Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

or

Commission File No. 001-33407

ISORAY, INC.

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

If 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 ☐ No ☒

Number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date:

The accompanying unaudited interim consolidated financial statements are those of Isoray, Inc., and its wholly-owned subsidiaries, 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 footnotesnotes as set forth in the Company’s annual report filed on Form 10-K for the year ended June 30, 2020.

The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnotenote 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’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 2021 will be 0%.

Accounting Standards Updates Adopted

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606, which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic 606. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The ASU became effective for, and was adopted by, the Company in the first quarter of the fiscal year ending June 30, 2021. The standard was adopted on July 1, 2020 and had no effect on the consolidated financial statements.

Accounting Standards Updates to Become Effective in Future Periods

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. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

Basic and diluted earnings (loss) per share are calculated by dividing net income (loss) available to common stockholdersshareholders 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,December 31, 2020 and 2019, 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,December 31, 2020 and 2019, were as follows (in thousands):

Inventory consisted of the following at September 30,December 31, 2020 and June 30, 2020 (in thousands):

Property and equipment consisted of the following at September 30,December 31, 2020 and June 30, 2020 (in thousands):

The following table presents the share-based compensation expense recognized for stock-based options during the three months ended September 30,December 31, 2020 and 2019 (in thousands): 

Isotope Purchase Agreement 

In December 2015, the Company completed negotiations with The Open Joint Stock Company (located in Russia)the Russian Federation) for the purchase of Cesium-131 manufactured by the Institute of Nuclear Materials. The purchase agreement provided the Company with one year’s supply of Cesium-131. The original agreement was due to expire 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 Cesium-131 manufactured at RIARResearch Institute of Atomic Reactors (RIAR) and extending it until December 31, 2018. On December 24, 2018, an addendum was signed extending the term of the supply contract through December 31, 2019 and modifying the volume of additional shipments of Cesium-131. 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 2019 to December 2020 as the Company had purchased the maximum amount of Cesium-131 permitted under the prior agreement. On August 6, 2019, an addendum was signed adding RIAR as another reactor to manufacture Cesium-131. On August 14, 2020, another addendum was signed modifying the volume of additional shipments of Cesium-131. On August 26, 2020, a new supply contract was signed with The Open Joint Stock Company for a term of August 2020 to December 2021 as the Company had purchased the maximum amount of Cesium-131 permitted under the prior agreement.

The Company maintains a production facility located at Applied Process Engineering Laboratory (APEL) in Richland, Washington. The APEL facility became operational in September 2007. The production facility has over 15,000 square feet and includes space for isotope separation, seed production, order dispensing, a clean room for assembly of our product offerings, and a dedicated shipping area. In 2015, the Company entered into a modification to the production facility lease that modified the requirement to return the facility to ground at the time of exit at Company discretion and exercised an extension in 2017 to increase the lease term to April 30, 2021, and reduced the required notice to terminate the lease early from twelve months to six months. In July 2019, the Company entered into another modification of the production facility lease that extends the term to April 20, 2026 and provides for an eighteen month termination notice with an early termination penalty of up to $40,000 which decreases in the future beginning May 1, 2022. Effective August 2020, the Company entered into a new lease with APEL for 540 square feet of storage space.

Upon the adoption of Topic 842 on July 1, 2019, the Company recognized a right-of-use asset and lease liability of approximately $1.2 million. In determining the amount of the right-of-use asset and lease liability, we assumed the termination of the lease in April 2024 and incurring a termination penalty of $20,000. As of the date of adoption, a right of use asset and a corresponding lease liability of approximately $1.2 million were recognized on the balance sheet based upon the present value of the future base payments discounted at a 6% discount rate using the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment as the lease does not provide an implicit discount rate. Due to the August 2020 lease, the Company increased the right-of-use asset and the lease liability by approximately $8,000 during the threesix months ended September 30, 2020.December 31, 2020. The weighted average remaining term and discount rate as of September 30,December 31, 2020 was 4.53.3 years and 6%, respectively.

For the three months ended September 30,December 31, 2020 and 2019 our operating lease expense was approximately $73,000$76,000 and $73,000 respectively, and is recognized in the statement of operations in cost of sales and general and administrative expenses. For the three months ended December 31, 2020 and 2019 our operating lease expense recognized in cost of sales was approximately $49,000 and $47,000 respectively and our lease expense recognized in general and administrative expense was approximately $27,000 and $26,000 respectively. 

For the six months ended December 31, 2020 and 2019 our operating lease expense was approximately $152,000 and $147,000 respectively, and is recognized in the statement of operations in cost of sales and general and administrative expenses. For the six months ended December 31, 2020 and 2019 our operating lease expense recognized in cost of sales was approximately $98,000 and $94,000 respectively and our lease expense recognized in general and administrative expense was approximately $54,000 and $53,000 respectively. 

The following table presents the future operating lease payments and lease liability included on the condensed balance sheet related to the Company’s operating lease as of September 30,December 31, 2020 (in thousands):

On March 31, 2020, the Company entered into an Equity Distribution Agreement (the “Agreement”“Distribution Agreement”) with Oppenheimer & Co., Inc. (“Oppenheimer”). The common stock sold pursuant to the Distribution Agreement was distributed at the market prices prevailing at the time of sale. The Distribution Agreement provided that Oppenheimer will be entitled to compensation for its services at a commission rate of 3.0% of the gross sales price per share of common stock sold plus reimbursement of certain expenses. Net proceeds from the sale of the Shares will be used for general corporate purposes. During the threesix months ended September 30,December 31, 2020, the Company sold no shares under the distribution agreement. As of September 30,Distribution Agreement. On October 19, 2020 the Company hadterminated the Distribution Agreement, effective on the same date. 

On October 22, 2020, the Company sold an aggregate18,269,230 shares of 1,247,232 shares under the distribution agreementits common stock at an averagea price of approximately $0.738$0.52 per common share, for aggregate gross proceeds of approximately $920,000 and$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 $8,500,000, to fund operations, research and development efforts, potential future acquisitions of approximately $874,000.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. None of the warrants were exercised during the three months ended December 31, 2020. 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.

We routinely enter into agreements with customers that include general commercial terms and conditions, notification requirements for price increases, shipping terms, and in most cases, prices for the products that we offer. However, these agreements do not obligate us to provide goods to the customer and there is no consideration promised to us at the onset of these arrangements. For customers without separate agreements, we have a standard list price established for all products and our invoices contain standard terms and conditions that are applicable to those customers where a separate agreement is not controlling. Our performance obligations are established when a customer submits a purchase order or e-mail notification (in writing or electronically) for goods, and we accept the order. We identify performance obligations as the sale of our products and professional services as requested from our customers. We generally recognize revenue upon the satisfaction of these criteria when control of the product has been transferred to the customer at which time we have an unconditional right to receive payment or as we provide professional services which are based on our actual time provided. Our prices are fixed and are not affected by contingent events that could impact the transaction price. We do not offer price concessions and do not accept payment that is less than the price stated when we accept the purchase order, except in rare credit related circumstances. We do not have any material performance obligations where we are acting as an agent for another entity.

Revenues for all products are typically recognized at the time the product is shipped, at which time the title passes to the customer, and there are no further performance obligations.

Sources of Revenue

We have identified the following revenues disaggregated by revenue source:

During the three months ended September 30,December 31, 2020 and 2019 the Company had nominal, and no international revenue respectively. For the three months ended September 30,December 31, 2020, prostate brachytherapy comprised 81%80% of our revenue while other revenue comprised 19%20% compared to 90%89% and 10%11%, respectively, in the three months ended September 30,December 31, 2019.

During the six months ended December 31, 2020 and 2019 the Company had nominal, and no international revenue respectively. For the six months ended December 31, 2020, prostate brachytherapy comprised 80% of our revenue while other revenue comprised 20% compared to 89% and 11%, respectively, in the six months ended December 31, 2019.

Warranty

Our general product warranties do not extend beyond an assurance that the product delivered will be consistent with stated specifications and do not include separate performance obligations.

Returns

Generally, we allow returns if not implanted and we are notified within a few weeks after satisfying our performance obligations of a return. Returns after shipment may result in a 50% restocking fee.

Commissions and Contract Costs

We expense commissions on orders to our sales team upon satisfaction of our performance obligations. We generally do not incur incremental charges associated with securing agreements with customers which would require capitalization and recovery over the life of the agreement.

Practical Expedients

Our payment terms for sales direct to customers and distributors are substantially less than the one year collection period that falls within the practical expedient in determination of whether a significant financing component exists.

Shipping and Handling Charges

Fees charged to customers for shipping and handling of products are included as revenue and the costs for shipping and handling of products are included as a component of cost of sales.

Taxes Collected from Customers

As our products are used in another service and are exempt, to this point we have not collected taxes. If we were to collect taxes they would be on the value of transaction revenue and would be excluded from revenues and cost of sales and would be accrued in current liabilities until remitted to governmental authorities.

Concentration of Customers

One group of customers, facilities or physician practices has revenues that aggregate to greater than 10% of total Company sales. This group of facilities individually do not aggregate to more than 10% of total Company sales. They are serviced by the same physician group, one of whom is our Medical Director:

On October 19, 2020, the Company terminated its Equity Distribution Agreement with Oppenheimer & Co., Inc.During January 2021, 12,292,839 warrants were exercised to sellpurchase our common stock at the market prices prevailing at the timefor aggregate gross proceeds of sale, effective on the same date.$7,770,641 and 274,690 options were exercised to purchase our common stock for gross proceeds of $166,187.

On October 22, 2020,February 8, 2021, the Company sold 18,269,230 shares of its common stock at a price of $0.52$1.25 per share,shares for aggregate gross proceeds of $9,500,000,approximately $45,000,000, 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 thethis offering, estimated at approximately $8,660,000,$41,675,000, 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 togranted the purchasers warrantsunderwriters an option 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 59,0655,400,000 shares of common stock asat a resultpurchase price of this offering. As a result of this recent capital raise, the Company does not anticipate the need to finance its operations$1.25 per share for the next fiscal year from additional capital raises.purpose of covering overallotments, which if exercised will generate gross proceeds of approximately $6,750,000. The overallotment option was exercised in full and closed on February 8, 2021.