PART I – FINANCIAL INFORMATION

 

ITEM 1 – FINANCIAL STATEMENTS 

IsoRay, Inc. and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(In thousands, except shares)

 

 

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

 

 

IsoRay, Inc. and Subsidiaries

Consolidated Statements of Operations  (Unaudited)

(Dollars and shares in thousands, except for per-share amounts)

 

 

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

 

 

IsoRay, Inc. and Subsidiaries

Consolidated Statements of Cash Flows  (Unaudited)

(In thousands)

 

 

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

 

 

IsoRay, Inc.

Notes to the Unaudited Consolidated Financial Statements

For the three months ended September 30, 2018 and 2017

 

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 17 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 26, 2018 are those that depend most heavily on these judgments and estimates. As of September 30, 2018 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 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 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 through its subsidiary IsoRay 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, Switzerland, and the Russian Federation, with $18,000 of reported revenues in the quarter ended September 30, 2018.

 

Results of Operations

 

Three months ended September 30, 2018 and 2017 (in thousands):

 

		Three months ended September 30,
		2018								2017								2018 - 2017
		Amount				% (a)				Amount				% (a)				% Change
Product sales, net		$	1,562				100			$	1,211				100				29
Cost of product sales			1,038				66				946				78				10
Gross profit			524				34				265				22				98
Operating expenses:
Research and development expenses - proprietary			394				25				287				24				37
Research and development expenses – collaboration agreement, net of reimbursement			26				2				75				6				(65	)
Sales and marketing expenses			649				42				614				51				6
General and administrative expenses			973				62				841				69				16
Total operating expenses			2,042				131				1,817				150				12
Operating loss			(1,518	)			(97	)			(1,552	)			(128	)			(2	)

 

(a)

Expressed as a percentage of product sales, net

  

Product Sales

 

Changes in sales personnel and implementation of a revitalized sales and marketing strategy in the second quarter of fiscal 2017 has continued to result in ongoing positive sales growth in the first quarter of fiscal 2019 when compared to prior year first quarter. 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, 2018 and 2017 (in thousands)

 

		Three months ended September 30,
		2018								2017								2018 - 2017
		Amount				% (a)				Amount				% (a)				% Change
Prostate brachytherapy		$	1,376				88			$	1,084				89				27
Other brachytherapy			186				12				127				11				46
Product sales, net			1,562				100				1,211				100				29

 

(a)    Expressed as a percentage of product sales, net

 

 

Prostate Brachytherapy

 

Prostate brachytherapy sales were impacted by changes in sales account managers and by the schedules of some key accounts in the first quarter of the fiscal year. During the quarter ended September 30, 2018, the Company had a full 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 the Company in the prostate brachytherapy treatment markets providing the Company opportunities to develop new customers and reconnect with past customers.

 

Management believes growth in prostate brachytherapy revenues will be the result of physicians, 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, 2018.

 

Other 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 of 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

 

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

 

Contributing to the quarters ended September 30, 2018 and 2017 comparison were increased isotope and other direct materials purchases as well as increased labor to meet production demand due to improved sales. Also contributing to the increase are higher depreciation costs due to completed automation projects placed into service.

 

Gross Profit

 

Contributing to the three months ended September 30, 2018 and 2017 gross profit comparison were increased sales partially offset by increased materials and labor costs to meet production demand.

 

Research and development

 

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, 2018 and 2017 proprietary research and development comparison were increases associated with participation in new protocols, as well as device development activities. These increases were partially offset by decreased legal fees and travel.

 

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 note 8 of the financial statements contained in this filing).

 

 

Contributing to the quarters ended September 30, 2018 and 2017 comparison were decreased costs due to the fact that payments being made pursuant to the collaborative arrangement with GammaTile, LLC were no longer necessary at the same level, as the collaborative arrangement primarily related to work involved in obtaining 510(k) clearance, which has now been obtained.

 

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, 2018 and 2017 comparison was a decrease in travel costs as a tradeshow that occurred in September 2017 did not occur until October 2018. Staffing differences are a major factor in the cost comparison as open positions in the quarter ended September 30, 2017 were filled in periods prior to the quarter ended September 30, 2018, thereby increasing personnel costs.

 

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, 2018 and 2017 comparison were cost increases from the prior year. Those include increase in headcount, salary increases implemented in July 2018, and incentive compensation related to the increase in revenue.

 

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, 2018 and 2017, the Company used existing cash reserves to fund its operations and capital expenditures (in thousands except current ratio):

 

		Three months
		ended September 30,
		2018				2017
Net cash used by operating activities		$	(1,612	)		$	(1,661	)
Net cash (used) by investing activities			(6,289	)			(315	)
Net cash provided by financing activities			7,494				-
Net (decrease) in cash and cash equivalents		$	(407	)		$	(1,976	)
Working capital		$	9,631			$	7,799
Current ratio			6.88				8.31

 

Cash flows from operating activities

 

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.

 

 

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 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, 2018 were due to the sale of common stock through a registered direct offering (see note 12 to the financial statements). There were no financing activities in the quarter ended September 30, 2017.

  

Projected 2019 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 twenty-five percent increase in revenue in fiscal 2019 and this annual growth continues, the Company anticipates reaching cashflow break-even in three to five years. The Company exceeded that target of twenty-five percent increased revenue in the first quarter of fiscal 2019. There is no assurance that targeted sales growth will continue over the next three to five years. However, management is encouraged by the results for the quarter ended September 30, 2018 and by the depth and experience of its restructured sales team.

  

Capital expenditures

 

Management has completed the design of a future production 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 reviewing 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.

 

During the quarter ended September 30, 2018, the Company invested approximately $50,000 in the automation of thirteen production processes, four of which have been placed into service. Through September 30, 2018, the Company has invested approximately $430,000 in these automation projects, and management is expecting to invest approximately $215,000 more over the next 9 months on the remaining projects. This investment is designed to allow the Company to significantly increase the output of Cs-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, 2018, 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 register securities up to $20 million in value for future issuance in our capital raising activities. The registration statement became effective on November 23, 2015, and the SEC file number assigned to the registration statement is 333-206559.

 

 

On July 11, 2018, the Company sold 11,000,000 shares of its common stock at a price of $0.75 per share, for aggregate gross proceeds of $8.25 million, pursuant to the registration statement on Form S-3 that became effective on November 23, 2015. The Company has not yet used any proceeds from this offering. Additionally, the Company issued to the purchasers unregistered warrants to purchase up to 5,500,000 shares of common stock. The warrants have an exercise price of $0.75 per share common stock, are exercisable commencing six months following the issuance date, and expire five and one-half years from the issuance date. If exercised for cash, future exercises of these warrants will provide additional capital to the Company. 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.

 

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 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.

 

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, 2018. There have been no material changes outside of the ordinary course of business in those obligations during the quarter ended September 30, 2018 other than those previously disclosed in note 8 of to 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, 2018, 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, 2018.

  

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, 2018, which is incorporated herein by reference.

 

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) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of September 30, 2018. 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 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, 2018, 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 Five Customers

 

For the three months ended September 30, 2018 approximately 48% of the Company’s revenues were dependent on five customers with approximately 25% 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.

 

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

 

On July 11, 2018, the Company completed the closing of a registered direct offering with several institutional and accredited investors (each an “Investor”) for the sale of a total of 11,000,000 shares of common stock of the Company (“Shares”) at a price per share of $0.75, for aggregate gross proceeds to the Company of $8.25 million.

 

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 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. The offer and sale of the Warrants was made without registration in reliance on the exemption provided in Section 4(a)(2) under the Securities Act and Rule 506 promulgated thereunder. We will receive gross proceeds from this offering solely to the extent any Warrants are exercised for cash.

 

The Company has not yet used any proceeds from our sale of 11,000,000 shares of common stock on July 11, 2018.

 

Although we have identified some of the potential uses of the proceeds from this offering, we have and reserve broad discretion in the application of these proceeds. Accordingly, we reserve the right to use these proceeds for different purposes or uses which we have not listed above, particularly if there is a change in demand for certain applications of our Cesium-131 and other products which may require increased investment in protocols and research studies and the hiring of additional sales staff

 

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4 - MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5 – OTHER INFORMATION

 

None

 

 

ITEM 6. EXHIBITS

 

Exhibits:
4.1		Amendment, dated July 9, 2018, to the Share Rights Agreement, dated as of February 1, 2007, between IsoRay, Inc. and Computershare Trust Company, N.A., as Rights Agent, incorporated by reference to the Form 8-K filed on July 12, 2018.
10.1		Letter Agreement between IsoRay, Inc. and H.C. Wainwright & Co., LLC dated July 9, 2018, incorporated by reference to the Form 8-K filed on July 11, 2018.
10.2		Form of Securities Purchase Agreement, incorporated by reference to the Form 8-K filed on July 11, 2018.
10.3		Form of Warrant, incorporated by reference to the Form 8-K filed on July 11, 2018.
10.4		Professional Services Agreement, dated August 15, 2018, between IsoRay Medical, Inc. and J. Squared Partners, Inc., DBA Global IR Group, incorporated by reference to the Form 8-K filed on September 25, 2018.
10.5		Services Agreement, dated August 13, 2018, between IsoRay Medical, Inc. and Schultz Public Relations, LLC, incorporated by reference to the Form 8-K filed on September 25, 2018.

31.1*		Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
31.2*		Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32**		Section 1350 Certifications
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

** Furnished herewith

 

SIGNATURES

 

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 9, 2018
		ISORAY, INC., a Minnesota corporation
		/s/ Lori A. Woods
		Lori A. Woods
		Interim Chief Executive Officer (Principal Executive Officer)
		/s/ Mark J. Austin
		Mark J. Austin
		Controller (Principal Financial and Accounting Officer)

 

 

 

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