ISORAY, INC.

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Isoray, Inc.

Notes to the Unaudited Consolidated Financial Statements

For the quarterthreemonths ended September 30, 20192020 and 20182019

Inventory, non-current represents 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, the Company entered into a Consignment Agreement and related Services Agreement with MedikorPharma-Ural LLC to begin utilizing our enriched barium-130 carbonate inventory. The Company originally anticipatedanticipates obtaining enough Cesium-131 under this arrangement to obtain overapproximately 4,000 curies of Cesium-131. During the three months ended September 30, 20192020, the Company obtained 31did not obtain any curies of Cesium-131 under this agreement which has been used in production.agreement. At September 30, 2019,2020, the Company estimates that the remaining enriched barium will result in 894 curies; approximately 6062 of which will be obtained in the next twelve months and 834832 will be obtained after September 30, 2020.2021. There is no assurance as to whether the agreement will be terminated before this full amount is obtained and other supply sources are used, nor is there assurance that the agreementsthird-party reactor which relies on this Consignment Agreement will be used by the Cesium-131 supplier under contract with the third-party Cesium-131 suppliers will be executed.Company.

¹ Plant and equipment, not placed in service are 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, and therefore, no depreciation expense has been recognized. Also included at September 30, 20192020 and June 30, 20192020 are costs associated with advance planning and design work on the Company’s new production facility of approximately $207,000. The advance planning and design work was primarily incurred in fiscal year 2017. The new production facility is currently on hold as the Company has sufficient production capacity to meet future demands and while the Company focuses its resources on revenue growth. It is anticipated that the Company will continue work on the new production facility in the next four to five years.

As of September 30, 2019,2020, total unrecognized compensation expense related to stock-based options was approximately $537,000$585,000 and the related weighted-average period over which it is expected to be recognized is approximately 0.981.15 years.

A summary of stock options within the Company’s share-based compensation plans as of September 30, 20192020 was as follows (in thousands except for exercise prices and terms):

There were no stock options exercised during the three months ended September 30, 20192020 and 2018,2019, respectively. The Company’s current policy is to issue new shares to satisfy stock option exercises.

There were 10,00040,000 and 82,50010,000 option awards granted with a fair value of approximately $3,000$18,000 and $35,000$3,000 during the three months ended September 30, 20192020 and 2018,2019, respectively.

There were 8,2502,000 and 10,0008,250 stock option awards which expired during the three months ended September 30, 20192020 and 2018,2019, respectively.

There were 26,2502,500 and 38,75026,250 stock option awards forfeited during the three months ended September 30, 2020 and 2019, and 2018, respectively.

Asset Retirement Obligation

The Company has an asset retirement obligation (ARO) associated with the facility it currently leases. In connection with the lease modification executed in July 2019, the ARO changed as follows (in thousands):

The original facility lease was scheduled to expire in the fourth quarter 2016. Upon the end of the original lease term, the initial asset retirement estimate was fully accreted and the related ARO asset was fully amortized. During the three months ended September 30,In July 2019, the Company extended the lease term an additional five years thus extending the time before asset retirement costs would be incurred. This resulted inThe Company estimated retirement costs to be $704,000, which was discounted utilizing an interest rate of 5.1% for a decrease in thenew ARO balance to a fair valueliability of $555,000, anda reduction of $73,000. At the time of extension, the asset retirement asset had been fully amortized, thus the Company recognized a gain on change in the estimate of $73,000$73,000.

In a concurrent private placement, the Company sold to each Investor, at no additional consideration, unregistered warrants to purchase up to the number of shares of common stock of the Company equal to 50% of such Investor’s Shares or a total of 5,500,000 shares, with an exercise price of $0.75 per share, exercisable from January 11, 2019 until January 11, 2024 (the “Investor Warrants”). The Company also issued warrants to purchase up to 330,000 shares of common stock of the Company, at an exercise price of $0.9375, to representatives of H.C. Wainwright & Co., LLC (“Wainwright”), the placement agent for the registered direct offering, as part of its compensation (the “Placement Agent Warrants” and together with the Investor Warrants, the “Warrants”).

The aggregate number of shares of our common stock issuable upon the exercise of the Warrants is 5,830,000 shares relating to this offering. We will receive gross proceeds from this offering solely to the extent any Warrants are exercised for cash.

On October 22, 2020, the Company sold 18,269,230 shares of its common stock at a price of $0.52 per share, for aggregate gross proceeds of $9,500,000, pursuant to the registration statement on Form S-3 that became effective on February 4, 2020. The Company intends to use the net proceeds from the offering, estimated at approximately $8,660,000, to fund operations, research and development efforts, potential future acquisitions of complementary businesses or technologies, sales and marketing initiatives, and for general corporate purposes, including general and administrative expenses, capital expenditures, and for general working capital purposes. Additionally, the Company issued to the purchasers warrants to purchase up to 9,134,615 shares of common stock. The warrants have an exercise price of $0.57 per share common stock, are exercisable immediately, and expire five years from the date of issuance. If exercised for cash, future exercises of these warrants will provide additional capital to the Company. Additionally, the 59,065 shares of Series B preferred stock automatically converted into 59,065 shares of common stock as a result of this offering. As a result of this recent capital raise, the Company does not anticipate the need to finance its operations for the next fiscal year from additional capital raises.

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-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (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, 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,” 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 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 Item 1A - Risk Factors beginning on page 19 below that may cause actual results to differ materially.

Consequently, all of the forward-looking statements made in this Form 10-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’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’s financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with 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 SEC on September 27, 201925, 2020 are those that depend most heavily on these judgments and estimates. As of September 30, 20192020 there had been no material changes to any of the critical accounting policies contained therein.

Overview

Isoray is a brachytherapy device manufacturer with FDA clearance 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.seed or Cesium Blu.

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 yielding 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. 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 has distributors in the Russian Federation, Peru and PeruIndia with nonominal reported revenues in these locations during the three months ended September 30, 2019.2020.

The Company has a supply agreement with The Open Joint Stock Company <<Isotope>>, a Russian company, for the supply of Cesium-131 which was recently extended by an addendum through December 31, 2019 and the volume was also modified. Under the addendum, current pricing and volumes for Cesium-131 purchases remained in place until May 31, 2019. On July 11, 2019, another addendum was signed extending the pricing terms until August 4, 2019. On July 30, 2019, a new supply contract was signed with The Open Joint Stock Company for a term of August 20192020 to December 2020 as the Company had purchased the maximum amount of Cesium-131 permitted under the prior agreement. The Company also has a consignment inventory agreement with MedikorPharma-Ural LLC (“Medikor”) to process the Company’s enriched barium at another nuclear reactor in Russia. The term of this consignment agreement began in November 2017 and is for 10 years.2021. Our source of supply of Cesium-131 from Russia is historically produced using one of two nuclear reactors which supply the irradiation needed for Cesium-131 production. One of the Russian nuclear reactors was shut down from December 2017 until August 2018, and the other Russian nuclear reactor shut down in August 2019 and is scheduledcontinues to be shut down into 2020.in 2020 for an indeterminate period. As a result of these scheduled shutdowns only one of the Company's historic Russian suppliers of Cesium-131 will beis available during these periods. The Company also has a consignment inventory agreement with MedikorPharma-Ural LLC (“Medikor”) to process the Company’s enriched barium at another nuclear reactor in Russia. The term of this consignment agreement began in November 2017 and is for 10 years.

The Company continues to explore how our proprietary isotope may be effective in the treatment of additional cancers. We recently entered into a research grant agreement with a leading cancer center to study the treatment of metastatic melanoma. In this immuno-oncology study, Cesium-131 will be used in combination with an immune checkpoint inhibitor. Metastatic melanoma is the most virulent form of skin cancer, often spreading to lymph nodes, the lungs, liver, brain, and tissue under the skin. This study follows our recently announced agreement with the University of Cincinnati to study the combination of Cesium-131 with the immunotherapy drug Keytruda® in recurrent head and neck cancers.

The Company recently filed a provisional patent application for a device designed to achieve directional dosing using our Cesium-131 seeds. This device is a bed that holds the Cesium-131 seeds to focus the radiation to a specific treatment area. The device is fixed to a directional mesh that can be used to treat pancreatic cancers as well as retroperitoneal sarcomas. We see unidirectional brachytherapy utilizing Cesium-131 as a highly attractive potential therapy for advanced abdominal cancers as well. In this practical application, the device would be aimed at cancers of the abdomen that invade the abdominal wall and pelvic floor, such as advanced cancers of the colon and rectum and advanced GYN cancers such as ovarian and uterine cancers. The directional dosing device will likely be used initially with the recurrent cancers mentioned above, where external beam radiation therapy has previously been administered.

Results of Operations

Three months ended September 30, 20192020 and 20182019 (in thousands):

Sales

Sales, net for the three months ended September 30, 20192020 increased 48%3% compared to the three months ended September 30, 2018.2019. The Company’s sales personnel continued to bring on new accounts while also working with existing customers to increase their order volumes. The Blu Build™ loader while in a limited market release, also helped to increase revenues during the three months ended September 30, 2019.2020. 

The sales breakdown between prostate and non-prostate applications is set forth below.

(a)    Expressed as a percentage of sales, net

Prostate Brachytherapy

Prostate sales growth ofdecreased by approximately 51%9% during the three months ended September 30, 20192020 compared to the three months ended September 30, 2018 was achieved2019. We believe that due to a sustainedstay-at-home orders in various states and hospitals’ focus on acquiring new accounts through physician training programs and marketing campaigns along with continued support of existing customersCOVID-19, patients’ brachytherapy procedures were either delayed or cancelled. This led to help them grow their business. Whilea decrease in sales for prostate treatments during the quarter ended September 30, 2020 compared to the quarter ended September 30, 2019. The decrease in sales volume was partially offset by a limited market release,price increase that occurred in January 2020. Also during the three months ended September 30, 2020, the Blu Build™ loader also contributedwas launched into full market release resulting in increased revenue compared to prostate revenue growth as it was sold to new customers that desired the intraoperative loader system. The Company continues to update its website and other marketing collateral as well as attending tradeshows to acquire new leads for our sales personnel. Also, the website along with some social media campaigns have been used to educate patients about the availability of Cesium-131 as a treatment option.three months ended September 30, 2019.

Management believes continued growth in prostate brachytherapy revenues will be the result of physicians, payors, and patients increasingly considering overall treatment advantages including costs compared with non-brachytherapy treatments, better treatment outcomes and improvement in the quality of life for patients. We believe the trend to use brachytherapy in lieu of other options is starting to improve our performance but there is no assurance as to how long this trend will continue.

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, during the three months ended September 30, 2019.2020.

Other SalesSales

Other sales includes, but is not limited to, brain, lung, head/neck, gynecological treatments, and services. Other sales, net increased by 30%104% for the three months ended September 30, 20192020 compared to the three months ended September 30, 2018.2019. The main driver of this growth was increased treatments for brain cancer including GammaTile™. 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.

Other brachytherapy treatments are 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 of physicians. This causes the revenue created by these types of treatment applications to be more volatile and varies significantly from year to year. Additionally, with other brachytherapy surgical procedures there remains inconsistency and uncertainty regarding reimbursement for the procedures. This unreliable reimbursement for these new procedures will remain until specific coding and coverage policies are established, which could take years. Individual centers weigh the value of the procedure with their other treatment priorities on a patient by patient basis. 

Other brachytherapy treatments, such as brain, lung, and head/neck are typically performed in the in-patient setting using the DRG or diagnostic related groups. DRGs are designed for Medicare and other health insurers to set payment levels for hospital in-patient services. When these other types of brachytherapy are performed in the out-patient setting existing codes for Cesium-131 that are also used for prostate brachytherapy are used to bill for these procedures.

In May 2020, the Centers for Medicare and Medicaid Services (CMS) approved 64 ICD-10-PCS billing codes used for reimbursement of Cesium-131 for the hospital in-patient DRG setting. The codes allow hospitals to bill Medicare and other health insurers for specific surgical procedures that would benefit from the addition of Cesium-131.

The 64 ICD-10-PCS codes are important for the growing surgical applications of Cesium-131 in treating a significant range of hard to treat cancers including brain, lung, head and neck, abdominal, gynecological, pelvic, and colorectal cancers. The new codes took effect on October 1, 2020 and management believes they will provide greater impetus for usage as now CMS will be able to track the additional cost of the Cesium-131 seed itself and be able to reimburse the hospital through the DRG payment system for this additional costs when an in-patient brachytherapy procedure is performed. Isoray believes that additional clinical data and these new billing codes will begin to build a compelling argument to support reimbursement and increased adoption of the procedures; however, any growth will be inconsistent in the near term.

GammaTile™

For several years the Company has focused on many different applications of its Cesium-131 brachytherapy seeds in the cranial cavity to target many forms of brain cancer. Most recently, the Company has focused on using braided strand configurations and on being a contract manufacturer of GammaTile™ Therapy which is owned by GT Medical Technologies, Inc. (GT Med Tech). GammaTile™ Therapy uses biodegradable “tiles” to deliver Cesium-131 brachytherapy seeds into contact with cancerous tumors in the brain.

Currently, GammaTile™ Therapy iswas originally cleared for treating recurrent brain cancers.  Recently, GT Med Tech filed a 510k with the FDA on an expanded indication of GammaTile™ Therapy to include treatment of newly diagnosed brain tumors. If cleared this could lead to a growing opportunity for the expandedtumors with an application of Cesium-131. As of September 30, 2019, we understand thatOn January 27, 2020, GT Med Tech hasannounced that it had received clearance from the FDA for an expanded indication under active reviewthat will allow patients of newly diagnosed malignant brain tumors to be treated by the FDA.GammaTile™ Therapy. For the three months ended September 30, 2019,2020, total revenues from sales to GT Med Tech were nominal. There were no salesless than ten percent (10%) of sales. Sales to GT Med Tech for the three months ended September 30, 2018 as2019 were nominal. GT Med Tech began the limited market release of GammaTile™ Therapy in January 2019. While GT Med Tech continueshas indicated it intends to assure Isoray that itsincrease sales and marketing efforts will show steady improvements in salesduring the Company’s fiscal year 2021, but there is no assurance that this will occur.

Cost of sales

Cost of sales consists primarily of the costs of manufacturing and distributing the Company’s products.

Contributing to the quartersslight increase in the quarter ended September 30, 2019 and 2018 comparison were increased other direct materials purchases as well as increased labor to meet production demand due to improved sales. Although sales improved dramatically, the increase in cost of sales was only nominal primarily as a result of cost savings in isotope due to the termination of use of our domestic isotope supplier that occurred in fiscal year 2019 which resulted in lower isotope unit costs2020 compared to the quarter ended September 30, 2018 and more efficient2019 were small increases in isotope usage driven bycosts as well as in labor. Higher freight costs for isotope were due to the increased revenue that leduse of cargo flights rather than passenger flights to transport the isotope from Russia to our facility. In addition, due to lower losses ofthan anticipated sales volumes we had excess isotope on hand which went unused. Labor costs increased slightly mainly due to decay.annual merit increases for production personnel.

Gross Profit

Contributing to the three months ended September 30, 20192020 and 20182019 gross profit comparison were increasedhad a slight increase due to a slight increase in sales partially offset by small increases in isotope costs due to higher freight costs and significantly lower isotope unit costs comparedpayroll due to the prior year comparable period, continued leverage of the fixed cost components within costs of sales, and more efficient isotope usage. The lower isotope unit costs are related to the previously discussed change in our supply chain made at the end of calendar year 2018.annual merit increases.

Research and development

Total research and development expense decreased 45%increased 34% as compared to the quarter ended September 30, 2018.2019.

Research and development – proprietary

Proprietary research and development consists primarily of employee and third party costs related to research and development activities.

Contributing to the quarters ended September 30, 20192020 and 2018 proprietary2019 research and development comparison were a decreasewas an increase in protocol expense primarily relating to anew research agreements as well as during the quarter ended September 30, 2019 the Company mutually-agreed termination ofto terminate a grant agreement which resulted in a reversal of the accrual andwhich was not repeated during the quarter ended September 30, 2020. This increase was offset by a reduction in investment in the development of the Blu Build™ delivery system for real-time prostate brachytherapy.

Research and development – collaborative arrangement

Collaboration arrangement related costs are incurred, shared, and separately stated in connection with a collaborative research and development project.

Contributing to the quarters ended September 30, 2019 and 2018 comparison were decreased costs due to the fact that payments being made pursuant to the collaborative arrangement with GammaTile, LLC were no longer necessary, as the collaborative arrangement primarily related to work involved in obtaining 510(k) clearance, which has now been obtained.

Management believes that research and development expenses will return to near historic normscontinue at this level as we do not anticipate accrual reversals in the future and other increases are likelywe continue to explore for new projects and collaborations planned in the future.collaborations.

Sales and marketing expenses

Sales and marketing expenses consist primarily of the costs related to the internal and external activities of the Company’s sales, marketing and customer 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, 20192020 and 20182019 comparison was an increasea decrease in travel and tradeshow costs as a tradeshow that occurred in October 2018 occurred in September 2019.due to COVID-19 restrictions. Incentive compensation increaseddecreased for the quarter ended September 30, 20192020 in connection with the increaseless growth in revenue.

General and administrative expenses

General and administrative expenses consist primarily of the costs related to the executive, human resources/training, quality assurance/regulatory affairs, finance, and information technology functions of the Company.

Contributing to the quarters ended September 30, 20192020 and 20182019 comparison were various cost increases. Those include increasedecreased travel costs due to COVID-19 restrictions as well as decreased employee hiring costs, partially offset by increased director and officer insurance expense.

Impact of COVID-19

From the onset of the COVID-19 global health pandemic we have been proactive in headcount, salary increases implemented in July 2019,implementing plans to ensure the health and incentive compensation relatedwell-being of our employees, while remaining focused on providing uninterrupted product flow to the increasephysicians and patients who count on us. We seamlessly transitioned many employees to work from home and made other adjustments to ensure the continuity of our business through this time. At the beginning of the pandemic, we moved quickly to ensure that our inventory of non-isotope supplies were appropriate in revenue.case our supply chain was disrupted. In addition, we set in motion our strategy to maintain a continuous and uninterrupted supply of isotope from our suppliers in Russia including the review and use of alternative freight services due to the cancellation of many international flights.

As COVID-19 began to spread, many states implemented new guidelines in an attempt to mitigate the spread of the virus and to conserve certain medical supplies. Those guidelines led to the cancellation or postponement of elective and non-emergency surgical procedures, including prostate brachytherapy procedures.  During the first quarter of fiscal 2021, although our sales revenues increased 3% compared to the first quarter of fiscal 2020, we were still below the average monthly revenues attained in our third quarter of fiscal 2020 prior to the outset of COVID-19's impact on our operations. We believe this is due to stay-at-home orders and hospitals focused on COVID-19 due to the pandemic resulting in a delay or cancellation of patients scheduled to be seen by physicians. This resulted in fewer or delayed urology referrals for prostate brachytherapy treatment.

As more states gradually lifted restrictions on non-essential surgeries and other activities, we received customer feedback of anticipated increases in implant volumes as patients begin returning from quarantines for office visits and consultations but there is no assurance this will occur or be sustained, particularly with the recent spike in COVID-19 cases in various locations.  In the meantime, we continue to tightly manage our expenses and make fluid adjustments to isotope orders to meet potential increased treatment demands.

Liquidity and capital resources

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 quarters ended September 30, 20192020 and 2018,2019, the Company used existing cash reserves to fund its operations and capital expenditures (in thousands except current ratio):

Cash flows from operating activities

Net cash used by operating activities in the three months ended September 30, 2020 was primarily due to a net loss of approximately $713,000, net of approximately $137,000 in adjustments for non-cash activity such as depreciation and amortization expense, share-based compensation, and accretion of asset retirement obligation. Changes in operating assets and liabilities provided approximately $238,000 from operating activities; decreases to accounts receivable due to increased collection efforts and prepaid expenses, and increases in accounts payable, accrued protocol expense, accrued vacation, and accrued radioactive waste disposal were partially offset by a decrease in accrued payroll and related taxes and increased inventory purchases.

Net cash used by operating activities in the three months ended September 30, 2019 was primarily due to a net loss of approximately $809,000, net of approximately $37,000 in adjustments for non-cash activity such as depreciation and amortization expense, share-based compensation, and change in estimate of asset retirement obligation. Changes in operating assets and liabilities provided approximately $90,000 from operating activities; decreases to prepaid expenses and increases to accounts payable and accrued expenses and accrued payroll and related taxes were partially offset by increases in accounts receivable resulting from higher sales as well as a decrease in accrued protocol expense primarily relating to a mutually-agreed termination of a grant agreement.

Net cash used by operating activities in the three months ended September 30, 2018 was primarily due to a net loss of approximately $1.51 million, net of approximately $140,000 in adjustments for non-cash activity such as depreciation and amortization expense, and share-based compensation. Changes in operating assets and liabilities used approximately $249,000 to fund operating activities; increases to prepaid expenses and decreases to accounts payable and accrued expenses and accrued payroll and related taxes were partially offset by decreases in accounts receivable resulting from improved collections as well as an increase in accrued protocol expense.agreement.

Cash flows from investing activities

Investing activities for the three months ended September 30, 2020 and 2019 respectively, consisted of transactions related to the purchase of fixed assets, including automation of production processes.assets. Management will continue to invest in technology and machinery that improves and streamlines production processes and to invest 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.

Investing activities for the three months ended September 30, 2018 consisted of transactions related to the purchase of fixed assets, including automation of production processes, as well as the purchase and subsequent maturity of certificates of deposit.

Cash flows from Financing activities

There were no financing activities in the quarter ended September 30, 2019.

Financing activities in the quarter ended September 30, 2018 were due to the sale of common stock through a registered direct offering.2020 and 2019 respectively.

Projected fiscal 20202021 liquidity and capital resources

Operating activities

Assuming no extraordinary expenses occur (whether operating or capital), if management is successful at implementing its strategy of renewed emphasis on driving the consumer to the prostate market, meets or exceeds its annual growth targets of about twenty-five percent increase in revenue in fiscal 20202021 and this annual growth continues, the Company anticipates reaching cash flow break-even in three to four years.years. The Company exceededmissed that target of twenty-five percent increased revenue in the first quarter of fiscal 2020.2021. There is no assurance that targeted sales growth will continue over the next three to four years. However, management is encouraged by the results for the quarter ended September 30, 2019.

Capital expenditures

Management has completed the design of a future production and administration facility.facility but has not determined when or if it will move ahead with construction. 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 reviewing 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 sales.

During the three months ended September 30, 2019,2020, the Company invested approximately $72,000did not invest in the automation of production processes. Beginning in fiscal 2017 and continuing through September 30, 2019,2020, the Company has invested approximately $912,000$1,061,000 in the automation of five production processes, four of which have been placed in service as of the end of September 30, 2019.2020. Management expects to invest approximately $54,000$10,000 more over the next three months on the remaining automation projects, but there is no assurance that this amount will not be revised. This investment is designed to allow the Company to significantly increase the output of Cesium-131 brachytherapy seeds, while allowing the Company to decrease the labor costs related to seed production and 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 September 30, 2019, 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.

capital expenditures, and for general working capital purposes. Additionally, the Company issued to the purchasers unregistered warrants to purchase up to 5,500,0009,134,615 shares of common stock. The warrants have an exercise price of $0.75$0.57 per share of common stock, are exercisable commencing six months following the issuance date,immediately, and expire five and one-half years from the issuance date.date of issuance. If exercised for cash, future exercises of these warrants will provide additional capital to the Company. 

On October 19, 2018,As a result of this recent capital raise, the Company filed a Form S-1 registration statementdoes not anticipate the need to finance its operations for the registration of 5,830,000 shares of common stock to be received by the investors and representatives of Wainwright on exercise of warrants issued in connection with the registered direct offering completed on July 11, 2018. The Company may receive up to $4,434,375 in gross proceeds solely to the extent the warrants are exercised for cash. The Form S-1 registration statement became effective on December 14, 2018.next fiscal year from additional capital raises.

As of September 30, 2019, the Company had cash and cash equivalents that totaled $4.58 million compared to $5.33 million at the end of fiscal 2019 ended June 30, 2019. The Company has zero long-term debt. Shareholders’ equity at the end of fiscal first quarter 2020 totaled $6.96 million versus $7.68 million at the end of fiscal 2019.

The Company 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 stockholders.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 stockholders.shareholders.

Other commitments and contingencies

The Company presented its other commitments and contingencies in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.2020. There have been no material changes outside of the ordinary course of business in those obligations during the quarter ended September 30, 20192020 other than those previously disclosed in note 7 of the financial statements contained in this filing.

Off-balance sheet arrangements

The Company has no off-balance sheet arrangements.

Critical accounting policies and estimates

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 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, 2019,2020, there have been no changes to the critical accounting policies and estimates discussed in Part II, Item 7 of our Form 10-K for the year ended June 30, 2019.2020.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to the disclosure in the “Quantitative and Qualitative Disclosures about Market Risk Factors” section of our annual report on Form 10-K for the year ended June 30, 2019.Not Applicable

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 co-principal financial officers, 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) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of September 30, 2019.2020. Based on that evaluation, our principal executive officer and our co-principal financial officers 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 Reporting

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.

PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

Nothing to disclose.

ITEM 1A – RISK FACTORS

A description of the risk factors associated with our business is included under “Risk Factors” contained in Part I, Item 1A of our annual report on Form 10-K for the year ended June 30, 2019.2020. There have been no material changes in our risk factors since such filing, except for the following:

We Rely Heavily on FiveThree Customers

For the three months ended September 30, 20192020 approximately 48%42% of the Company’s revenues were dependent on fivethree customers with approximately 24%26% being generated by one group of customers. The loss of any of these customers would have a material adverse effect on the Company’s revenues that 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 MaintainRecent Novel Coronavirus (COVID-19) Outbreak Could Materially Adversely Affect Our NYSE American ListingFinancial Condition and Results of Operations.

COVID-19 may impact supply chain and product sales. Our Common StockCesium supply comes from Russia and while at this time we are not aware of any shutdowns of nuclear facilities in Russia or limited staffing due to ongoing risk of virus transmission this may occur in the future. We also depend on overseas flights which have been curtailed and any further flight cancellations may impact our supply chain. While our surgeries are not considered elective, in areas where hospitals are devoted to COVID-19 or other chronic conditions, surgeries required to implant our seeds may be postponed or cancelled, as occurred in late March and continued through much of April at numerous locations and impacted us again in September. If conditions worsen with the COVID-19 pandemic this may have a material adverse effect on our business.

The spread of COVID-19 has caused us to modify our business practices (including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, and suppliers. There is currently listedno certainty that such measures will be sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be harmed.

These and similar, and perhaps more severe, disruptions in our operations could negatively impact our business, operating results and financial condition. In addition, quarantines, stay-at-home, executive and similar government orders, or the perception that such orders, shutdowns or other restrictions on the NYSE American stock exchange which will consider delisting a company’s securities if, among other things, the company fails to maintain minimum stockholder’s equity. Although we previously believed we would need to raise capital sooner, with our recent positive quarterly results, we now believe that with our existing cash reserves we will not be able to maintain our listing on the NYSE American unless we raise capitalconduct of business operations could occur, could impact personnel at third-party manufacturing facilities in the next nineUnited States and other countries, or the availability or cost of materials, which would disrupt our supply chain.

The spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to twelve months assuming we maintainassess or predict, it has significantly disrupted global financial markets, and may limit our projected budgeted expenses and contemplated level of revenues. Inability to access capital, which could in the event thatfuture negatively affect our common stock is delistedliquidity. A recession or market correction resulting from the NYSE American, trading, if any, inspread of COVID-19 could materially affect our business and 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.

The ultimate impact of the COVID-19 outbreak or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, healthcare systems or the global economy as a whole. However, the effects could have a material impact on our operations, and we will continue to monitor the COVID-19 situation closely.

We Are Subject To Uncertainties Regarding Reimbursement For Use Of Our Product.

Hospitals and freestanding clinics may be less likely to purchase our product if they cannot be assured of receiving favorable reimbursement for treatments using our product from third-party payers, such as Medicare and private health insurance plans. Currently, Medicare reimburses hospitals at fixed rates that cover the cost of stranded and loose seeds. Clinics and physicians performing procedures in a free-standing center are reimbursed at the actual cost of the seeds.

In July 2019, CMS proposed a significant change to the way Medicare currently pays for radiation services in an out-patient setting. The Radiation Oncology Alternative Payment Method (RO APM) proposed a single, bundled payment for a 90-day episode of radiation therapy including LDR brachytherapy, IMRT, SBRT, proton therapy, and HDR brachytherapy. The RO APM proposal applied the same payment levels to services provided in physician offices, free-standing centers, and hospital outpatients. In addition, certain surgical codes were proposed to be included in the bundled payment such as those for gynecological treatments. This CMS proposal for a revised payment included brachytherapy sources. All comments regarding the RO APM were due to CMS by mid-September 2019 and the Company submitted its comments prior to the deadline.

The final rule was published on September 18, 2020 with an initial effective date of January 1, 2021; however, CMS subsequently delayed the effective date to July 1, 2021. As published, the rule is effective for randomly selected Core-Based Statistical Areas (CBSAs) and the participating zip codes are included in the final rule. The selected zip codes include approximately thirty percent of all eligible Medicare fee-for-service (FFS) radiotherapy episodes nationally. The RO APM could prove beneficial to the Company if clinics and physicians transition to brachytherapy options and away from more expensive IMRT and other non-brachytherapy options. However, if clinics and physicians determine to use less costly iodine brachytherapy this would have a negative impact on the Company as the costs of our Cesium-131 seeds are higher than iodine seeds. Management is currently evaluating the impact the final rule may have on our business, financial condition, or results of operations, but it is uncertain whether this rule will have a favorable or unfavorable impact on our business.

Brachytherapy seeds have two CMS codes – one code for loose seeds and a second code for stranded seeds. Reimbursement amounts are reviewed and revised annually based upon information submitted to CMS on claims by providers. Changes in reimbursement can positively or negatively affect market demand for our product. We monitor these changes and provide comments, as permitted, when changes are proposed, prior to implementation.

In-patient procedures are covered by CMS and hospitals are paid based on the type and complexity of the surgery. These procedures are done as part of a Diagnostic Related Group or DRG system under which the hospital pays for all items involved in the care of the patient exclusive of the physician fees. Hospitals are less receptive to treatments which require out of pocket costs such as procedures we use for certain non-prostate applications. Certain of our DRG reimbursement amounts coupled with out-of-pocket costs imposed on hospitals make some of our surgical, in-patient procedures not financially viable. We rely on our reimbursement consultant to assist us to improve the rate of reimbursement so that our product reimbursement will create greater incentives to be used. Effective October 1, 2020, new codes took effect and now CMS will be able to track the additional cost of the Cesium-131 seed itself and be able to reimburse the hospital through the DRG payment system for this additional costs when an in-patient brachytherapy procedure is performed. There is no assurance we will obtain the increase necessary to keep certain procedures viable and improve the margins of others.

Historically, private insurers have followed Medicare guidelines in establishing reimbursement rates. However, third-party payers are increasingly challenging the pricing of certain medical services or devices, and we cannot be sure that they will reimburse our customers at levels sufficient for us to maintain favorable sales and price levels for our product. There is no uniform policy on reimbursement among third-party payers, and we can provide no assurance that our product will continue to qualify for reimbursement from all third-party payers or that reimbursement rates will not be reduced. A reduction in or elimination of third-party reimbursement for treatments using our products would have a material adverse effect on our revenues.

Our success in international markets also depends upon the eligibility of our product for coverage and reimbursement through government-sponsored health care payment systems and third-party payors. Reimbursement practices vary significantly by country. Many international markets have government-managed insurance systems that control reimbursement for our new product and procedures. Other foreign markets have both private insurance systems and government-managed systems that control reimbursement for our new product and procedures. Market acceptance of our product may depend on the availability and level of coverage and reimbursement in any country within a particular time. In addition, health care cost containment efforts similar to those we face in the United States are prevalent in many of the other countries in which we intend to sell our product and these efforts are expected to continue.

Furthermore, any federal and state efforts to reform government and private healthcare insurance programs, such as those passed by the federal government in 2010, could significantly affect the purchase of healthcare services and our product in general and demand for our product in particular. Approximately 60% of men diagnosed with prostate cancer are of Medicare age (65+), providing Medicare with a significant influence in the marketplace. We are unable to predict the ultimate impact of current healthcare reform rates, those reforms that may be enacted in the future both in the United States and in other countries, whether other healthcare legislation or regulations affecting the business may be proposed or enacted in the future or what effect any such legislation or regulations would have on our business, financial condition or results of operations.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 - MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 – OTHER INFORMATION

None

ITEM 6. EXHIBITS

(Except as otherwise indicated (a) all exhibits were previously filed, (b) all omitted exhibits are intentionally omitted, and (c) all documents referenced below were filed under SEC file number 001-33407.)