PART I – FINANCIAL INFORMATION

 

ITEM 1 – FINANCIAL STATEMENTS

 

  

IsoRay, Inc. and Subsidiaries

Consolidated Balance Sheets

(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 nine months ended March 31, 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 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 28, 2017 are those that depend most heavily on these judgments and estimates. As of March 31, 2018, there had been no material changes to any of the critical accounting policies contained therein.

  

Overview

 

IsoRay, Inc. is a brachytherapy device manufacturer with FDA clearance and CE marking for a single medical device that can be delivered to the physician in multiple configurations as prescribed for the treatment of cancers in multiple body sites. The Company manufactures and sells this product as the Cesium-131 brachytherapy seed.

 

The brachytherapy seed utilizes Cesium-131, with a 9.7 day half-life, as its radiation source. The Company believes that it is the unique combination of the short half-life and the energy of the Cesium-131 isotope that is 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 and the Russian Federation, with approximately $35,000 in reported revenues in the nine months ended March 31, 2018.

 

 

Results of Operations

 

Three months ended March 31, 2018 and 2017 (in thousands):

 

		Three months ended March 31,
		2018								2017								2018 - 2017
		Amount				% (a)				Amount				% (a)				% Change
Product sales, net		$	1,573				100			$	1,282				100				23
Cost of product sales			964				61				989				77				(3	)
Gross profit / (loss)			609				39				293				23				108
Operating expenses:
Research and development expenses - proprietary			317				20				166				13				91
Research and development expenses – collaboration agreement, net of reimbursement			156				10				161				13				(3	)
Sales and marketing expenses			692				44				530				41				31
General and administrative expenses			783				50				825				64				(5	)
Total operating expenses			1,948				124				1,682				131				16
Operating loss			(1,339	)			(85	)			(1389	)			(108	)			(4	)

 

(a)

Expressed as a percentage of product sales, net

 

Nine months ended March 31, 2018 and 2017 (in thousands):

 

		Nine months ended March 31,
		2018								2017								2018 - 2017
		Amount				% (a)				Amount				% (a)				% Change
Product sales, net		$	4,320				100			$	3,391				100				27
Cost of product sales			2,915				67				3,051				90				(4	)
Gross profit / (loss)			1,405				33				340				10				313
Operating expenses:
Research and development expenses - proprietary			914				21				488				14				87
Research and development expenses – collaboration agreement, net of reimbursement			260				6				161				5				61
Sales and marketing expenses			1,980				46				1,550				46				28
General and administrative expenses			2,610				60				2,632				77				(1	)
Change in estimate of ARO			-				-				(48	)			(1	)			(100	)
Total operating expenses			5,764				133				4,783				141				21
Operating loss			(4,359	)			(101	)			(4,443	)			(131	)			(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 third quarter of fiscal 2017 has resulted in positive sales growth in the third quarter of fiscal 2018 when compared to the prior fiscal year's third 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 March 31, 2018 and 2017 (in thousands):

 

		Three months ended March 31,
		2018								2017								2018 - 2017
		Amount				% (a)				Amount				% (a)				% Change
Prostate brachytherapy		$	1,304				83			$	1,124				88				16
Other brachytherapy			269				17				158				12				70
Product sales, net			1,573				100				1,282				100				23

 

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

 

Nine months ended March 31, 2018 and 2017 (in thousands):

 

		Nine months ended March 31,
		2018								2017								2018- 2017
		Amount				% (a)				Amount				% (a)				% Change
Prostate brachytherapy		$	3,703				86			$	2,979				88				24
Other brachytherapy			617				14				412				12				50
Product sales, net			4,320				100				3,391				100				27

 

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

 

Prostate Brachytherapy

 

During the quarter ended March 31, 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.

 

During the nine months ended March 31, 2018, approximately $35,000 of reported revenues originated from the international market.

 

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 March 31, 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 three and nine months ended March 31, 2018 and 2017 comparisons were decreases attributed to cost savings initiatives that resulted in lower procurement costs of goods and services. Some costs shifted in the three and nine months ended March 31, 2018 as compared to the same periods in fiscal 2017 to research and development and property and equipment, net from cost of product sales as employees performed research and development work as well as worked on the automation projects. Also, reduced staffing costs were realized with decreased head count. These decreases were partially offset by an increase in supply of isotope from the University of Missouri Research Reactor ("MURR") which increased total cost of product sales but resulted in lower supply cost per curie of Cesium-131 obtained from MURR.

 

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 three months ended March 31, 2018 and 2017 and the nine months ended March 31, 2018 and 2017 proprietary research and development comparison were increases associated with participation in new protocols, device development activities, as well as a reallocation of employee costs from cost of product sales as those employees performed work on research and development projects.

 

Research and development – collaborative arrangement

 

Collaboration arrangement related costs are incurred, shared, and separately stated in connection with a Collaborative Development Agreement (CDA) with GammaTile, LLC.

 

During the three months ended March 31, 2018 and 2017, costs incurred in connection with the CDA were $304,000 and $322,000, respectively.

 

During the nine months ended March 31, 2018 and 2017, costs incurred in connection with the CDA were $509,000 and $322,000, respectively.

 

Sales and marketing expenses

 

Sales and marketing expenses consist primarily of the costs related to the internal and external activities of the sales, marketing and customer service functions of the Company. As the Company increasingly focuses on improving sales, the cost associated with marketing and greater staffing continues to increase.

 

Staffing differences are a major factor in the cost comparison for the three months ended March 31, 2018 and 2017 as open positions in the quarter ended March 31, 2017 were filled in periods prior to the quarter ended March 31, 2018 with increased salaries and increased travel costs. Due to increased sales, there were also increases in incentive compensation.

 

Contributing to the nine months ended March 31, 2018 and 2017 comparison were increased advertising and public relations costs as part of the revitalized marketing plan. Staffing differences are a major factor in the cost comparison as open positions in the nine months ended March 31, 2017 were filled in periods prior to the quarter ended March 31, 2018 with increased salaries and travel costs. Due to increased sales, there were also increases in incentive compensation.

 

 

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 three months ended March 31, 2018 and 2017 comparison were significant reductions in legal fees, decreases to payroll as a result of the re-organization of the finance department with reduced head count, decreased consulting fees, and public company related expenses. These cost decreases were partially offset in the three months ended March 31, 2018 by increased share-based compensation and bonus expenses, and increased travel costs.

 

Contributing to the nine months ended March 31, 2018 and 2017 comparison were cost decreases from the prior year. Those include significant decreases to legal expenses, decreases to payroll as a result of the re-organization of the finance department with reduced head count, decreased consulting fees, lower audit and bank fees, and seminars, conference, and training expenses. These cost decreases were partially offset in the nine months ended March 31, 2018 by increases associated with share-based compensation, bonus expense, investor relations fees, state taxes, and employment hiring expenses related to the hiring of the Company's Controller.

 

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 nine month periods ended March 31, 2018 and 2017, the Company used existing cash reserves to fund its operations and capital expenditures (in thousands except current ratio):

 

		Nine months
		ended March 31,
		2018				2017
Net cash used by operating activities		$	(4,264	)		$	(4,499	)
Net cash provided (used) by investing activities			658				(531	)
Net cash provided (used) by financing activities			39				(9	)
Net decreases in cash and cash equivalents		$	(3,567	)		$	(5,039	)

 

		As of
		March 31, 2018				June 30, 2017
Working capital		$	5,202			$	9,185
Current ratio			5.63				9.30

 

Cash flows from operating activities

 

Net cash used by operating activities in the nine months ended March 31, 2018 was primarily due to a net loss of approximately $4.34 million, net of approximately $432,000 in adjustments for non-cash activity such as depreciation and amortization expense, ARO accretion, and share-based compensation. Changes in operating assets and liabilities used approximately $354,000 to fund operating activities; Increases in accounts receivable, inventory, and prepaid expenses and other current assets, along with decreases in accrued radioactive waste disposal and accrued payroll and related taxes were partially offset by an increase in accounts payable and accrued expenses.

 

Cash flows from investing activities

 

Investing activities for the nine months ended March 31, 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. 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 nine months ended March 31, 2018 included payment of preferred dividends and proceeds of sales of common stock through option exercises.

 

Projected 2018 Liquidity and Capital Resources

 

Operating activities

 

Management forecasts that current cash and cash equivalents along with certificates of deposit will be sufficient to meet projected operating cash needs for the remainder of fiscal 2018 and into the first half of fiscal 2019. 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 percent increase in revenue in fiscal 2018 and this annual growth continues, the Company anticipates reaching cashflow break-even in three to five years. Although the Company did not reach that target of twenty percent increased revenue in the first quarter of fiscal 2018, that target was surpassed in the second and third quarters and the Company is continuing to project revenue growth in fiscal 2018 of at least twenty percent over fiscal 2017. There is no assurance that targeted sales growth will materialize over the next three to five years. However, management is encouraged by the results for the nine months ended March 31, 2018 and with 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 nine months ended March 31, 2018, the Company invested approximately $175,000 in the automation of production processes, resulting in the completion of three pieces of equipment. Each have been received, tested and evaluated, and were placed in service in the nine months ended March 31, 2018. One additional machine has been received and is currently being tested. Beginning in fiscal 2017 and continuing through March 31, 2018, the Company has invested approximately $476,000 in these automation projects and management is expecting to invest approximately $360,000 more over the next 14 months on the remaining projects. 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 March 31, 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 19, 2015, and the SEC file number assigned to the registration statement is 333-206559.

 

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 may be at a discount to the market price and if so it will be dilutive to shareholders.

 

 

The Company’s common stock is currently listed on the NYSE American stock exchange, which will consider delisting a company’s securities if, among other things, a company fails to maintain minimum stockholder's equity.  With the Company’s existing cash reserves, we believe we will not be able to maintain our listing on the NYSE American unless we raise capital in the next three months assuming we maintain our projected budgeted expenses and contemplated level of revenues. 

 

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, 2017. There have been no material changes outside of the ordinary course of business in those obligations during the quarter ended March 31, 2018 other than those previously disclosed in Note 8 to the interim financial statements contained in this Form 10-Q.

 

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 is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these 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 March 31, 2018, there have been no changes to the critical accounting policies and estimates, as discussed in Part II, Item 7 of our Form 10-K for the year ended June 30, 2017.

  

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, 2017.

 

ITEM 4 – CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the design and operation of our disclosure controls and procedures, as such term is defined under Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of March 31, 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 is 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

 

The Company is not involved in any material legal proceedings as of the date of this Report.

 

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 Form 10-K for the year ended June 30, 2017, and is incorporated herein by reference. There have been no material changes in our risk factors since such filing, except for the following:

 

We Rely Heavily On Five Customers

 

For the nine months ended March 31, 2018, approximately 46% of the Company’s revenues were dependent on five customers with approximately 24% 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 which 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 Will Need Additional Capital In The Next Three Months To Maintain Our NYSE American Listing And For Acquisitions And Expansion Into Other Markets. 

 

Our common stock is currently listed on the NYSE American stock exchange which will consider delisting a company’s securities if, among other things, a company fails to maintain minimum stockholder's equity. With our existing cash reserves we believe we will not be able to maintain our listing on the NYSE American unless we raise capital in the next three months assuming we maintain our projected budgeted expenses and contemplated level of revenues. In the event that our common stock is delisted from the NYSE American, trading, if any, in the common stock would be conducted in the over-the-counter market. As a result, our shareholders would likely find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our common stock. We may also need to raise capital for strategic acquisitions or expansion into other markets and there is no assurance management will not pursue this additional capital if available.

 

 

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

 

None.

 

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4 - MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5 – OTHER INFORMATION

 

None

 

ITEM 6. EXHIBITS

 

Exhibits:
10.1		Manufacturing and Supply Agreement, dated January 3, 2018, between IsoRay Medical, Inc. and GT Medical Technologies, Inc., incorporated by reference to Exhibit 10.1 of the Form 8-K filed on January 8, 2018.
10.2		Collaborative Development Agreement, dated effective as of March 13, 2017, between IsoRay Medical, Inc. and GammaTile, LLC, incorporated by reference to Exhibit 10.2 of the Form 8-K filed on January 8, 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: May 4, 2018
		ISORAY, INC., a Minnesota corporation
		/s/ Thomas C. LaVoy
		Thomas C. LaVoy
		Chief Executive Officer (Principal Executive Officer)
		/s/ Mark J. Austin
		Mark J. Austin
		Controller (Principal Financial and Accounting Officer)

 

20