UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ | QUARTERLY Report PURSUANT TO Section 13 or 15( d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 20162017
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 No. 001-33407
ISORAY, INC.
(Exact name of registrant as specified in its charter)
Minnesota | 41-1458152 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
350 Hills St., Suite 106, Richland, Washington | 99354 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code:(509) 375-1202 |
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 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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).
Yesx ☒ No¨ ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large“large accelerated filer”,filer,” “accelerated filer”,filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | (Do not check if a smaller reporting company) | ||
Smaller reporting company | ☒ | |||
Emerging growth company | ☐ |
Large accelerated filer¨ Accelerated filerx Non-accelerated filer¨
Smaller reportingIf an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided
pursuant to Section 13(¨a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨☐ Nox ☒
Number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date:
Class | Outstanding as of November |
Common stock, $0.001 par value | 55,017,419 |
Table of Contents
PART I | ||
Item 1 | 1 | |
1 | ||
2 | ||
3 | ||
4 | ||
Item 2 |
| 10 |
Item 3 | 15 | |
Item 4 | 15 | |
PART II | ||
Item 1 | 16 | |
Item 1A | 16 | |
Item 2 | 16 | |
Item 3 | 16 | |
Item 4 | 16 | |
Item 5 | 17 | |
Item 6 | 17 | |
18 |
PART I – FINANCIAL INFORMATION
Consolidated Balance Sheets |
(In thousands, except shares) |
Consolidated Balance Sheets
(In thousands, except shares)
September 30, | June 30, | |||||||
2017 | 2017 | |||||||
| (unaudited) | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 3,956 | $ | 5,932 | ||||
Certificates of deposit (Note 3) | 3,300 | 3,039 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $26 and $26, respectively | 743 | 726 | ||||||
Inventory | 453 | 323 | ||||||
Prepaid expenses and other current assets | 414 | 271 | ||||||
Total current assets | 8,866 | 10,291 | ||||||
Property and equipment, net | 1,090 | 1,054 | ||||||
Restricted cash | 181 | 181 | ||||||
Inventory, non-current | 427 | 513 | ||||||
Other assets, net of accumulated amortization | 217 | 230 | ||||||
Total assets | $ | 10,781 | $ | 12,269 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 811 | $ | 630 | ||||
Accrued protocol expense | 65 | 75 | ||||||
Accrued radioactive waste disposal | 11 | 125 | ||||||
Accrued payroll and related taxes | 34 | 138 | ||||||
Accrued vacation | 146 | 138 | ||||||
Total current liabilities | 1,067 | 1,106 | ||||||
Long-term liabilities: | ||||||||
Asset retirement obligation | 568 | 561 | ||||||
Total liabilities | 1,635 | 1,667 | ||||||
Commitments and contingencies (Note 8) | ||||||||
Shareholders' equity: | ||||||||
Preferred stock, $.001 par value; 7,001,671 shares authorized: Series A: 1,000,000 shares allocated; no shares issued and outstanding | - | - | ||||||
Series B: 5,000,000 shares allocated; 59,065 shares issued and outstanding | - | - | ||||||
Series C: 1,000,000 shares allocated; no shares issued and outstanding | - | - | ||||||
Series D: 1,671 shares allocated; no shares issued and outstanding | - | - | ||||||
Common stock, $.001 par value; 192,998,329 shares authorized; 55,017,419 and 55,017,419 shares issued and outstanding | 55 | 55 | ||||||
Additional paid-in capital | 83,241 | 83,151 | ||||||
Accumulated deficit | (74,150 | ) | (72,604 | ) | ||||
Total shareholders' equity | 9,146 | 10,602 | ||||||
Total liabilities and shareholders' equity | $ | 10,781 | $ | 12,269 |
September 30, | June 30, | |||||||
2016 | 2016 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 8,459 | $ | 10,139 | ||||
Certificates of deposit (Note 3) | 5,249 | 2,247 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $30 and $30, respectively | 574 | 605 | ||||||
Inventory | 380 | 334 | ||||||
Prepaid expenses and other current assets | 263 | 304 | ||||||
Total current assets | 14,925 | 13,629 | ||||||
Property and equipment, net | 703 | 577 | ||||||
Certificates of deposit, non-current (Note 3) | - | 2,973 | ||||||
Restricted cash | 181 | 181 | ||||||
Inventory, non-current | 584 | 591 | ||||||
Other assets, net of accumulated amortization | 292 | 151 | ||||||
Total assets | $ | 16,685 | $ | 18,102 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 493 | $ | 612 | ||||
Accrued protocol expense | 150 | 122 | ||||||
Accrued radioactive waste disposal | 189 | 177 | ||||||
Accrued payroll and related taxes | 170 | 72 | ||||||
Accrued vacation | 122 | 111 | ||||||
Total current liabilities | 1,124 | 1,094 | ||||||
Long-term liabilities: | ||||||||
Warrant derivative liability | - | 27 | ||||||
Asset retirement obligation | 588 | 580 | ||||||
Total liabilities | 1,712 | 1,701 | ||||||
Commitments and contingencies (Note 8) | ||||||||
Shareholders' equity: | ||||||||
Preferred stock, $.001 par value; 7,001,671 shares authorized: | ||||||||
Series A: 1,000,000 shares allocated; no shares issued and outstanding | - | - | ||||||
Series B: 5,000,000 shares allocated; 59,065 shares issued and outstanding | - | - | ||||||
Series C: 1,000,000 shares allocated; no shares issued and outstanding | - | - | ||||||
Series D: 1,671 shares allocated; no shares issued and outstanding | - | - | ||||||
Common stock, $.001 par value; 192,998,329 shares authorized; 55,010,619 and 55,010,619 shares issued and outstanding | 55 | 55 | ||||||
Additional paid-in capital | 82,858 | 82,788 | ||||||
Accumulated deficit | (67,940 | ) | (66,442 | ) | ||||
Total shareholders' equity | 14,973 | 16,401 | ||||||
Total liabilities and shareholders' equity | $ | 16,685 | $ | 18,102 |
The accompanying notes are an integral part of these consolidated financial statements. |
Consolidated Statements of Operations (Unaudited) |
(Dollars and shares in thousands, except for per-share amounts) |
Quarter ended September 30, | ||||||||
2017 | 2016 | |||||||
Product sales, net | $ | 1,211 | $ | 1,081 | ||||
Cost of product sales | 946 | 1,033 | ||||||
Gross profit | 265 | 48 | ||||||
Operating expenses: | ||||||||
Research and development | ||||||||
Propriety research and development | 287 | 172 | ||||||
Collaboration arrangement, net of reimbursement | 75 | - | ||||||
Total research and development | 362 | 172 | ||||||
Sales and marketing | 614 | 524 | ||||||
General and administrative | 841 | 927 | ||||||
Total operating expenses | 1,817 | 1,623 | ||||||
Operating loss | (1,552 | ) | (1,575 | ) | ||||
Non-operating income: | ||||||||
Interest income, net | 6 | 30 | ||||||
Change in fair value of warrant derivative liability | - | 27 | ||||||
Other income | - | 20 | ||||||
Non-operating income, net | 6 | 77 | ||||||
Net loss | (1,546 | ) | (1,498 | ) | ||||
Preferred stock dividends | (3 | ) | (3 | ) | ||||
Net loss applicable to common shareholders | (1,549 | ) | (1,501 | ) | ||||
Basic and diluted loss per share | $ | (0.03 | ) | $ | (0.03 | ) | ||
Weighted average shares used in computing net loss per share: | ||||||||
Basic and diluted | 55,017 | 55,011 |
The accompanying notes are an integral part of these consolidated financial statements. |
|
Consolidated Statements of Cash Flows (Unaudited) |
(In thousands) |
Quarter ended September 30, | ||||||||
2016 | 2015 | |||||||
Product sales, net | $ | 1,081 | $ | 1,261 | ||||
Cost of product sales | 1,033 | 1,178 | ||||||
Gross profit | 48 | 83 | ||||||
Operating expenses: | ||||||||
Research and development | 172 | 144 | ||||||
Sales and marketing | 524 | 278 | ||||||
General and administrative | 927 | 752 | ||||||
Total operating expenses | 1,623 | 1,174 | ||||||
Operating loss | (1,575 | ) | (1,091 | ) | ||||
Non-operating income: | ||||||||
Interest income, net | 30 | 56 | ||||||
Change in fair value of warrant derivative liability | 27 | 15 | ||||||
Other income | 20 | - | ||||||
Non-operating income, net | 77 | 71 | ||||||
Net loss | (1,498 | ) | (1,020 | ) | ||||
Preferred stock dividends | (3 | ) | (3 | ) | ||||
Net loss applicable to common shareholders | (1,501 | ) | (1,023 | ) | ||||
Basic and diluted loss per share | $ | (0.03 | ) | $ | (0.02 | ) | ||
Weighted average shares used in computing net loss per share: | ||||||||
Basic and diluted | 55,011 | 55,013 |
Quarter ended September 30, | ||||||||
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (1,546 | ) | $ | (1,498 | ) | ||
Adjustments to reconcile net loss to net cash used by operating activities: | ||||||||
Depreciation expense | 18 | 16 | ||||||
Loss on equipment disposals | - | 5 | ||||||
Amortization of other assets | 13 | 10 | ||||||
Change in fair value of warrant derivative liability | - | (27 | ) | |||||
Accretion of asset retirement obligation | 7 | 7 | ||||||
Share-based compensation | 90 | 70 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, gross | (17 | ) | 31 | |||||
Inventory | (44 | ) | (39 | ) | ||||
Prepaid expenses and other current assets | (143 | ) | 41 | |||||
Accounts payable and accrued expenses | 181 | (118 | ) | |||||
Accrued protocol expense | (10 | ) | 28 | |||||
Accrued radioactive waste disposal | (114 | ) | 12 | |||||
Accrued payroll and related taxes | (104 | ) | 98 | |||||
Accrued vacation | 8 | 11 | ||||||
Net cash used by operating activities | (1,661 | ) | (1,353 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Additions to property and equipment | (54 | ) | (147 | ) | ||||
Additions to other assets | - | (151 | ) | |||||
Proceeds from maturity of certificates of deposit | 3,043 | - | ||||||
Purchases of and interest from certificates of deposit | (3,304 | ) | (29 | ) | ||||
Net cash used by investing activities | (315 | ) | (327 | ) | ||||
Net decrease in cash and cash equivalents | (1,976 | ) | (1,680 | ) | ||||
Cash and cash equivalents, beginning of quarter | 5,932 | 10,139 | ||||||
CASH AND CASH EQUIVALENTS, END OF QUARTER | $ | 3,956 | $ | 8,459 |
The accompanying notes are an integral part of these consolidated financial statements. |
Consolidated StatementsTable of Cash Flows (Unaudited)
(In thousands)
Quarter ended September 30, | ||||||||
2016 | 2015 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (1,498 | ) | $ | (1,020 | ) | ||
Adjustments to reconcile net loss to net cash used by operating activities: | ||||||||
Depreciation expense | 16 | 137 | ||||||
Loss on equipment disposals | 5 | - | ||||||
Amortization of other assets | 10 | 21 | ||||||
Change in fair value of warrant derivative liability | (27 | ) | (15 | ) | ||||
Accretion of asset retirement obligation | 7 | 21 | ||||||
Share-based compensation | 70 | 32 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, gross | 31 | (81 | ) | |||||
Inventory | (39 | ) | (57 | ) | ||||
Prepaid expenses and other current assets | 41 | 14 | ||||||
Accounts payable and accrued expenses | (118 | ) | (87 | ) | ||||
Accrued protocol expense | 28 | 28 | ||||||
Accrued radioactive waste disposal | 12 | 12 | ||||||
Accrued payroll and related taxes | 98 | (83 | ) | |||||
Accrued vacation | 11 | (31 | ) | |||||
Net cash used by operating activities | (1,353 | ) | (1,109 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Additions to property and equipment | (147 | ) | (4 | ) | ||||
Additions to other assets | (151 | ) | (16 | ) | ||||
Proceeds from maturity of certificates of deposit | - | 3,527 | ||||||
Purchases of and interest from certificates of deposit | (29 | ) | (6,084 | ) | ||||
Net cash used by investing activities | (327 | ) | (2,577 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from sales of common stock, pursuant to exercise of options | - | 47 | ||||||
Net cash provided by financing activities | - | 47 | ||||||
Net decrease in cash and cash equivalents | (1,680 | ) | (3,639 | ) | ||||
Cash and cash equivalents, beginning of quarter | 10,139 | 5,227 | ||||||
CASH AND CASH EQUIVALENTS, END OF QUARTER | $ | 8,459 | $ | 1,588 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest |
The accompanying notes are an integral part of these consolidated financial statements.
Notes to the Unaudited Consolidated Financial Statements
For the three months ended September 30, 201630, 2017 and 20152016
1. | Basis of Presentation |
The accompanying unaudited interim consolidated financial statements are those of IsoRay, Inc., and its wholly-owned subsidiaries (“IsoRay”, referred to herein as “IsoRay” or the “Company”). All significant intercompany accounts and transactions have been eliminated in the consolidation. In the opinion of management, all adjustments necessary for the fair presentation of the consolidated financial statements have been included. These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes as set forth in the Company’s annual report filed on Form 10-K for the year ended June 30, 2016.2017.
The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures are adequate for the information not to be misleading.
Certain prior period amounts have been reclassified to conform to the current period’speriod’s presentation. The results of operations for the periods presented may not be indicative of those which may be expected for a full year. The Company anticipates that as the result of continuing operating losses and the significant net operating losses available from prior fiscal years, its effective income tax rate for fiscal year 20172018 will be 0%.
2. | New Accounting |
In May 2014, the Financial Accounting Standards Board (FASB)(“FASB”) issued Accounting Standards Update (ASU)(“ASU”) No. 2014-09 "Revenue from ContractsRevenue Recognition, replacing guidance currently codified in Subtopic 605-10 Revenue Recognition-Overall with Customers" (ASU 2014-09), which supersedes thevarious SEC Staff Accounting Bulletins providing interpretive guidance. The guidance establishes a new five step principle-based framework in an effort to significantly enhance comparability of revenue recognition requirements in FASB Accounting Standards Codification (ASC) Topic 605, "Revenue Recognition".practices across entities, industries, jurisdictions, and capital markets. The guidance requires that an entity recognize revenue in a way that depicts the transfer of promised goods or services to customers in the amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. The guidancestandard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period andthe Company in the first quarter of its fiscal year 2019, but early adoption is to be applied retrospectively, with early application not permitted.permitted starting in the first quarter of fiscal year 2018. The Company continuesintends to evaluateadopt the new standard in the first quarter of fiscal year 2019 and itsexpects to use the modified retrospective method. The Company has evaluated the impact of the future adoption of ASU 2014-09 on the Company'sits consolidated financial statements. This update will be effective asstatements and does not currently expect significant changes in the timing of revenue recognition compared to the beginning of fiscal 2019. This update is not expected to have a material impact on the Company’s consolidated financial statements.existing methodology.
In July 2015, the FASB issued ASU No. 2015-11: Inventory. The guidance requires an entity’sentity’s management to measure inventory within the scope of this ASU at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early application is permitted. The ASU became effective for the Company continues to evaluate the new standard and itson July 1, 2017. This update did not have a material impact on the Company'sCompany’s consolidated financial statements. This update will be effective as of the beginning of fiscal 2018.statements upon adoption.
In NovemberNovember 2015, the FASB issued an ASU 2015-17 to simplify the balance sheet classification of deferred taxes. This update requires all deferred tax assets and liabilities to be reported as non-current in the consolidated balance sheets. The ASU became effective for the Company on July 1, 2017. This update will be effective as of the beginning of fiscal 2018. This update isdid not expected to have a material impact on the Company’s consolidated financial statements.statements upon adoption.
In February 2016, the FASB issued ASU 2016-02 Leases (Subtopic 842), which will require lessees to recognizerecognize assets and liabilities on the balance sheet for the rights and obligations created by most leases. The update is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. The ASU will be effective for the Company continues to evaluatein the new standard and itsfirst quarter of fiscal year 2020. We are currently evaluating the impact of the guidance on the Company'sCompany’s consolidated financial statements. This
In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update will beprovides guidance on classification for cash receipts and payments related to eight specific issues. The update is effective asfor fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of implementing this update on the beginning of fiscal 2019.consolidated financial statements.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. Except to indicate an evaluation of a recent pronouncement is in process, theThe Company does not discuss recent pronouncements that are not anticipated to have potentialan impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
3. | Certificates of |
Certificate of Deposit Account Registry Service (CDARS) is a system that allows the Company to invest in certificates of deposit through a single financial institution that exceed the $250,000 limit to be fully insured by the Federal Deposit Insurance CorporationCorporation (FDIC). That institution utilizes the CDARS system to purchase certificates of deposit at other financial Institutionsinstitutions while keeping the investment at each institution fully insured by the Federal Deposit Insurance Corporation (FDIC).FDIC. CDARS held by the Company as of September 30, 20162017 and June 30, 2016 are2017 mature as follows (in thousands):
As of September 30, 2016 | ||||||||||||||||
Under 90 | 91 days to | Six months to | Greater | |||||||||||||
Days | six months | 1 year | than 1 year | |||||||||||||
CDARS | $ | - | $ | - | $ | 5,249 | $ | - |
As of September 30, 2017 | ||||||||||||||||
Under 90 | 91 days to | Six months to | Greater | |||||||||||||
Days | six months | 1 year | than 1 year | |||||||||||||
CDARS | $ | 825 | $ | 825 | $ | 1,650 | $ | - |
As of June 30, 2016 | ||||||||||||||||
Under 90 | 91 days to | Six months to | Greater | |||||||||||||
Days | six months | 1 year | than 1 year | |||||||||||||
CDARS | $ | - | $ | - | $ | 2,247 | $ | 2,973 |
As of June 30, 2017 | ||||||||||||||||
Under 90 | 91 days to | Six months to | Greater | |||||||||||||
Days | six months | 1 year | than 1 year | |||||||||||||
CDARS | $ | 3,039 | $ | - | $ | - | $ | - |
4. | Loss per Share |
Basic and diluted earnings (loss) per share are calculated by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding, and does not include the impact of any potentially dilutive common stock equivalents. At September 30, 20162017 and 2015,2016, the calculation of diluted weighted average shares did not include convertible preferred stock, common stock warrants, or options that are potentially convertible into common stock, as those would be antidilutive due to the Company’s net loss position.
Securities not considered in the calculation of diluted weighted average shares, but that could be dilutive in the future as of September 30, 20162017 and 2015,2016, were as follows (in thousands):
September 30, | ||||||||
2016 | 2015 | |||||||
Series B preferred stock | 59 | 59 | ||||||
Common stock warrants | 230 | 361 | ||||||
Common stock options | 2,609 | 2,364 | ||||||
Total potential dilutive securities | 2,898 | 2,784 |
September 30, | ||||||||
2017 | 2016 | |||||||
Series B preferred stock | 59 | 59 | ||||||
Common stock warrants | - | 230 | ||||||
Common stock options | 3,395 | 2,609 | ||||||
Total potential dilutive securities | 3,454 | 2,898 |
5. | Inventory |
Inventory consisted of the following at September 30, 20162017 and June 30, 2016(in2017 (in thousands):
September 30, | June 30, | September 30, | June 30, | |||||||||||||
2016 | 2016 | 2017 | 2017 | |||||||||||||
Raw materials | $ | 194 | $ | 155 | $ | 339 | $ | 191 | ||||||||
Work in process | 164 | 161 | 94 | 121 | ||||||||||||
Finished goods | 22 | 18 | 20 | 11 | ||||||||||||
Total inventory, current | $ | 380 | $ | 334 | $ | 453 | $ | 323 |
September 30, | June 30, | |||||||
2016 | 2016 | |||||||
Enriched barium, non-current | $ | 470 | $ | 470 | ||||
Raw materials, non-current | 114 | 121 | ||||||
Total inventory, non-current | $ | 584 | $ | 591 |
September 30, | June 30, | |||||||
2017 | 2017 | |||||||
Enriched barium, non-current | $ | 347 | $ | 470 | ||||
Raw materials, non-current | 80 | 43 | ||||||
Total inventory, non-current | $ | 427 | $ | 513 |
Inventory, non-current is raw materials that were ordered in quantities to obtain volume cost discounts which based on current and anticipated sales volumes will not be consumed within an operating cycle.
On August 25, 2017, IsoRay Medical, Inc. (“Medical”) entered into a Consignment Agreement and related Services Agreement with MedikorPharma-Ural LLC (“Medikor”). Pursuant to the Consignment Agreement, Medical has consigned its inventory of enriched barium whichcarbonate to Medikor. It is expected that beginning in November, 2017, Medikor will only be utilized if requireduse the barium carbonate consigned by Medical and contract with a third-party manufacturer to produce Cesium-131. Pursuant to the Service Agreement, Medical will perform certain qualitative and quantitative chemical analyses on the resulting Cesium-131. It is further expected that a separate third-party contractor will receive the Cesium-131 produced by the third-party manufacturer and will sell the Cesium-131 exclusively to Medical. Medical anticipates obtaining enough Cesium-131 under this arrangement to obtain volumesover 4,000 curies of isotope not ableCesium-131 over a ten-year period but there is no assurance as to whether the agreements will be purchased from an existing source interminated before this full amount is obtained and other supply sources are used, nor is there assurance that the short or long-term. Management does not anticipateagreements with the need to utilize the enriched barium within the current operating cycle.third-party Cesium-131 suppliers will be periodically executed over this time period.
6. | Property and Equipment |
Property and equipment consisted of the following at September 30, 20162017 and June 30, 2016(in2017 (in thousands):
September 30, | June 30, | September 30, | June 30, | |||||||||||||
2016 | 2016 | 2017 | 2017 | |||||||||||||
Land | $ | 168 | $ | 168 | $ | 366 | $ | 366 | ||||||||
Equipment | 3,614 | 3,606 | 3,776 | 3,776 | ||||||||||||
Leasehold improvements | 4,130 | 4,130 | 4,134 | 4,130 | ||||||||||||
Other1 | 331 | 214 | 422 | 373 | ||||||||||||
Property and equipment | 8,243 | 8,118 | 8,698 | 8,645 | ||||||||||||
Less accumulated depreciation | (7,540 | ) | (7,541 | ) | (7,608 | ) | (7,591 | ) | ||||||||
Property and equipment , net | $ | 703 | $ | 577 | ||||||||||||
Property and equipment, net | $ | 1,090 | $ | 1,054 |
1 – Plant & equipment, not placed in service areRepresents items that meet the capitalization threshold or which management believes will meet the threshold at the time of completion and which have yet to be placed into service as of the date of the balance sheet. Also included at September 30, 20162017 and June 30, 20162017 are costs associated with automation of production processes and advance planning and design work on the Company’s new production facility.
7. | Share-Based Compensation |
The following table presents the share-based compensation expense recognized during the quarterthree months ended September 30, 2017 and 2016 and 2015(in(in thousands):
Quarter ended September 30, | Three Months | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
Cost of product sales | $ | 27 | $ | 18 | $ | 16 | $ | 27 | ||||||||
Research and development expenses | 8 | 3 | 19 | 8 | ||||||||||||
Sales and marketing expenses | 15 | 3 | 17 | 15 | ||||||||||||
General and administrative expenses | 20 | 8 | 38 | 20 | ||||||||||||
Total share-based compensation | $ | 70 | $ | 32 | $ | 90 | $ | 70 |
As of September 30, 2016,2017, total unrecognized compensation expense related to stock-based options was approximately $732,000$807,000 and the related weighted-average period over which it is expected to be recognized is approximately 1.841.39 years.
A summary of stock options within the Company’sCompany’s share-based compensation plans as of September 30, 20162017 was as follows (in thousands except for exercise prices and terms):
Weighted | Weighted | |||||||||||||||||||||||||||||||
Weighted | Average | Weighted | Average | |||||||||||||||||||||||||||||
Number of | Exercise | Contractual | Intrinsic | Number of | Exercise | Contractual | Intrinsic | |||||||||||||||||||||||||
As of September 30, 2016 | Options | Price | Term (Years) | Value | ||||||||||||||||||||||||||||
As of September 30, 2017 | Options | Price | Term (Years) | Value | ||||||||||||||||||||||||||||
Outstanding | 2,609,189 | $ | 1.07 | 7.12 | $ | 141,677 | 3,395 | $ | 0.76 | 7.71 | $ | 67 | ||||||||||||||||||||
Vested and expected to vest | 2,530,789 | $ | 1.06 | 7.06 | $ | 141,677 | 3,290 | $ | 0.76 | 7.66 | $ | 67 | ||||||||||||||||||||
Vested and exercisable | 1,629,996 | $ | 1.09 | 5.74 | $ | 139,802 | 1,760 | $ | 0.90 | 5.82 | $ | 67 |
There were no and 45,994 stock options exercised and no and $21,654 of intrinsic value associated with these exercises during the quartersthree months ended September 30, 20162017 and 2015,2016, respectively. The Company’s current policy is to issue new shares to satisfy stock option exercises.
There were 75,000 and no option awards granted with a fair value of approximately $33,000 and $0 during the three months ended September 30, 2017 and 2016, respectively.
There were no stock option awards granted during the quarters ended September 30, 2016 and 2015, respectively.
There were 280,534 and 1,608 stock option awards which expired during quartersthree months ended September 30, 2017 and 2016, and 2015, respectively.
There were 35,33659,666 and 6,33435,336 stock option awards forfeited during quartersthree months ended September 30, 2017 and 2016, and 2015, respectively.
8. | Commitments and Contingencies |
Class Action Lawsuit RelatedIsotope Purchase Agreement
In December 2015, the Company completed negotiations with The Open Joint Stock Company (located in Russia) for the purchase of Cs-131 manufactured by the Institute of Nuclear Materials. The purchase agreement provided the Company with one year’s supply of Cs-131. The original agreement was due to Press Releaseexpire on March 31, 2017, but in December 2016 an addendum was signed extending it until December 31, 2017. On October 23, 2017, the Company, together with The Open Joint Stock Company signed an addendum to the contract to include Cs-131 manufactured at SSC RIAR and extending it until December 31, 2018.
Research and Development - Collaborative Arrangement
On May 22, 2015, the first of three lawsuits was filed against IsoRay, Inc. and two of its officers – Dwight Babcock (the Company’s retired CEO) and Brien Ragle, CFO – related to a press release on May 20, 2015 regarding a May 19 online publication of the peer-reviewed article in the journal Brachytherapy titled “Analysis of Stereotactic Radiation vs. Wedge Resection vs. Wedge Resection Plus Cesium-131 Brachytherapy in Early-Stage Lung Cancer” by Dr. Bhupesh Parashar, et al. The lawsuits are class actions alleging violations of the federal securities laws. By Order dated August 17, 2015, all of the pending lawsuits were consolidated into one case – In re IsoRay, Inc. Securities Litigation; Case No. 4:15-cv-05046-LRS, in the US District Court for the Eastern District of Washington. On October 16, 2015, an amended complaint was filed with more detailed allegations relating to alleged violations of federal securities laws. On December 15, 2015, IsoRay filed a motion to dismiss the complaint altogether. On June 1, 2016, the court entered an order denying IsoRay's motion to dismiss, holding that the complaint's allegations, if accepted as true, state a plausible claim to relief. The order did not adjudicate the merits of the lawsuit. No other issues were decided in the ruling.
On June 15, 2016, IsoRay filed their answer to the amended complaint. As IsoRay previously disclosed, on September 23, 2016, the partiesMarch 13, 2017, Medical entered into a stipulationCollaborative Development Agreement (CDA) with GammaTile, LLC to further develop a brachytherapy medical device for the treatment of settlementcancerous tumors in the brain and to seek regulatory approval for the new product. As the project manager, Medical will incur all costs in connection with the collaboration project which if it becomes final, will providehas been shared equally by both parties as of November 8, 2016 when they informally began the collaboration. The start of the formal collaboration has been extended from December 2017 until March 2018. In accordance with ASC 808 “Collaborative Arrangements”, this activity is accounted for as a paymentcollaborative arrangement and related costs are incurred, shared, and separately stated in connection with a collaborative research and development project. These costs are reported on the financial statements under “Research and development: Collaboration arrangements, net of reimbursement.” The Company collaborated with GammaTile LLC in filing applications to the plaintiff class of $3,537,500, which will be paid by our insurers. On October 4, 2016,U.S. Food and Drug Administration (FDA) to clear GammaTile™ for clinical use, and a New Technology Add-on Payment (NTAP) to the stipulation of settlementCenter for Medicare and Medicaid Services (CMS) seeking re-imbursement for the GammaTile™ treatment in the in-patient setting. The application with the FDA is ongoing, however, the NTAP was filed in October 2017.
During the quarter ended September 30, 2017 and June 30, 2017, costs incurred in connection with the court, along with plaintiffs’ unopposed motion for preliminary approvalcollaboration agreement were $147,000 and $65,000, respectively.
As of September 30, 2017 and June 30, 2017, the settlement. On October 20, 2016, the court granted preliminary approvalCompany had outstanding receivables from GammaTile LLC of the settlement. Following notice to class members, the class action is subject to final approval by the court. A final approval hearing is scheduled for March $68,000 and $66,000 respectively.
Derivative Complaint related to shareholder valueShareholder Value
On September 29, 2016, a purported shareholder derivative complaint captionedDavid M. Kitley, v. Babcock, et al., No. 0:16-cv-03297, was filedpurportedly on behalf of the CompanyIsoRay, filed a derivative lawsuit in the United States District Court for the District of Minnesota against certain ofunder the Company’scase caption Kitley v. IsoRay, Inc., Case No. 0:16-cv-03297-DTS. The complaint named as defendants current and former officersIsoRay directors Dwight Babcock, Thomas LaVoy, Philip J. Vitale and directors. The complaint allegesMichael W. McCormick, alleging that the defendants breachedthey violated their fiduciary duties by causing the Company to issueIsoRay in connection with a press release allegedly containing false and misleading statements in a May 20, 2015 press release – the same press release at issue in the pending securities class action – concerning the results from a peer reviewed study of its Cesium-131 isotope seeds and mesh product for the treatment of non-small cell lung cancers.cancers, thereby artificially inflating the price of IsoRay stock. The complaint bringssought unspecified damages, in an amount not presently determinable, among other forms of relief.
On November 17, 2016, IsoRay moved to dismiss the complaint, arguing that plaintiff was not entitled to pursue his derivative claims due to his failure to serve a pre-suit demand on IsoRay’s board. Rather than respond to the motion to dismiss, plaintiff filed an amended complaint on January 23, 2017. The amended complaint alleged the same derivative claims as the original, and added IsoRay director Alan Hoffmann as a defendant. Plaintiff sought an award of breachdamages and an order directing IsoRay to undertake reforms of fiduciary duty, gross mismanagement, and unjust enrichment, and seeks unspecified compensatory damages, changes inits corporate governance and attorney’s feesinternal procedures. IsoRay moved to dismiss the amended complaint on March 9, 2017. Plaintiff responded on April 20, 2017, and costs. BecauseIsoRay replied on May 17, 2017. The court heard oral argument on the complaintmotion on August 22, 2017, and took the matter under advisement at that time. On October 19, 2017, the court granted IsoRay’s motion to dismiss. The matter is derivative in nature, it does not seek monetary damages from the Company. The Company may be obligated pursuant to indemnification obligations to advance fees and costs incurred by the individuals defending against the action. The Company has applicable directors and officers insurance policies. Defendants’ response to the complaint is due November 17, 2016.now resolved.
9. Fair Value Measurements
The following table sets forth the Company’sCompany’s financial assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement(in (in thousands):
Fair value at September 30, 2016 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Cash and cash equivalents | $ | 8,459 | $ | 8,459 | $ | - | $ | - | ||||||||
Warrant derivative liability | - | - | - | - |
Fair Value at September 30, 2017 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Cash and cash equivalents | $ | 3,956 | $ | 3,956 | $ | - | $ | - |
Fair value at June 30, 2016 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Cash and cash equivalents | $ | 10,139 | $ | 10,139 | $ | - | $ | - | ||||||||
Warrant derivative liability | 27 | - | 27 | - |
Fair Value at June 30, 2017 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Cash and cash equivalents | $ | 5,932 | $ | 5,932 | $ | - | $ | - |
The Company’s cash and cash equivalent instruments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.
The Company’s warrant derivative liability is valued using the Black-Scholes option pricing model which requires a variety of inputs. Such instruments are typically included in Level 2.
As of September 30, 2016, there were accrued but undeclared dividends on Series B Preferred Stock outstanding in the amount of approximately $8,000.
10. |
Warrants
The following table summarizes all warrants outstanding as of the beginning of the fiscal year, all activity related to warrants issued, cancelled, exercised or expired during the period and weighted average prices by category.
Weighted average | ||||||||
Warrants | exercise price | |||||||
Outstanding as of June 30, 2016 | 230,087 | $ | 0.94 | |||||
Warrants expired | - | - | ||||||
Outstanding as of September 30, 2016 | 230,087 | $ | 0.94 |
The following table summarizes additional information about the Company’s common warrants outstanding as of September 30, 2016:
Range of | ||||||||
Number of Warrants | Exercise Prices1 | Expiration Date | ||||||
199,437 | $ | 0.94 | October 2016 | |||||
25,650 | $ | 0.94 | December 2016 | |||||
5,000 | $ | 0.98 | June 2017 | |||||
230,087 |
1 – Exercise prices have been rounded to the nearest whole cent.
Related Party Transactions |
In previous fiscal years the Company engaged the services of APEX Data Systems, Inc. (APEX), owned by Dwight Babcock, former Chairman and Chief Executive Officer, to build and maintain a web interfaced data collection application to aggregate patient data in a controlled environment. An alternative vendor began providing these services beginning January 2016.
The cost recorded during the quarter ended September 30, 2015 from APEX Data Systems, Inc. for the maintenance of the web interfaced data collection applications in combination with the updating of the Company website was approximately $3,000. An additional approximately $3,000 was spent on the maintenance of Customer Relationship Management (CRM) software in the quarter ended September 30, 2015.
During the quarter ended June 30, 2016, the Company engaged GO Intellectual Capital, LLC (GO) for marketing services in support of the Company’sCompany’s rebranding effort. Michael McCormick, a member of the Company Board of Directors, is a 1/3 owner of GO. A statement of work was developed defining the scope of the effort and the deliverables to the Company including a new logo with brand messaging and communication tools including a website, sales presentation tools and a public relations strategy. For the quarter ended September 30, 2016, the Company paid approximately $15,000 to GO for its performance of work related to the agreed upon statement of work. No such services were provided in the quarter ended September 30, 2015.2017.
11. | Concentrations of Credit and Other Risks |
One group of customers, facilities or physician practices havehas revenues that aggregate to greater than 10% of total Company product sales:
Quarter ended | Three months ended | |||||||||||||||
September 30, | June 30, | September 30, | September 30, | |||||||||||||
Facility | 2016 | 2016 | 2017 | 2016 | ||||||||||||
El Camino Hospital of Los Gatos, Fremont Surgery Center & other facilities1 | 22.33 | % | 23.39 | % | 25.98 | % | 22.33 | % |
1 – This group of facilities individually do not aggregate to moreeach comprise less than 10% of total Company product sales. They are serviced by the same physician group, one of whom is our Medical Director.
The Company routinely assesses the financial strength of its customers and provides an allowance for doubtful accounts as necessary.necessary.
12. | Subsequent Events |
Media Advertising Agreement
On October 3, 2017, IsoRay, Inc. (“IsoRay”) entered into a Media Advertising Agreement (the “Agreement”) with Al & J Media Inc., a corporation incorporated in the State of New York (the “Consultant”).
Pursuant to the Agreement, the Consultant will introduce IsoRay to potential sources of media, marketing agreements, and/or strategic alliances, including but not limited to radio and television media advertising, various media publications, and Internet podcasts. The Consultant does not promote IsoRay as part of the Agreement; it is only a media agent for advertising. The services are expected to be complete in 180 days. IsoRay may cancel the Agreement after the first 90 days.
As compensation for the services, IsoRay will pay the Consultant $120,000 of which $20,000 is payable upon execution of the Agreement, and $20,000 is payable 30, 60, 90, 120, and 150 days after execution of the Agreement. Additionally, the Consultant will receive 250,000 warrants upon execution of the Agreement, which vest immediately, entitling the Consultant to purchase shares of IsoRay common stock, exercisable on or before October 3, 2020, at an exercise price of $0.54 per share, and 250,000 at the market warrants 90 days after execution of the Agreement, at a price based on the issuance date.
ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Caution Regarding Forward-Looking Information
In addition to historical information, this Form 10-Q10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”)(PSLRA). This statement is included for the express purpose of availing IsoRay, Inc. of the protections of the safe harbor provisions of the PSLRA.
All statements contained in this Form 10-Q,10-Q, other than statements of historical facts, that address future activities, events or developments are forward-looking statements, including, but not limited to, statements containing the words "believe," "expect," "anticipate," "intends," "estimate," "forecast," "project,"“believe,” “expect,” “anticipate,” “intends,” “estimate,” “forecast,” “project,” and similar expressions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products, services, developments or industry rankings; any statements regarding future revenue, economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. These statements are based on certain assumptions and analyses made by us in light of our experience and our assessment of historical trends, current conditions and expected future developments as well as other factors that we believe are appropriate under the circumstances. However, whether actual results will conform to the expectations and predictions of management is subject to a number of risks and uncertainties described under “Risk Factors” under Part II, Item 1A - Risk Factors beginning on page 23 below and in the “Risk Factors” sections of our Form 10-K for the fiscal year ended June 30, 2016 .that may cause actual results to differ materially.
Consequently, all of the forward-looking statements made in this Form 10-Q10-Q are qualified by these cautionary statements and there can be no assurance that the actual results anticipated by management will be realized or, even if substantially realized, that they will have the expected consequences to or effects on our business operations. Readers are cautioned not to place undue reliance on such forward-looking statements as they speak only of the Company'sCompany’s views as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’sCompany’s financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, management evaluates past judgments and estimates, including those related to bad debts, inventories, accrued liabilities, derivative liabilities and contingencies. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies and related risks described in the Company’s annual report on Form 10-K as filed with the Securities and Exchange CommissionSEC on September 9, 201628, 2017 are those that depend most heavily on these judgments and estimates. As of September 30, 2016,2017 there had been no material changes to any of the critical accounting policies contained therein.
Overview
IsoRay Inc. is a brachytherapy device manufacturer with FDA clearance and CE marking for a single medical device that can be delivered to the physician in multiple configurations as prescribed for the treatment of cancers in multiple body sites. The Company manufactures and sells this product as the Cesium-131 brachytherapy seed.
The brachytherapy seed utilizes Cesium-131, with a 9.7 day half-life, as its radiation source. The Company believes that it is the unique combination of the short half-life and the energy of the Cesium-131 isotope that are yieldingyielding the beneficial treatment results that have been published in peer reviewed journal articles and presented in various forms at conferences and tradeshows.
The Company has distribution agreements outside of the United States through its subsidiary IsoRayIsoRay International LLC. These distributors are responsible for obtaining regulatory clearance to sell the Company’s products in their territories, with the support of the Company. As of the date of this Report, the Company had distributors in Italy and the Russian Federation, with no reported revenues in the quarter ended September 30, 2016.2017.
Results of Operations
QuarterThree months ended September 30, 20162017 and 20152016 (in thousands):
Quarter ended September 30, | Three months ended September 30, | |||||||||||||||||||||||||||||||||||||||
2016 | 2015 | 2016 - 2015 | 2017 | 2016 | 2017 - 2016 | |||||||||||||||||||||||||||||||||||
Amount | % (a) | Amount | % (a) | % Change | Amount | % (a) | Amount | % (a) | % Change | |||||||||||||||||||||||||||||||
Product sales, net | $ | 1,081 | 100 | $ | 1,261 | 100 | (14 | ) | $ | 1,211 | 100 | $ | 1,081 | 100 | 12 | |||||||||||||||||||||||||
Cost of product sales | 1,033 | 96 | 1,178 | 93 | (12 | ) | 946 | 78 | 1,033 | 96 | (8 | ) | ||||||||||||||||||||||||||||
Gross profit | 48 | 4 | 83 | 7 | (42 | ) | 265 | 22 | 48 | 4 | 452 | |||||||||||||||||||||||||||||
Research and development expenses | 172 | 16 | 144 | 11 | 19 | |||||||||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||||||
Research and development expenses - proprietary | 287 | 24 | 172 | 16 | 67 | |||||||||||||||||||||||||||||||||||
Research and development expenses – collaboration agreement, net of reimbursement | 75 | 6 | ||||||||||||||||||||||||||||||||||||||
Sales and marketing expenses | 524 | 48 | 278 | 22 | 88 | 614 | 51 | 524 | 48 | 17 | ||||||||||||||||||||||||||||||
General and administrative expenses | 927 | 86 | 752 | 60 | 23 | 841 | 69 | 927 | 86 | (9 | ) | |||||||||||||||||||||||||||||
Non-operating income | 77 | 7 | 71 | 6 | 8 | |||||||||||||||||||||||||||||||||||
Net loss | $ | (1,498 | ) | (139 | ) | $ | (1,020 | ) | (81 | ) | (47 | ) | ||||||||||||||||||||||||||||
Total operating expenses | 1,817 | 150 | 1,623 | 150 | 12 | |||||||||||||||||||||||||||||||||||
Operating loss | (1,552 | ) | (128 | ) | (1,575 | ) | (146 | ) | (2 | ) |
(a) | Expressed as a percentage of product sales, net |
Product Sales.Sales
Focus on Changes in sales personnel and implementation of a newrevitalized sales and marketing approach and sales training coupled with a summer vacation by some key accountsstrategy in the second quarter of fiscal 2017 has resulted in lowerpositive sales growth in the first quarter of fiscal 2018 when compared to the prior year’syear first quarterquarter. Ongoing training and support of new sales personnel has led to not only new accounts but also reconnecting with and receiving orders from prior accounts.
Three months ended September 30, 2017 and 2016 (in thousands):
Quarter ended September 30, | Three months ended September 30, | |||||||||||||||||||||||||||||||||||||||
2016 | 2015 | 2016 - 2015 | 2017 | 2016 | 2017 - 2016 | |||||||||||||||||||||||||||||||||||
Amount | % (a) | Amount | % (a) | % Change | Amount | % (a) | Amount | % (a) | % Change | |||||||||||||||||||||||||||||||
Prostate brachytherapy | $ | 966 | 89 | $ | 1,116 | 88 | (13 | ) | $ | 1,084 | 89 | $ | 966 | 89 | 12 | |||||||||||||||||||||||||
Other brachytherapy | 115 | 11 | 145 | 12 | (21 | ) | 127 | 11 | 115 | 11 | 10 | |||||||||||||||||||||||||||||
Product sales, net | 1,081 | 100 | 1,261 | 100 | (14 | ) | 1,211 | 100 | 1,081 | 100 | 12 |
(a) Expressed as a percentage of product sales, net
Prostate Brachytherapy.Brachytherapy
Prostate brachytherapy sales decreases were impacted by physician’s reduced summerchanges in sales account managers and by the schedules and the timing of ASTRO, which is typically held during the second quarter of the Company’s fiscal year but was heldsome key accounts in the first quarter of thisthe fiscal year. Relationship development was emphasized following a transitionary period whereDuring the quarter ended September 30, 2017, the Company addedhad a Vice-Presidentfull sales team in place contributing to the increase in sales. Also, website improvements and significant investments in product support literature, social media and public relations are increasing the awareness of Sales and Marketing and a Senior Marketing Consultant as well as two Senior Account Managers bringing approximately 45 years of combined experiencethe Company in the prostate cancerbrachytherapy treatment markets providing the Company opportunities to develop new customers and related markets. reconnect with past customers.
Management believes growth in prostate brachytherapy revenues will be the result of physicians, payors,payers, and patients increasingly considering overall brachytherapy treatment advantages including costs, better treatment outcomes and improvement in the quality of life for patients, when compared with non-brachytherapy treatments.
Management believes increased pressure to deliver effective healthcare in both terms of outcome and cost drove treatment options, and accordingly drove the Company’s prostate revenues, in the quarter ended September 30, 2015, with prostate brachytherapy receiving more consideration than in previous years and believes this trend is continuing in the quarter ended September 30, 2016.2017.
Other Brachytherapy.Brachytherapy
Other brachytherapy includes, but is not limited to, brain, lung, head/neck, and gynecological treatments. Initial applications for these other brachytherapy treatments are primarily used in recurrent cancer treatments or salvage cases that are generally difficult to treat aggressive cancers where other treatment options are either ineffective or unavailable.
These other brachytherapy treatments continue to be subject to the influence of a small pool of innovative physicians who are the early adopters of the technology who also tend to be faculty at teaching hospitals training the next generation ofof physicians. This causes the revenue created by these types of treatment applications to be more volatile and vary significantly from quarter to quarter. This volatility resulted in the increase from the prior year.
Cost of product sales.sales
Cost of product sales consists primarily of the costs of manufacturing and distributing the Company’s products.
Contributing to the quarters ended September 30, 2017 and 2016 comparison were decreases attributed to cost savings initiatives that resulted in lower procurement costs of goods and services. Some costs shifted in the quarter ended September 30, 20162017 to research and 2015 comparisondevelopment from cost of product sales as employees performed research and development work. Also, reduced staffing costs were realized with decreased head count. These decreases attributed to a change in the asset retirement obligation and reduced depreciation expense as several production related assets became fully depreciated.
The Company purchases an excesswere partially offset by increased supply of isotope to meet not only known customer orders but also enough to fill anticipated ordersfrom MURR which may or may not materialize. Excess isotope is utilized in the production of upcoming orders where possible considering the decay rates of Cesuim-131. Loss of isotope to decay is also included as aincreased total cost of production.product sales but resulted in lower supply cost per curie of Cesium-131.
Gross Profit
ResearchContributing to the three months ended September 30, 2017 and development.2016 gross profit comparison were increased sales as well as reductions in cost of product sales due to cost savings initiatives and reduced staffing costs including utilization of production personnel on research and development projects.
Research and development
Research and development – proprietary
Proprietary research and development consists primarily of theemployee and third-party costs related to employee and third party research and development activities.
Contributing to the quarters ended September 30, 2017 and 2016 proprietary research and development comparison were increases associated with participation in new protocols, device development activities, as well as a reallocation of employee costs from cost of product sales as those employees performed work on research and development projects. These increases were partially offset by decreased legal fees.
Research and development – collaborative arrangement
Collaboration arrangement related costs are incurred, shared, and separately stated in connection with a collaborative research and development project (see footnote 8 of Notes to unaudited consolidated financial statements contained in this filing). For the quarter ended September 30, 2016 and 2015 comparison were increased legal expenses related to maintenance2017 the collaborative arrangement incurred total costs of intellectual property.approximately $147,000 net of approximately $72,000 in shared cost reimbursements.
Sales and marketing expenses.expenses
Sales and marketing expenses consist primarily of the costs related to the internal and external activitiesactivities of the Company’s sales, marketing and customer service. service functions of the Company. As the Company increasingly focuses on improving sales, the cost associated with marketing and additional staffing continues to increase.
Contributing to the quarters ended September 30, 2017 and 2016 comparison were increased advertising and public relations costs as part of the revitalized marketing plan. Staffing differences are a major factor in the cost comparison as open positions in the quarter ended September 30, 2016 were filled in periods prior to the quarter ended September 30, 2016 and 2015 comparison increase were rebranding efforts and a website redesign that launched during the quarter and2017 with increased costs attributed to filled sales positions, including the position of Vice President of Sales and Marketing, some of which were unfilled in the previous quarter ended September 30, 2015 and others that were added including a Product Manager and a Senior Marketing Consultant. These increases were partially offset by decreased costs associated with attending trade shows.salaries.
General and administrative expenses.expenses
General and administrative expenses consist primarily of the costs related to the executive, human resources/training quality assurance/regulatory affairs, departments, finance, and information technology functions of the Company.
Contributing to the quarters ended September 30, 2017 and 2016 comparison were cost decreases from the prior year. Those include decreases to payroll as a result of the re-organization of the finance department with reduced head count, decreased legal expenses, audit fees, and public company related fees. These cost decreases were partially offset in the quarter ended September 30, 20162017 by increases associated with share-based compensation, and 2015 comparison were increased salary, benefits, and share-based compensationemployment hiring expenses related to the hiring of the Director of Quality Assurance and Regulatory Affairs and the Senior Accountant in June 2016, and the Vice President of Human Resources and Training in July 2016. There were also increased public company expenses related to the executive compensation review by an independent consultant and the attendance of the Company’s Chief Executive, Financial and Operating/Scientific Officers to the Rodman & Renshaw investor conference.Controller.
Non-operating income (expense).
Interest income consists primarily of interest earned on certificates of deposit in the CDARS system which are FDIC insured.
The warrant derivative liability requires periodic evaluation for changes in fair value. For the quarter ended September 30, 2016 and 2015, the Company evaluated the fair value of the warrant derivative liability using the Black-Scholes option pricing model and applied updated inputs as of those dates. The resulting change in fair value was recorded during the quarters ended September 30, 2016 and 2015.
Other income consists primarily of gains on asset disposals and other revenues not attributed to the Company’s core business products. In the quarter ended September 30, 2016 the Company recorded a gain of approximately $5,000 on asset disposals and approximately $16,000 of refunds resulting from an audit performed on one of our vendors.
Liquidity and capital resourcesresources.
The Company assesses its liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. The Company has historically financed its operations through selling equity to investors. During the quarterquarters ended SeptemberSeptember 30, 20162017 and 2015,2016, the Company used existing cash reserves to fund its operations and capital expenditures (in thousands except current ratio).:
Quarter | Three months | |||||||||||||||
ended September 30, | ended September 30, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
Net cash used by operating activities | $ | (1,353 | ) | $ | (1,109 | ) | $ | (1,661 | ) | $ | (1,353 | ) | ||||
Net cash used by investing activities | (327 | ) | (2,577 | ) | ||||||||||||
Net cash provided by financing activities | - | 47 | ||||||||||||||
Net decreases in cash and cash equivalents | $ | (1,680 | ) | $ | (3,639 | ) | ||||||||||
Net cash provided (used) by investing activities | (315 | ) | (327 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | $ | (1,976 | ) | $ | (1,680 | ) | ||||||||||
Working capital | $ | 13,801 | $ | 14,409 | $ | 7,799 | $ | 13,801 | ||||||||
Current ratio | 13.28 | 16.47 | 8.31 | 13.28 |
Cash flows from operating activities
Net cash used by operating activities in the quarterthree months ended September 30, 20162017 was primarily due to a net loss of approximately $1.5$1.55 million, net of approximately $81,000$128,000 in adjustments for non-cash activity such as depreciation and amortization expense, the change in fair value of the warrant derivative liability and share-based compensation. Changes in operating assets and liabilities contributedused approximately $64,000$243,000 to the cash providedfund operating activities; increases to prepaid expenses and other current assets, along with decreases to accrued radioactive waste disposal and accrued payroll and related taxes, were partially offset by operating activities, such as improved effectiveness fromdecreases in accounts receivable collection efforts which was offset by the timing ofresulting from improved collections as well as an increase in accounts payable and accrued expenses.expenses resulting from better cash management procedures to more effectively utilize payment terms.
Cash flows from investing activities
Investing activities consisted of transactions related to the purchase of fixed assets, including automation of production processes and advance planning and design work on the Company’s new production facility, as well as the purchase and subsequent maturity of certificates of deposit. Management will continue to invest in technology and machinery that improves and streamlines production processes and to invest and reinvest maturing certificates of deposit in low-risk investment opportunities that safeguard assets and provide greater assurance those resources will be liquid and available for business needs as they arise.
Cash flows from financing activities
Financing activities in the quarter ended September 30, 2015 were due to sales of common stock through option exercises.
Projected 2017 LiquidityProjected 2018 liquidity and Capital Resourcescapital resources
Operating activities
Management forecasts that fiscal 2017 cash requirements will be similar to previous years and that current cash and cash equivalents along with certificates of deposit (current and non-current) will be sufficient to meet projected operating cash needs for the coming year.remainder of fiscal 2018. Assuming no extraordinary expenses occur (whether operating or capital), if management is successful at implementing its strategy to focus onof renewed emphasis to driveon driving the consumer to the prostate market, and meets or exceeds its annual growth targets of twenty percent increase in revenue in fiscal 20172018 and this annual growth continues, the Company anticipates reaching cashflow break-even in three to five years. Although the Company did not reach that target of twenty percent increased revenue in the first quarter of fiscal 2018, the Company is continuing to project revenue growth in fiscal 2018 of at least twenty percent over fiscal 2017. There is no assurance that the targeted sales growth will materialize butover the next three to five years. However, management is encouraged by the results for the quarter ended September 30, 2017 and with the depth and experience of its restructured sales team.
Capital expenditures
Management is inhas completed the design process of a future productionproduction and administration facility. If financing is obtained and the facility constructed, it is believed that the new facility will have non-cash depreciation cost equal to or greater than the monthly rental cost of the current facility.
Management is reviewingreviewing and implementing changes in all aspects of production operations (including process automation), research and development, sales and marketing, and general and administrative functions to evaluate the most efficient deployment of capital to ensure that the appropriate materials, systems, and personnel are available to support and drive product sales. Through
During the quarter ended September 30, 2016,2017, the Company has invested approximately $110,000 towards$44,000 in the automation of thirteen production processes, three of which have been received, are being tested and evaluated, and are expected to bewere placed in service in the coming quarter. ManagementOne additional machine has been received and is currently being tested. Beginning in fiscal 2017 and continuing through September 30, 2017, the Company has invested approximately $349,000 in these automation projects and management is expecting to invest approximately $390,000$260,000 more during fiscal 2017over the next 11 months on the remaining production process automation projects. This investment is designed to allow the Company to significantly increase the output of Cs-131 brachytherapy seeds, while allowing the Company to controldecrease the highest cost inputslabor costs related to seed production whileand also improving the overall safety of our operations.
Financing activities
There was no material change in the use of proceeds from our public offering as described in our final prospectus supplement filed with the SEC pursuant to Rule 424(b) on March 24, 2014. Through JuneSeptember 30, 2016,2017, the Company had used the net proceeds raised through the March 2014 offering as described in the public offering. No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of our equity securities or to any other affiliates.
On August 25, 2015, the Company filed a registration statement on Form S-3 to registerregister securities up to $20 million in value for future issuance in our capital raising activities. The registration statement became effective on November 19, 2015, and the SEC file number assigned to the registration statement is 333-206559.
The CompanyCompany expects to finance its future cash needs through sales of equity, possible strategic collaborations, debt financing or through other sources that may be dilutive to existing shareholders,shareholders. Management anticipates that if it raises additional financing that it will be at a discount to the market price and it will be dilutive to shareholders.
The Company’s common stock is currently listed on the NYSE American stock exchange, which will consider delisting a company’s securities if, among other things, a company fails to maintain minimum stockholder's equity. With the Company’s existing cash reserves we believe we will not be able to maintain our listing on the NYSE American unless we raise capital in the next six to nine months assuming we maintain our projected budgeted expenses and contemplated level of revenues.
Other Commitmentscommitments and Contingenciescontingencies
The Company presented its other commitments and contingencies in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016.30, 2017. There have been no material changes outside of the ordinary course of business in those obligations during the quarter ended September 30, 20162017 other than those previously disclosed in Notefootnotes 8 and 12 of Notes to the interimunaudited consolidated financial statements contained in this Form 10-Q.filing.
Off-Balance Sheet ArrangementsOff-balance sheet arrangements
The Company has no off-balance sheet arrangements.
Critical Accounting Policiesaccounting policies and Estimatesestimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as revenue and expenses during the reporting periods. The Company evaluates its estimates and judgments on an ongoing basis. The Company bases its estimates on historical experience and on various other factors the Company believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. Actual results could therefore differ materially from those estimates if actual conditions differ from our assumptions.
During the quarter ended September 30, 2016,2017, there have been no changes to the critical accounting policies and estimates as discussed in Part II, Item 7 of our Form 10-K for the year ended June 30, 2016.2017.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the disclosure in the “Quantitative“Quantitative and Qualitative Disclosures about Market Risk Factors” section of our Annual Reportannual report on Form 10-K for the year ended June 30, 2016.2017.
ITEM 4 – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the design and operation of our disclosure controls and procedures, as such term is defined under Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of September 30, 2016.2017. Based on that evaluation, our principal executive officer and our principal financial officer concluded that the design and operation of our disclosure controls and procedures were effective. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, management believes that our system of disclosure controls and procedures are designed to provide a reasonable level of assurance that the objectives of the system will be met.
Changes in Internal Control over Financial ReportingReporting
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The Company may, in the ordinary course of business, be subject to various legal proceedings. LegalSome legal proceedings areare discussed in Notefootnote 8 of Notes to CondensedUnaudited Consolidated Financial Statements (Unaudited).contained in this filing. We refer you to that discussionfootnote for important information concerning those legal proceedings, including the basis for such actions and, where known, the relief sought. We provide the following additional information concerning those legal proceedings, including the name of the lawsuit, the court in which the lawsuit is pending, and the date on which the petition commencing the lawsuit was filed.
Class Action Lawsuit Related to Press Release
On May 22, 2015, the first of three lawsuits was filed against IsoRay, Inc. and two of its officers – Dwight Babcock (the Company’s retired CEO) and Brien Ragle, CFO – related to a press release on May 20, 2015 regarding a May 19 online publication of the peer-reviewed article in the journal Brachytherapy titled “Analysis of Stereotactic Radiation vs. Wedge Resection vs. Wedge Resection Plus Cesium-131 Brachytherapy in Early-Stage Lung Cancer” by Dr. Bhupesh Parashar, et al. The lawsuits are class actions alleging violations of the federal securities laws. By Order dated August 17, 2015, all of the pending lawsuits were consolidated into one case – In re IsoRay, Inc. Securities Litigation; Case No. 4:15-cv-05046-LRS, in the US District Court for the Eastern District of Washington. On October 16, 2015, an amended complaint was filed with more detailed allegations relating to alleged violations of federal securities laws. On December 15, 2015, IsoRay filed a motion to dismiss the complaint altogether. On June 1, 2016, the court entered an order denying IsoRay's motion to dismiss, holding that the complaint's allegations, if accepted as true, state a plausible claim to relief. The order did not adjudicate the merits of the lawsuit. No other issues were decided in the ruling.
On June 15, 2016, IsoRay filed their answer to the amended complaint. As IsoRay previously disclosed, on September 23, 2016, the parties entered into a stipulation of settlement which, if it becomes final, will provide for a payment to the plaintiff class of $3,537,500, which will be paid by our insurers. On October 4, 2016, the stipulation of settlement was filed with the court, along with plaintiffs’ unopposed motion for preliminary approval of the settlement. On October 20, 2016, the court granted preliminary approval of the settlement. Following notice to class members, the class action is subject to final approval by the court. A final approval hearing is scheduled for March 7, 2017. If the proposed settlement is not approved by the court or if IsoRay is otherwise unable to obtain a favorable resolution of the claims set forth in the complaint, the lawsuit could have a material adverse effect on our business, results of operations and financial condition.
Derivative Complaint related to shareholder valueShareholder Value
On September 29, 2016, a purported shareholder derivative complaint captionedDavid M. Kitley, v. Babcock, et al., No. 0:16-cv-03297, was filedpurportedly on behalf of the CompanyIsoRay, filed a derivative lawsuit in the United States District Court for the District of Minnesota against certain ofunder the Company’scase caption Kitley v. IsoRay, Inc., Case No. 0:16-cv-03297-DTS. The complaint named as defendants current and former officersIsoRay directors Dwight Babcock, Thomas LaVoy, Philip J. Vitale and directors. The complaint allegesMichael W. McCormick, alleging that the defendants breachedthey violated their fiduciary duties by causing the Company to issueIsoRay in connection with a press release allegedly containing false and misleading statements in a May 20, 2015 press release – the same press release at issue in the pending securities class action – concerning the results from a peer reviewed study of its Cesium-131 isotope seeds and mesh product for the treatment of non-small cell lung cancers.cancers, thereby artificially inflating the price of IsoRay stock. The complaint bringssought unspecified damages, in an amount not presently determinable, among other forms of relief.
On November 17, 2016, IsoRay moved to dismiss the complaint, arguing that plaintiff was not entitled to pursue his derivative claims due to his failure to serve a pre-suit demand on IsoRay’s board. Rather than respond to the motion to dismiss, plaintiff filed an amended complaint on January 23, 2017. The amended complaint alleged the same derivative claims as the original, and added IsoRay director Alan Hoffmann as a defendant. Plaintiff sought an award of breachdamages and an order directing IsoRay to undertake reforms of fiduciary duty, gross mismanagement, and unjust enrichment, and seeks unspecified compensatory damages, changes inits corporate governance and attorney’s feesinternal procedures. IsoRay moved to dismiss the amended complaint on March 9, 2017. Plaintiff responded on April 20, 2017, and costs. BecauseIsoRay replied on May 17, 2017. The court heard oral argument on the complaintmotion on August 22, 2017, and took the matter under advisement at that time. On October 19, 2017, the court granted IsoRay’s motion to dismiss. The matter is derivative in nature, it does not seek monetary damages from the Company. The Company may be obligated pursuant to indemnification obligations to advance fees and costs incurred by the individuals defending against the action. The Company has applicable directors and officers insurance policies. Defendants’ response to the complaint is due November 17, 2016.now resolved.
A description of the risk factors associated with our business is included under “Risk“Risk Factors” contained in Part I, Item 1A of our annual report on Form 10-K for the year ended June 30, 2016,2017, and is incorporated herein by reference. There have been no material changes in our risk factors since such filing, except for the following:
We Rely Heavily On Fiveon Four Customers
For the quarterthree months ended September 30, 20162017 approximately 48%54% of the Company’sCompany’s revenues were dependent on five customers with nearly 22%approximately 26% being generated by one customer.physician group. The loss of any of these customers would have a material adverse effect on the Company’s revenues whichthat may not be replaced by other customers particularly as these customers are in the prostate sector which is facing substantial competition from other treatments.
We May Need Additional Capital In The Future To Maintain Our NYSE American Listing And For Acquisitions And Expansion Into Other Markets.
Our common stock is currently listed on the NYSE American stock exchange which will consider delisting a company’s securities if, among other things, a company fails to maintain minimum stockholder's equity. With our existing cash reserves we believe we will not be able to maintain our listing on the NYSE American unless we raise capital in the next six to nine months assuming we maintain our projected budgeted expenses and contemplated level of revenues. In the event that our common stock is delisted from the NYSE American, trading, if any, in the common stock would be conducted in the over-the-counter market. As a result, our shareholders would likely find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our common stock. We may also need to raise capital for strategic acquisitions or expansion into other markets and there is no assurance management will not pursue this additional capital if available.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEMITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - MINE SAFETY DISCLOSURES
Not applicable.
None.None
Exhibits: | ||
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer | ||
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer | ||
101.INS* | XBRL Instance Document | |
101.SCH* | XBRL Taxonomy Extension Schema Document | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document
| |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith.herewith
** Furnished herewith
*** Denotes Management Contract or Compensatory Plan or Arrangement
Pursuant to the requirements 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.
Dated: November | ||
ISORAY, INC., a Minnesota corporation | ||
/s/ Thomas C. LaVoy | ||
Thomas C. LaVoy | ||
Chief Executive Officer
| ||
/s/Mark J. Austin | ||
Mark J. Austin | ||
Controller |
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