares issuable upon exercise of outstanding options, warrants, and conversion of outstanding convertible securities, assuming exercise and conversion occurred as of that date, for a total of 49,178,942 shares.

 

Name and Address of Beneficial Owner(1)	Amount and Nature of Beneficial Ownership(2)	Percent of Class
Cadwell Family Irrevocable Trust	169,839	0.5%
Carlton M. Cadwell (3)	1,268,844	3.4%
James C. Katzaroff (4)	1,409,860	3.7%
Thomas J. Clement (3)	100,000	0.3%
L. Bruce Jolliff (5)	635,034	1.7%
All Current Directors and Executive Officers as a group (5 individuals)	3,583,577	7.1%

 

 

 

Beneficial Ownership of The Company’s Preferred Stock

 

The following table sets forth, as of March 6, 2017, the number of shares of preferred stock beneficially owned by the following persons: (i) all persons the Company known to be beneficial owners of at least 5% of the Company’s preferred stock, (ii) the Company’s directors, (iii) the Company’s executive officers, both of whom are named in the Summary Compensation Table above, and (iv) all current directors and executive officers as a group. 

 

Name and Address of Beneficial Owner (1)	Amount and Nature of Beneficial Ownership (2)	Percent of Class
Cadwell Family Irrevocable Trust	148,309	4.5%
Carlton M. Cadwell	908,910	27.6%
James C. Katzaroff	-	-%
Thomas J. Clement	-	-%
L. Bruce Jolliff	114,700	3.5%
All Current Directors and Executive Officers as a group (5 individuals)	1,171,919	35.5%

 

 

Changes in Control

 

The Company does not know of any arrangements, including any pledges of the Company’s 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

 

Beginning in December, 2008, the Company has obtained financing from Carlton M. Cadwell, one of our directors and a beneficial owner of more than 10% of the Company’s common stock, in transactions which involved the Company’s issuance of convertible notes and common stock. On September 4, 2015, the Company exchanged $1,414,100 of convertible notes plus $810,538 of accrued interest into 148,311 shares of Series A Preferred and another $2,224,466 of convertible notes plus $889,838 of accrued interest into 207,620 shares of Series A Preferred. Additionally, the Company exchanged the remaining $906,572 of convertible notes plus $148,960 accrued interest into a $1,055,532 demand note, 8% interest rate, due on demand at any time after March 31, 2017. Such note was converted into 73,546 shares of Series A Preferred on May 19, 2016. At December 31, 2016 Mr. Cadwell has an aggragate total of $332,195 in promissory notes.

 

Independent Directors

 

 The Company’s common stock is traded on the OTC Pink Marketplace, 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.  The Company has decided to adopt the independence standards of the NASDAQ listing rules in determining whether the Company’s 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.  The Company’s board of directors has determined that Mr. Cadwell and Mr. Clement 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 the Company had established such committees of the Company’s 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 the Company’s principal accountant for the audit of the Company’s 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, 2016 and 2015 were $13,500, all of which was paid to Fruci & Associates II, PLLC, and $156,000 ($71,000 was to HJ & Associates, LLC and $85,000 was to Haynie & Company), respectively.

 

 Tax Fees

 

The aggregate fees billed for professional services rendered by principal accountant for tax compliance, tax advice and tax planning during the fiscal years ended December 31, 2016 and 2015 were $0, all of which was paid to Fruci & Associates II, PLLC, and $3,000, respectively, all of which was paid to HJ & Associates, LLC. These fees related to the preparation of federal income tax returns.

 

All Other Fees

 

There were no other fees billed for products or services provided by the Company’s principal accountant during the fiscal years ended December 31, 2016 and 2015.

 

 

 

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

 

(a) Documents filed as part of this Report.

 

 

 

 

Exhibit
Number		Description
3.1		Certificate of Incorporation of Savage Mountain Sports Corporation, dated January 11, 2000 (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form 10-12G (File No. 000-53497) filed on November 12, 2008).
3.2		By-Laws (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 10-12G (File No. 000-53497) filed on November 12, 2008).
3.3		Articles and Certificate of Merger of HHH Entertainment Inc. and Savage Mountain Sports Corporation, dated April 3, 2000 (incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement on Form 10-12G (File No. 000-53497) filed on November 12, 2008).
3.4		Articles and Certificate of Merger of Earth Sports Products Inc. and Savage Mountain Sports Corporation, dated May 11, 2000 (incorporated by reference to Exhibit 3.4 to the Company’s Registration Statement on Form 10-12G (File No. 000-53497) filed on November 12, 2008).
3.5		Certificate of Amendment of Certificate of Incorporation changing the name of the Company to Advanced Medical Isotope Corporation, dated May 23, 2006 (incorporated by reference to Exhibit 3.5 to the Company’s Registration Statement on Form 10-12G (File No. 000-53497) filed on November 12, 2008).
3.6		Certificate of Amendment of Certificate of Incorporation increasing authorized capital dated September 26, 2006 (incorporated by reference to Exhibit 3.6 to the Company’s Registration Statement on Form 10-12G (File No. 000-53497) filed on November 12, 2008).
3.7		Certificate of Amendment to the Certificate of Incorporation increasing authorized common stock and authorizing preferred stock, dated May 18, 2011 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on May 18, 2011).
3.8		Certificate of Amendment to the Certificate of Incorporation authorizing a series of Preferred Stock to be named “Series A Convertible Preferred Stock”, consisting of 2,500,000 shares, which series shall have specific designations, powers, preferences and relative and other special rights, qualifications, limitations and restrictions as outlined in the Certificate of Designations, filed June 30, 2015 (incorporated by reference to Exhibit 3.4).
3.9		Certificate of Amendment to the Certificate of Incorporation increasing the authorized series of “Series A Convertible Preferred Stock” to 5,000,000 shares, filed June 31, 2016 (incorporated by reference to Exhibit 3.5).
10.1		Agreement and Plan of Reorganization, dated as of December 15, 1998, by and among HHH Entertainment, Inc. and Earth Sports Products, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form 10-12G (File No. 000-53497) filed on November 12, 2008).

 

 

10.2		Agreement and Plan of Merger of HHH Entertainment, Inc. and Savage Mountain Sports Corporation, dated as of January 6, 2000 (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form 10-12G (File No. 000-53497), filed on November 12, 2008).
10.3		Agreement and Plan of Acquisition by and between Neu-Hope Technologies, Inc., UTEK Corporation and Advanced Medical Isotope Corporation, dated September 22, 2006 (incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form 10-12G (File No. 000-53497), filed on November 12, 2008).
10.4		Employment Agreement dated May 16, 2007 with Leonard Bruce Jolliff (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form 10-12G (File No. 000-53497), filed on November 12, 2008).
10.5		Agreement and Plan of Acquisition by and between Isonics Corporation and Advanced Medical Isotope Corporation dated June 13, 2007 (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form 10-12G (File No. 000-53497), filed on November 12, 2008).
10.6		Employment Agreement dated January 15, 2008 with Dr. Fu-Min Su (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form 10-12G (File No. 000-53497), filed on November 12, 2008).
10.7		Master Lease Agreement dated September 20, 2007 between BancLeasing, Inc. and Advanced Medical Isotope Corporation, and related documents (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K/A filed on December 2, 2011).

10.8		Lease Agreement dated July 17, 2007 between Robert L. and Maribeth F. Myers and Advanced Medical Isotope Corporation (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K/A filed on December 2, 2011).
10.9		Form of Non-Statutory Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 15, 2012).
10.10		Promissory Note dated December 16, 2008 between Advanced Medical Isotope Corporation and Carlton M. Cadwell (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K filed on March 3, 2012).
10.11		Memorandum of Agreement for Strategic Relationship dated August 19, 2011 between Advanced Medical Isotope Corporation and Spivak Management Inc. (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K filed on March 3, 2012).
10.12		2015 Omnibus Securities and Incentive Plan (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K, filed May 25, 2016).
31.1*		Certification of Chief Executive Officer pursuant to Sec. 302 of the Sarbanes-Oxley Act of 2002 (4)
31.2*		Certification of Chief Financial Officer pursuant to Sec. 302 of the Sarbanes-Oxley Act of 2002 (4)
32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (4)
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase
101.DEF*		XBRL Taxonomy Extension Definition Linkbase
101.LAB*		XBRL Taxonomy Extension Label Linkbase
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase

 

* Filed herewith.

 

 

 

SIGNATURES

  

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	ADVANCED MEDICAL ISOTOPE CORPORATION
Date: March 8, 2017	By:	/s/ Michael K. Korenko
	Name:	Michael K. Korenko
	Title:	Chief Executive Officer

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Date: March 8, 2017	By:	/s/ Michael K. Korenko
	Name:	Michael K. Korenko
	Title:	Chief Executive Officer (Principal Executive Officer)
Date: March 8, 2017	By:	/s/ L. Bruce Jolliff
	Name:	L. Bruce Jolliff
	Title:	Chief Financial Officer (Principal Financial and Accounting Officer)
Date: March 8, 2017	By:	/s/ Carlton M. Cadwell
	Name:	Carlton M. Cadwell
	Title:	Secretary and Chairman of the Board

 

 

 

Advanced Medical Isotope Corporation

Index to Financial Statements

 

		Pages
Report of Independent Registered Public Accounting Firm for 2016		F-1
Report of Independent Registered Public Accounting Firm for 2015		F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 2016 and 2015		F-3
Consolidated Statements of Operations for the years ended December 31, 2016 and 2015		F-4
Consolidated Statement of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2016 and 2015		F-5
Consolidated Statements of Cash Flow for the years ended December 31, 2016 and 2015		F-6
Notes to Consolidated Financial Statements		F-7

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Advanced Medical Isotope Corporation

We have audited the accompanying consolidated balance sheet of Advanced Medical Isotope Corporation as of December 31, 2016, and the related consolidated statement of operations, stockholders’ equity (deficit), and cash flows for the year ended December 31, 2016. Advanced Medical Isotope Corporation’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Advanced Medical Isotope Corporation as of December 31, 2016, and the results of its operations and its cash flows for the year ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has a history of recurring losses, has limited cash, resources, and, based upon current operating levels, its viability is dependent upon its ability to meet future financing requirements or restructuring to sustain its operations. These issues raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/Fruci & Associates II, PLLC
Fruci & Associates II, PLLC Spokane, WA
March 8, 2017

 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders

Advanced Medical Isotope Corporation

 

We have audited the accompanying balance sheet of Advanced Medical Isotope Corporation as of December 31, 2015, and the related statements of operations, stockholders’ equity (deficit), and cash flow for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Advanced Medical Isotope Corporation as of December 31, 2015, and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses, used significant cash in support of its operating activities, and, based upon current operating levels, requires additional capital or significant restructuring to sustain its operations for the foreseeable future. These issues raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Haynie & Company

Salt Lake City, Utah

May 25, 2016

 

 

Advanced Medical Isotope Corporation

Consolidated Balance Sheets

 

	December 31,
	2016	2015
ASSETS
Current assets:
Cash	$27,889	$179,032
Prepaid expenses	11,990	26,211
Inventory	-	8,475
Total current assets	39,879	213,718
Fixed assets, net of accumulated depreciation	1,473	4,420
Other assets:
Patents and intellectual property	-	35,482
Deposits	644	644
Total other assets	644	36,126
Total assets	$41,996	$254,264
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses	$1,137,086	$1,182,112
Related party accounts payable	109,718	102,647
Accrued interest payable	114,755	229,246
Payroll liabilities payable	499,502	298,900
Convertible notes payable, net	544,508	1,788,384
Derivative liability	324,532	4,235,016
Related party promissory note	332,195	1,280,450
Liability for lack of authorized shares	-	852,091
Total current liabilities	3,062,296	9,968,846
Total liabilities	3,062,296	9,968,846
Commitments and contingencies
MEZZANINE EQUITY
Preferred stock, $.001 par value, 20,000,000 shares of authorized preferred stock, $.001 par value, 5,000,000 Series A shares authorized; 3,773,592 and 1,627,000 - shares issued and outstanding, respectively	14,144,571	4,617,052
Total mezzanine equity	14,144,571	4,617,052
Stockholders’ equity (deficit):
Common stock, $.001 par value; 2,000,000,000 shares authorized; 31,743,797 and 19,969,341 shares issued and outstanding, respectively	31,744	19,969
Paid in capital	40,672,825	33,662,942
Accumulated deficit	(57,869,440)	(48,014,545)
Total stockholders’ equity (deficit)	(17,164,871)	(14,331,634)
Total liabilities and stockholders’ equity (deficit)	$41,996	$254,264

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Advanced Medical Isotope Corporation

Consolidated Statements of Operations

 

	Year ended
	December 31,
	2016	2015
Consulting revenues	$8,108	$24,108
Operating expenses
Cost of materials	-	474
Sales and marketing expenses	284,138	-
Depreciation and amortization expense	2,947	5,672
Professional fees	2,068,796	741,375
Stock based compensation	675,324	80,635
Payroll expenses	652,877	679,259
Research and development	328,026	149,650
General and administrative expenses	432,470	408,306
Total operating expenses	4,444,578	2,065,371
Operating loss	(4,436,470)	(2,041,263)
Non-operating income (expense):
Interest expense	(6,259,467)	(3,196,153)
Gain on settlement of debt	3,108,342	3,562,067
Grant income	21,010	21,010
Gain (loss) on derivative liability	(2,244,353)	7,887,025
Loss on impaired assets	(43,957)	-
Non-operating income (expense), net	(5,418,425)	8,273,949
Income (loss) before income taxes	(9,854,895)	6,232,686
Income tax provision	-	-
Net income (loss)	$(9,854,895)	$6,232,686
Earnings (loss) per common share	$(0.46)	$0.34
Weighted average number of common shares outstanding	21,497,069	18,505,467

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 Advanced Medical Isotope Corporation

Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

 

	Common Stock		Paid in	Accumulated
	Shares	Amount	Capital	Deficit	Total
Balances at December 31, 2014	17,053,825	17,054	34,068,009	(54,247,231)	(20,162,168)
Common stock issued for:
Exercise of options and warrants	1,995,000	1,995	(1,995)	-	-
Loan fees on convertible debt	43,326	43	6,344	-	6,387
Conversion of debt	920,516	920	108,892	-	109,812
Classified to liability due to lack of authorized shares	(43,326)	(43)	(598,943)	-	(598,986)
Options issued for services	-	-	80,635	-	80,635
Net income	-	-	-	6,232,686	6,232,686
Balances at December 31, 2015	19,969,341	$19,969	$33,662,942	$(48,014,545)	$(14,331,634)
Common stock issued for:
Exercise of options and warrants	30,644	31	(31)	-	-
Settlement of debt	563,523	564	70,299	-	70,863
Conversion of preferred stock	11,180,289	11,180	4817024	-	4,828,204
Classified to liability due to lack of authorized shares	-	-	852,092	-	852,092
Options and warrants issued for services	-	-	1,270,499	-	1,270,499
Net loss	-	-	-	(9,854,895)	(9,854,895)
Balances at December 31, 2016	31,743,797	31,744	40,672,825	(57,869,440)	(17,164,871)