Perspective Therapeutics, Inc. - Annual Report: 2008 (Form 10-K)
United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
FORM
10-K
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þ
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Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
For
the fiscal year ended June 30, 2008
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or
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¨
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
For
the transition period from __________ to
____________
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Commission
File No. 001-33407
IsoRay,
Inc.
(Exact
name of registrant as specified in its charter)
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Minnesota
(State
of incorporation)
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41-1458152
(I.R.S.
Employer Identification No.)
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350
Hills St., Suite 106
Richland,
Washington 99354
(Address
of principal executive offices)
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(509)
375-1202
(Registrant’s
telephone number)
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Registrant's
telephone number, including area code: (509)
375-1202
Securities
registered pursuant to Section 12(b) of the Exchange Act – Common Stock – $0.001
par value
(American
Stock Exchange)
Securities
registered pursuant to Section 12(g) of the Exchange Act – Series C Preferred
Share Purchase Rights
Number
of shares outstanding of each of the issuer's classes of common
equity:
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Class
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Outstanding
as of September 16, 2008
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Common
stock, $0.001 par value
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22,942,088
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding
12
months (or for such shorter period that the registrant was required to file
such
reports), and (2) has been subject to such filing requirements for the past
90
days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
Accelerated filer o Non-accelerated
filer o Smaller
reporting company x
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act): Yes o No x
State
the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was
last sold, or the average bid and asked prices of such common equity, as of
the
last business day of the registrant’s most recently completed second fiscal
quarter – $44,350,379 as of December 31, 2007.
Documents
incorporated by reference – none.
ISORAY,
INC.
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Caution
Regarding Forward-Looking Information
In
addition to historical information, this Form 10-K 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-K, 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 21 below that may cause
actual results to differ materially.
Consequently,
all of the forward-looking statements made in this Form 10-K 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.
As
used
in this Form 10-K, unless the context requires otherwise, “we” or “us” or the
“Company” means IsoRay, Inc. and its subsidiaries.
General
Century
Park Pictures Corporation (Century) was organized under Minnesota law in 1983.
Century had no operations since its fiscal year ended September 30, 1999 through
June 30, 2005.
On
July
28, 2005, IsoRay Medical, Inc. (Medical) became a wholly-owned subsidiary of
Century pursuant to a merger. Century changed its name to IsoRay, Inc. (IsoRay
or the Company). In the merger, the Medical stockholders received approximately
82% of the then outstanding securities of the Company.
Medical,
a Delaware corporation, was incorporated on June 15, 2004 to develop,
manufacture and sell isotope-based medical products and devices for the
treatment of cancer and other malignant diseases. Medical is headquartered
in
Richland, Washington.
IsoRay
International LLC (International), a Washington limited liability company,
was
formed on November 27, 2007 to serve as an owner in a Russian LLC that will
distribute the Company’s products to the Russian market and also license the
Company’s technology for use in manufacturing Cs-131 brachytherapy seeds in
Russia. International is a wholly-owned subsidiary of the Company.
Available
Information
The
Company electronically files its annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and all amendments to these reports
and other information with the Securities and Exchange Commission (SEC). These
reports can be obtained by accessing the SEC’s website at www.sec.gov. The
public can also obtain copies by visiting the SEC’s Public Reference Room at 100
F Street NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330.
In
addition, the Company makes copies of its annual and quarterly reports available
to the public at its website at www.isoray.com. Information on this website
is
not a part of this report.
Business
Operations
Overview
IsoRay
began production and sales of Proxcelan Cesium-131 (Cs-131) brachytherapy seeds
in October 2004 for the treatment of prostate cancer after clearance of its
premarket notification (510(k)) by the Food and Drug Administration (FDA).
In
December 2007, IsoRay began selling its Proxcelan Cs-131 seeds for the treatment
of ocular melanoma. Cs-131 could also be applied as a treatment for other solid
tumor applications such as breast, lung, liver, brain and pancreatic cancer,
expanding the total available market opportunity for Cs-131 brachytherapy.
Management believes its Cs-131 technology will allow it to capture a major
position in the brachytherapy market. The beneficial characteristics of the
Cs-131 isotope are expected to result in decreased radiation exposure to the
patient and reduced severity and duration of side effects, while treating cancer
cells as effectively as other isotopes used in seed brachytherapy.
Brachytherapy
seeds are small devices used in an internal radiation therapy procedure. In
recent years the procedure has become one of the primary treatments for prostate
cancer. The brachytherapy procedure places radioactive seeds as close as
possible to (in or near) the cancerous tumor (the word “brachytherapy” means
close therapy). The seeds deliver therapeutic radiation thereby killing the
cancerous tumor cells while minimizing exposure to adjacent healthy tissue.
This
procedure allows doctors to administer a higher dose of radiation directly
to
the tumor. Each seed contains a radioisotope sealed within a welded titanium
capsule. When brachytherapy is the only treatment (monotherapy), approximately
70 to 120 seeds are permanently implanted in the prostate in an outpatient
procedure lasting less than one hour. When brachytherapy is combined with
external beam radiation or intensity modulated radiation therapy (dual therapy),
then approximately 40-80 seeds are used in the procedure. The isotope decays
over time and eventually the seeds become inert. The seeds may be used as a
primary treatment or in conjunction with other treatment modalities, such as
chemotherapy, or as treatment for residual disease after excision of primary
tumors.
Management
believes that the IsoRay Proxcelan Cesium-131 brachytherapy seed represents
the
first
major advancement in brachytherapy technology in over 20 years with attributes
that could make it the long-term “seed of choice” for internal radiation therapy
procedures. The Cs-131 seed has an FDA cleared 510(k) for treatment of malignant
disease (e.g. cancers of the head and neck, brain, liver, lung, breast,
prostate, etc.) and may be used in surface, interstitial, and intracavity
applications for tumors with known radiosensitivity.
Increasingly,
prostate cancer patients and their doctors who decide on seed brachytherapy
choose Cs-131 because of its significant advantages over Palladium-103 (Pd-103)
and Iodine-125 (I-125), two other isotopes currently in use. These
advantages include:
Higher
Energy
Cs-131
has a higher average energy than any other commonly used prostate brachytherapy
isotope on the market. Energy is a key factor in how uniformly the
radiation dose can be delivered throughout the prostate. This is known as
homogeneity. Early studies demonstrate Cs-131 implants are able to deliver
the required dose while maintaining homogeneity across the gland itself and
potentially reducing unnecessary dose to critical structures such as the urethra
and rectum. (Prestidge B.R., Bice W.S., Jurkovic I., et
al.
Cesium-131 Permanent Prostate Brachytherapy: An Initial Report.
Int.
J. Radiation Oncology Biol. Phys.
2005: 63 (1) 5336-5337.)
Shorter
Half-Life
Cs-131
has the shortest half-life of any commonly used prostate brachytherapy isotope
at 9.7 days. Cs-131 delivers 90% of the prescribed dose in just 33 days
compared to 58 days for Pd-103 and 204 days for I-125. The short half-life
of Cs-131 reduces the duration of time during which the patient experiences
the
irritating effects of the radiation.
Improved
Coverage of the Prostate
Permanent
prostate brachytherapy utilizing Cs-131 seeds allows for better dose homogeneity
and sparing of the urethra and rectum while providing comparable prostate
coverage compared to I-125 or Pd-103 seeds with comparable or fewer seeds and
needles. (R Yang, J Wang, Dosimetric Comparison of Permanent Prostate
Brachytherapy Plans Utilizing Cs-131, I-125 and Pd-103 Seeds. Abstract
presented at the AAPM Annual Meeting,
July
2008, Houston TX)
Rapid
Resolution of Side effects
Studies
demonstrate that objective measures of common side-effects showed an early
peak
in symptoms in the 2-week to 1-month time frame. Resolution of morbidity
resolved rapidly within 4-6 months. (Prestidge B, et. al., Clinical Outcomes
of
a Phase-II, Multi-institutional Cesium-131 Permanent Prostate Brachytherapy
Trial. Brachytherapy.
2007: 6
(2); Prestidge B, et
al.
Cesium-131 Permanent Prostate Brachytherapy: An Initial Report.
Int.
J. Radiation Oncology Biol. Phys.
2005: 63 (1) 5336-5337)
Higher
Biologically Effective Dose
Another
benefit to the short half-life of Cs-131 is what is known as the “biological
effective dose” or BED. BED is a way for health care providers to predict
how an isotope will perform against slow versus fast growing tumors.
Studies have shown Cs-131 is able to deliver a higher BED across a wide range
of
tumor types than either I-125 or Pd-103. Although prostate cancer is typically
viewed as a slow growing cancer it can present with aggressive features.
Cs-131’s higher BED may be particularly beneficial in such situations.
(Armpilia CI, Dale RG, Coles IP et
al.
The Determination of Radiobiologically Optimized Half-lives for Radionuclides
Used in Permanent Brachytherapy Implants. Int.
J. Radiation Oncology Biol. Phys.
2003;
55 (2): 378-385.)
PSA
Control
Investigators
tracking PSA in both single arm and randomized trials have concluded Cs-131’s
PSA response rates show similar tumor control to I-125, long considered the
gold
standard in permanent seed brachytherapy. (Moran, B, et. al. Cesium-131 Prostate
Brachytherapy” An Early Experience. Brachytherapy.
2007; 6
(2). Bice W, et. al. Recommendations for permanent prostate brachytherapy with
131Cs: a consensus report from the Cesium Advisory Group. Oral
Presentation at ABS Annual Meeting,
May
2008, Boston MA)
The
following graph was presented in William Bice, PhD’s presentation at the 2008
ABS Annual Meeting in May 2008 and shows Cs-131’s PSA response rate compared to
I-125 and Pd-103.
Industry
Information
Incidence
of Prostate Cancer
The
prostate is a walnut-sized gland surrounding the male urethra, located below
the
bladder and adjacent to the rectum. Prostate cancer is a malignant tumor that
begins most often in the periphery of the gland and, like other forms of cancer,
may spread beyond the prostate to other parts of the body. According to the
American Cancer Society, approximately one in six men will be diagnosed with
prostate cancer during his lifetime. It is the most common form of cancer in
men
after skin cancer, and the second leading cause of cancer deaths in men. The
American Cancer Society estimates there will be about 186,320 new cases of
prostate cancer diagnosed and an estimated 28,660 deaths associated with the
disease in the United States in 2008. Because of early detection techniques
(e.g., screening for prostate specific antigen, or PSA), approximately nine
out
of ten prostate cancers are found in the local and regional stages (local means
it is still confined to the prostate; regional means it has spread from the
prostate to nearby areas, but not to distant sites, such as bone).
Prostate
cancer accounts for about 9% of cancer related deaths in men. Prostate cancer
incidence and mortality increase with age. The National Cancer Institute has
reported that the incidence of prostate cancer increases dramatically in men
over the age of 55. At the age of 70, the chance of having prostate cancer
is 12
times greater than at age 50.
The American Cancer Society recommends that men without symptoms, risk factors and who have a life expectancy of at least ten years, should begin regular annual medical exams at the age of 50, and believes that health care providers should offer as part of the exam the prostate-specific antigen (PSA) blood test and a digital rectal examination. The PSA blood test determines the amount of prostate specific antigen present in the blood. PSA is found in a protein secreted by the prostate, and elevated levels of PSA can be associated with either prostatitis (a noncancerous inflammatory condition) or a proliferation of cancer cells in the prostate. Transrectal ultrasound tests and biopsies are typically performed on patients with elevated PSA readings to confirm the existence of cancer. Early screening has fostered a decline in the prostate cancer death rate since 1990. When compared to men of the same age and race who do not have cancer (called relative survival), the 5-year relative survival rate for men when the cancer is found in the local and regional stages is nearly 100%.
Brachytherapy
There
is
a large potential market for the Company’s products. Several significant
clinical and market factors are contributing to the increasing popularity of
the
brachytherapy procedure. Over 61,000 procedures were forecasted to occur in
the
U.S. in 2007 (Source: iData Research, Inc., 2008). IsoRay’s management believes
that the Proxcelan seed will add incremental growth to the existing
brachytherapy seed market as physicians who are currently reluctant to recommend
brachytherapy for their prostate patients due, in part, to side effects caused
by longer-lived isotopes, become comfortable with the shorter half-life of
Cs-131, and the anticipated related reduction of side effects that it
offers.
In
1996
only 4% of prostate cancer cases were treated with brachytherapy, or about
8,000
procedures. The number of brachytherapy cases has consistently increased and
in
2007 approximately 61,000 brachytherapy procedures were performed to treat
prostate cancer. (Source: iData Research Inc., 2008)
Minimally
invasive brachytherapy has significant advantages over competing treatments
including lower cost, equal or better survival data, fewer side effects, faster
recovery time and the convenience of a single outpatient implant procedure
that
generally lasts less than one hour (Merrick, et al., Techniques in Urology,
Vol.
7, 2001; Potters, et al., Journal of Urology, May 2005; Sharkey, et al., Current
Urology Reports, 2002).
Management
expects that market growth in all brachytherapy in the U.S. will increase at
the
rate of 4% per year through 2011. Independent research firms have estimated
Cs-131 growth alone in the U.S. marketplace to average 32% a year from 2009
through 2014 (Source: iData Research Inc., 2008). The competing isotopes Pd-103
and I-125 are projected to decrease by .5% and increase 1.6% respectively per
year during this same time period (Source: iData Research Inc.,
2008).
Treatment
Options and Protocol
In
addition to brachytherapy, localized prostate cancer can be treated with
prostatectomy surgery (RP for radical prostatectomy), external beam radiation
therapy (EBRT), intensity modulated radiation therapy (IMRT), dual or
combination therapy, high dose rate brachytherapy (HDR), cryosurgery, hormone
therapy, and watchful waiting. The success of any treatment is measured by
the
feasibility of the procedure for the patient, morbidities associated with the
treatment, overall survival, and cost. When the cancerous tissue is not
completely eliminated, the cancer typically returns to the primary site, often
with metastases to other areas of the body.
Prostatectomy
Surgery Options. Historically
the
most
common treatment option for prostate cancer, radical prostatectomy is the
removal of the prostate gland and some surrounding tissue through an invasive
surgical procedure. RP is performed under general anesthesia and involves a
hospital stay of three days on average for patient observation and recovery.
Possible side affects of RP include impotence and incontinence. According to
a
study published in the Journal
of the American
Medical Association
in
January 2000, approximately 60% of men who had a RP reported erectile
dysfunction as a result of surgery. This same study stated that approximately
40% of the patients observed reported at least occasional incontinence. New
methods such as laparoscopic and robotic prostatectomy surgeries are currently
being used more frequently in order to minimize the nerve damage that leads
to
impotence and incontinence, but these techniques require a high degree of
surgical skill. RP and laparoscopic prostatectomy are projected to decrease
approximately 31% in the U.S. from the 2004 high of 66,567 to 20,838 procedures
in 2014. However, robotic surgeries are projected to more than replace the
decrease in the RP and laparoscopic procedures (Source: iData Research Inc.,
2008).
Primary
External Beam Radiation Therapy. EBRT
involves directing a beam of radiation from outside the body at the prostate
gland to destroy cancerous tissue. EBRT treatments are received on an outpatient
basis five days per week usually over a period of eight or nine weeks. Some
studies have shown, however, that the ten-year disease free survival rates
with
treatment through EBRT are less than the disease free survival rates after
RP or
brachytherapy treatment. Side effects of EBRT can include diarrhea, rectal
leakage, irritated intestines, frequent urination, burning while urinating,
and
blood in the urine. Also the incidence of incontinence and impotence five to
six
years after EBRT is comparable to that for surgery. EBRT procedures are
projected to increase slightly from 22,000 procedures in 2006 to 24,900 in
2012
(Source: Millennium Research Group, 2008).
Intensity
Modulated Radiation Therapy. IMRT
is
considered a more advanced form of EBRT in which sophisticated computer control
is used to aim the beam at the prostate from multiple different angles and
to
vary the intensity of the beam. Thus, damage to normal tissue and critical
structures is minimized by distributing the unwanted radiation over a larger
geometric area. This course of treatment is similar to EBRT and requires daily
doses over a period of seven to eight weeks to deliver the total dose of
radiation prescribed to kill the tumor. Because IMRT is a new treatment, less
clinical data regarding treatment effectiveness and the incidence of side
effects is available. One advantage of IMRT, and to some extent EBRT, is the
ability to treat cancers that have begun to spread from the tumor site. An
increasingly popular therapy for patients with more advanced prostate cancer
is
a combination of IMRT with seed brachytherapy, known as combination or dual
therapy. IMRT in the U.S. (including dual therapy) is projected to grow 9%
per
year from 31,500 procedures in 2007 to 48,500 procedures in 2012 (Source:
Millennium Research Group, 2008). IMRT is generally more expensive than other
common treatment modalities.
Dual
or Combination Therapy. Dual
therapy is the combination of IMRT or 3-dimensional conformal external beam
radiation and seed brachytherapy to treat extra-prostatic extensions or high
risk prostate cancers that have grown outside the prostate. Combination therapy
treats high risk patients with a full course of IMRT or EBRT over a period
of
several weeks. When this initial treatment is completed, the patient must then
wait for several more weeks to months to have the prostate seed
implant.
With
the
arrival of Proxcelan Cs-131, with its short half life, patients may now complete
their course of treatment sooner and have shorter duration of side-effects.
Management estimates that at least 30% of all prostate implants are now dual
therapy cases.
High
Dose Rate Temporary Brachytherapy.
HDR
temporary brachytherapy involves placing very tiny plastic catheters into the
prostate gland, and then giving a series of radiation treatments through these
catheters. The catheters are then removed, and no radioactive material is left
in the prostate gland. A computer-controlled machine inserts a single highly
radioactive iridium seed into the catheters one by one. This procedure is
typically repeated at least three times while the patient is hospitalized for
at
least 24 hours. HDR is projected to grow approximately 1.3% per year from 26,200
procedures in 2007 through 2012 (Source: Millennium Research Group,
2008).
Cryosurgery.
Cryosurgery
involves placing cold metal probes into the prostate and freezing the tissue
in
order to destroy the tumor. Cryosurgery patients typically stay in the hospital
for a day or two and have had higher rates of impotence and other side effects
than those who have used seed implant brachytherapy. Market research firms
project that cryosurgery will grow steadily through 2012. To date the market
has
remained almost flat (Source: Millennium Research Group, 2008).
Additional
Treatments. Additional
treatments include hormone therapy and chemotherapy. Hormone therapy is
generally used to shrink the tumor or make it grow more slowly but will not
eradicate the cancer. Likewise, chemotherapy will not eradicate the cancer
but
can slow the tumor growth. Generally, these treatment alternatives are used
by
doctors to extend patients’ lives once the cancer has reached an advanced stage
or in conjunction with other treatment methods. Hormone therapy can cause
impotence, decreased libido, and breast enlargement. Most recently, hormone
therapy has been linked to an increased risk of cardiovascular disease in men
with certain pre-existing conditions such as heart disease or diabetes.
Chemotherapy can cause anemia, nausea, hair loss, and fatigue.
Watchful
Waiting. Watchful
waiting is not a treatment but might be suggested by some healthcare providers
depending on the age and life expectancy of the patient. Watchful waiting may
be
recommended if the cancer is diagnosed as localized and slow growing, and the
patient is asymptomatic. Generally, this approach is chosen when patients are
trying to avoid the side affects associated with other treatments or when they
are not candidates for current therapies due to other health issues. Healthcare
providers will carefully monitor the patient’s PSA levels and other symptoms of
prostate cancer and may decide on active treatments at a later
date.
Brachytherapy
Clinical Results
Long-term
survival data is now available for brachytherapy with I-125 and Pd-103, which
support the efficacy of brachytherapy. Clinical data indicate that brachytherapy
offers success rates for early-stage prostate cancer treatment that are equal
to
or better than those of RP or EBRT. While clinical studies of brachytherapy
to
date have focused primarily on results from brachytherapy with I-125 and Pd-103,
management believes that these data are also relevant for brachytherapy with
Cs-131. In fact, it appears that Cs-131 offers improved clinical outcomes over
I-125 and Pd-103, given its shorter half-life and higher energy.
Improved
patient outcomes.
A number
of published studies on the use of I-125 and Pd-103 brachytherapy in the
treatment of early-stage prostate cancer have been very positive, the most
recent of which was as follows:
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§
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Results
of a trial published in 2007 in the International Journal of Radiation
Oncology looking at 15-year survival in 223 patients with stage T1-T3
prostate cancer and treated with brachytherapy in combination with
external beam demonstrated excellent long-term biochemical control.
Fifteen-year biochemical relapse free survival (BRFS) for the entire
treatment group was 74%. (Sylvester J. et al. “15-year biochemical relapse
free survival in clinical stage T1-T3 prostate cancer following combined
external beam radiotherapy and brachytherapy; Seattle experience”, Int. J.
Rad. Onc. Biol., Vol. 67, 2007,
57-64.).
|
Reduced
Incidence of Side Effects.
Sexual
potency and urinary incontinence are two major concerns men face when choosing
among various forms of treatment for prostate cancer. Because the Proxcelan
Cesium-131 brachytherapy seed delivers a highly concentrated and confined dose
of radiation directly to the prostate, healthy surrounding tissues and organs
typically experience less radiation exposure. Management believes, and initial
results appear to support, that this should result in lower incidence of side
effects and complications than may be incurred with other conventional therapies
or isotopes. Additionally when side effects do occur, they should resolve more
rapidly than those experienced with I-125 and Pd-103 isotopes.
Cs-131
Clinical Results and Ongoing Trials
A
Cs-131
monotherapy trial for the treatment of prostate cancer was fully enrolled in
February 2007. The trial was a 100 patient multi-institutional study to
observe the dosimetric characteristics of Cs-131 and its side effect
profile. The results of the monotherapy trial have demonstrated that
Cs-131 is a viable alternative as an isotope for permanent seed prostate
brachytherapy. Some of the significant and specific findings were as
follows:
|
§
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Patient
reported symptoms (IPSS Scores) were mild to moderate with relatively
rapid resolution within 4-6 months.
|
|
§
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Prostate
Specific Antigen, or PSA, response over 30 months has been very
encouraging to date with similar tumor control rates to that of I-125.
(Prestidge BR, Bice WS, “Clinical outcomes of a Phase II,
multi-institutional Cesium-131 permanent prostate brachytherapy trial”.
Brachytherapy, Volume
6, Issue 2, April-June
2007, Page
78) (Moran BJ, Braccioforte MH, “Cesium-131 prostate brachytherapy: An
early experience”. Brachytherapy, Volume
6, Issue 2, April-June
2007, Page
80). (Bice, W, et. al. “Recommendations for permanent prostate
brachytherapy with 131Cs: a consensus report from the Cesium Advisory
Group”. Oral
Presentation at ABS Annual Meeting,
May 2008, Boston MA).
|
|
§
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The
resolution of acute side effects proved to be much quicker with Cs-131
compared to I-125 thus validating the theoretical argument that dose
related side effects dissipate faster with shorter lived isotopes.
(Prestidge BR, “Cesium-131; the isotope of choice in permanent prostate
brachytherapy”. Oral Presentation at the American Brachytherapy
Society annual conference, April 2007.).
|
|
§
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The
dosimetric observations of the trial demonstrated that it was possible
to
deliver adequate dose to the prostate while maintaining dose uniformity
across the gland. The dose delivered to critical structures was well
within acceptable limits. (Bice WS, Prestidge BR, “Cesium-131 permanent
prostate brachytherapy: The dosimetric analysis of a multi-institutional
Phase II trial”. Brachytherapy 2007(6); 88-89.).
|
The
monotherapy Cs-131 trial will continue to follow patients with annual updates
on
symptoms and patient long-term survival data.
The
prospective randomized monotherapy trial headed by Dr. Brian Moran of The
Chicago Prostate Cancer Center directly compared Cs-131 to I-125 PSA response
and treatment related morbidities following brachytherapy for localized
carcinoma of the prostate in low to intermediate risk patients. Dr. Moran
concluded that prostate brachytherapy with Cs-131 is effective and
well-tolerated; both PSA response and acute morbidity profile are very
encouraging. Dr. Moran will continue to track these patients in order to collect
long-term outcomes.
A
third
ongoing study first presented at the American Association of Physicists in
Medicine (AAPM) meeting in July 2007 compared the dosimetry of Cs-131 and Pd-103
directly. The study showed a 17.5% reduction in the number of seeds, 6%
reduction in planned needles, 35.5% reduction in V150 (percent of gland that
receives more than 150% of the prescription dose), and 44.2% reduction in R100
(percent of rectal tissue that receives the full prescription dose of
radiation). (Musmacher, J., “Dosimetric comparison of Cesium-131 and
Palladium-103 for permanent prostate brachytherapy”, poster presented at
49th
AAPM
Annual Conference, Minneapolis, MN, April 22-26, 2007.)
Recently
accepted for publication was the Cs-131 Advisory Group’s (CAG) article entitled
“Recommendations for permanent prostate brachytherapy with 131Cs:
a
consensus report from the Cesium Advisory Group”. The objective of the article
was to provide
consensus recommendations for Cs-131 prostate brachytherapy based on experience
to date for physicians still unfamiliar with Cs-131. The recommendations are
based on three clinical trials, one of which has completed accrual and has
been
published in the peer reviewed literature, and combined CAG experience of more
than 1,200 Cs-131 implants. The recommendations from the group are designed
to
aid practitioners in the safe and effective delivery of Cs-131 prostate
brachytherapy. The Consensus Paper is slated to be published in Brachytherapy
in
the fourth quarter of calendar year 2008. The CAG is sponsored by the
Company.
The
Company has also commissioned a dual therapy protocol. This
multi-institutional trial observes the dosimetric characteristics of Cs-131
and
health related quality of life (HRQOL) results following combined Cs-131
transperineal permanent prostate brachytherapy and external beam radiotherapy
in
patients with intermediate to high risk prostate cancer. This protocol is
being conducted to confirm clinically what radiobiological data suggests
regarding this treatment modality. The quantified dosimetric variables
collected will be correlated to the reported HRQOL data and ultimately compared
to existing data in the literature for similar investigations using I-125 and
Pd-103. Patient enrollment for this study began in April 2007 and to date
50 patients have been enrolled.
In addition to establishing the dosimetric and quality of life impact of Proxcelan Cesium-131 brachytherapy seeds in different treatment modalities, all trials have been designed to collect ongoing PSA results for the purposes of establishing long-term survival rates using Cs-131 seed implant brachytherapy.
Our
Strategy
The
key
elements of IsoRay’s strategy for fiscal year 2009 include:
|
§
|
Continue
to introduce the Proxcelan Cs-131 brachytherapy seed into the U.S.
market.
Utilizing our direct sales organization, IsoRay intends to continue
expanding the use of Proxcelan Cs-131 seeds in brachytherapy procedures
for prostate cancer by increasing the number of treatment centers
offering
Cs-131 and increasing the number of patients treated at each center
using
Cs-131. IsoRay hopes to capture much of the incremental market growth
in
seed implant brachytherapy and take market share from existing
competitors.
|
|
§
|
Develop
an enriched barium manufacturing process.
Working
with leading scientists, IsoRay is working to design and create a
proprietary process for manufacturing enriched barium, a key source
material for Cs-131. This will ensure adequate future supply of Cs-131
and
greater efficiencies in producing the
isotope.
|
|
§
|
Introduce
Cs-131 therapies for other cancers.
The Company’s first sale for ocular melanoma occurred in late 2007 and
periodic sales have occurred since then. Although the ocular melanoma
market is not a large one, this continues to support the application
of
Cs-131 in other solid tumors. IsoRay will continue to explore partnering
with other companies to develop the appropriate technologies and
therapeutic delivery systems for treatment of other solid tumors
such as
breast, lung, liver, pancreas, neck, and brain cancers.
|
|
§
|
Support
clinical research and sustained product development.
The Company plans to structure and support clinical studies on the
therapeutic benefits of Cs-131 for the treatment of solid tumors
and other
patient benefits. We are and will continue to support clinical studies
with several leading radiation oncologists to clinically document
patient
outcomes, provide support for our product claims, and compare the
performance of our seeds to competing seeds. IsoRay plans to sustain
long-term growth by implementing research and development programs
with
leading medical institutions in the U.S. and other countries to identify
and develop other applications for IsoRay’s core radioisotope
technology.
|
|
§
|
Improve
our manufacturing efficiencies.
Over the past several months the Company has been working on improving
its
gross margin by reviewing its manufacturing processes. Over the next
year,
the Company will continue reviewing its manufacturing processes,
implementing improvements, and automating either certain portions
or all
of its manufacturing process. Management believes that it will be
able to
lower its costs of production relative to its sales revenue through
this
evaluation.
|
|
§
|
Introduce
Proxcelan Cesium-131 brachytherapy seeds to the Canadian and Russian
market.
In
August 2008, the Company obtained its ISO 13485 certification. This
was an
important step to allow the Company to register and eventually sell
its
Proxcelan Cs-131 brachytherapy seeds in Canada and Russia. The Company
anticipates finalizing its registrations of Proxcelan Cs-131 brachytherapy
seeds in Canada and Russia during fiscal year 2009. The Company is
now
focusing on the Canadian and Russian markets and is no longer pursuing
sales in the European Union (EU). Management does not believe a strategic
alliance with IBt, SA, a Belgian company, will be consummated nor
will
management leverage IBt’s distribution channels in the
EU.
|
Products
IsoRay
markets the Proxcelan Cs-131 brachytherapy
seed for the treatment of prostate cancer and ocular melanomas, and intends
to
market Cs-131 for the treatment of other malignant disease in the future.
Additionally, the Company may market other radioactive isotopes in the
future.
Competitive
Advantages of Proxcelan Cs-131
General.
Management believes that the Proxcelan Cesium-131 brachytherapy seed has
specific clinical advantages for treating cancer over I-125 and Pd-103, the
other isotopes currently used in brachytherapy seeds. The table below highlights
the key differences of the three seeds. The Company believes that the short
half-life, high-energy characteristics of Cs-131 will increase industry growth
and facilitate meaningful penetration into the treatment of other forms of
cancer such as lung cancer.
Brachytherapy
Isotope Comparison
|
Cesium-131
|
Palladium-103
|
Iodine-125
|
||||
|
Half
Life
|
9.7
Days
|
17.5
days
|
60
days
|
|||
|
Avg.
Energy
|
30.4
keV+
|
20.8
keV+
|
28.5
keV+
|
|||
|
Dose
Delivery
|
90%
in 33 days
|
90%
in 58 days
|
90%
in 204 days
|
|||
|
Total
Dose
|
115
Gy
|
125
Gy
|
145
Gy
|
|||
|
Anisotropy
Factor*
|
|
0.969
|
|
0.877
(TheraSeed® 200)
|
|
0.930
(OncoSeed® 6711)
|
*Degree
of
symmetry of therapeutic dose, a factor of 1.00 indicates symmetry.
+keV
=
kiloelectron volt, a standard unit of measurement for electrical
energy.
Shorter
half-life.
The
Company believes that Cs-131’s shorter half-life of 9.7 days will prove to have
greater biological effectiveness, will mitigate the negative effects of long
radiation periods on healthy tissue, and will reduce the duration of any side
effects. Our early clinical data supports the Company’s belief that there is a
reduced duration of side effects post implant. A shorter half-life produces
more
intense therapeutic radiation over a shorter period of time and may reduce
the
potential for cancer cell survival and tumor recurrence. Radiobiological studies
indicate that shorter-lived isotopes are more effective against faster growing
tumors (Dicker, et. al., Semin.
Urol. Onc.
18:2,
May 2000). Other researchers conclude that “half-lives in the approximate range
4-17 days are likely to be significantly better for a wide range of tumor types
for which the radiobiologic characteristics may not be precisely known in
advance.” (Armpilia CI, et. al., Int.
J. Rad. Oncol. Biol. Phys. 55:2,
February 2003).
Higher
energy.
The
Cs-131 isotope average decay energy of 30.4 keV (versus 21 keV for Pd-103 and
28.5 keV for I-125) generates a therapeutic radiation field that extends beyond
the current dosimetry reference point of one centimeter. Pd-103 seeds emit
radiation that does not penetrate as far into tissue (up to 40% lower than
Cs-131). To compensate for this lack of penetration, more Pd-103 seeds are
required to attain the equivalent dose than are required for Proxcelan seeds.
This increase in the number of seeds implanted increases the time and cost
required to perform Pd-103-based procedures.
Quality
of Life.
Because
IsoRay’s Proxcelan Cesium-131 brachytherapy seed delivers a highly concentrated
and confined dose of radiation directly to the prostate, healthy surrounding
tissues and organs are exposed to less radiation than with other treatments.
Initial results indicate that the side effects experienced, if any, are mild
to
moderate and urinary symptoms resolve more rapidly, within 4-6 months, when
compared to I-125. Management believes that as the data matures it will continue
to support fewer and less severe side effects and complications when compared
to
other conventional therapies.
Shape
of radiation field.
The
shape
of the radiation field generated by a Proxcelan seed is more uniform than most
brachytherapy seed designs, and this uniformity may result in better radiation
dose coverage and improved therapeutic effectiveness. The higher energy of
Cs-131 makes the isotope more “forgiving” for treatment planning purposes.
IsoRay has conducted extensive computer modeling of its Proxcelan Cs-131 seed
design. The dosimetric characteristics of the Cs-131 seed were recently
confirmed through American Association of Physicists in Medicine (AAPM)
evaluations of the seed design (Med Phys, 34:2). The results of these tests
showed superior dose characteristics relative to the leading I-125 and Pd-103
seeds. The IsoRay seed has also met all Nuclear Regulatory Commission (NRC)
requirements for sealed radioactive sources.
Cs-131
Manufacturing Process and Suppliers
Product
Overview.
Cs-131
is a radioactive isotope that can be produced by the neutron bombardment of
Barium-130 (Ba-130). When placed into a nuclear reactor and exposed to a flux
of
neutrons, Ba-130 becomes Ba-131, the radioactive material that is the parent
isotope of Cs-131. The radioactive isotope Cs-131 is normally produced by
placing a quantity of stable non-radioactive barium (ideally barium enriched
in
isotope Ba-130) into the neutron flux of a nuclear reactor. The irradiation
process converts a small fraction of this material into a radioactive form
of
barium (Ba-131). The Ba-131 decays by electron capture to the radioactive
isotope of interest (Cs-131).
To
produce the Proxcelan seed, the purified Cs-131 isotope is adsorbed onto a
ceramic core containing a gold X-ray marker. This internal core assembly is
subsequently inserted into a titanium capsule that is then welded shut and
becomes a sealed radioactive source and a biocompatible medical device. The
dimensional tolerances for the ceramic core, gold X-ray marker, and the titanium
capsule are extremely important. To date the Company has used sole-source
providers for certain components such as the gold X-ray marker and the titanium
capsule as these suppliers have been validated by our quality department and
they have been cost effective.
Barium
Enrichment Device.
The
Company has retained an independent contractor to develop an enrichment device
to produce “enriched barium” having a higher concentration of the Ba-130 isotope
than is found in naturally occurring barium. Irradiating enriched barium will
result in higher yields of Cs-131. The Company anticipates the use of enriched
barium will also streamline the manufacturing process and reduce Cs-131
production costs. The Company’s prototype enrichment device is expected to be
tested in October 2008 but there is no assurance this testing will occur by
then
or whether or not it will be successful.
Isotope
Suppliers.
Due to
the short half-life of both the Ba-131 and Cs-131 isotopes, potential suppliers
must be capable of removing irradiated materials from the reactor core on a
routine basis for subsequent processing to produce ultra-pure Cs-131. In
addition, the supplier’s nuclear reactor facility must have sufficient
irradiation capacity to accommodate barium targets and the nuclear reactors
must
have sufficient neutron flux to economically produce commercially viable
quantities of Cs-131. Ideally, the irradiation facility will also have a
radiochemical separation infrastructure to carry out the initial separation
steps. The Company has identified key reactor facilities in the U.S. and the
former Soviet Union that are capable of meeting these requirements. As of the
date of this report, IsoRay has agreements in place with three suppliers of
irradiated Ba-131 or Cs-131. For the fiscal year ended June 30, 2008,
approximately sixty-five percent (65%) of our Cs-131 was supplied by one of
two
Russian suppliers, but the Company has begun taking steps to reduce its reliance
on a single source for Cs-131.
With
the
development of barium enrichment capabilities, the Company plans to expand
Cs-131 manufacturing capability at the MURR reactor in the United States but
will continue to obtain Cs-131 from multiple suppliers. Failure to obtain
deliveries of Cs-131 from multiple sources could have a material adverse effect
on seed production. Management believes it will continue to rely solely on
its
three suppliers in the near future and shutdowns from these suppliers could
cause delays in deliveries and production.
Quality
Controls.
We have
established procedures and controls to comply with the FDA’s Quality System
Regulation. The Company constantly monitors these procedures and controls to
ensure that they are operating properly, thereby working to maintain a
high-quality product. Also, the quality, production, and customer service
departments maintain open communications to ensure that all regulatory
requirements for the FDA, DOT, and applicable nuclear radiation and health
authorities are fulfilled.
In
July
2008, IsoRay had its baseline inspection by the FDA at its manufacturing and
administrative offices in Richland, WA. This inspection was carried out over
a
five day period of time during which the investigator performed an inspection
following Quality Systems Inspection Techniques (QSIT). This was a complete
and
very thorough inspection. At the end of the inspection no report of deviations
from Good Manufacturing Practices or list of observations (form FDA 483) was
issued to IsoRay.
Order
Processing.
The
Company has implemented a just-in-time production process that is responsive
to
customer input and orders to ensure that individual customers receive a higher
level of customer service than received from our competitors who have the luxury
of longer lead times due to longer half-life products. Time from order
confirmation to completion of product manufacture is reduced to several working
days, including receipt of irradiated barium (from a supplier’s reactor),
separation of Cs-131, isotope labeling of the core, and loading of cores into
pre-welded titanium “cans” for final welding, testing, quality assurance and
shipping.
It
is up
to each physician to determine the dosage necessary for implants and acceptable
dosages vary among physicians. Many of the physicians who order our seeds order
more seeds than necessary to assure themselves that they have a sufficient
quantity. Upon receipt of an order, the Company either delivers the seeds from
its facility directly to the physician or sends the order to an independent
preloading service that delivers the seeds preloaded into needles or cartridges
just prior to implant. If the implant is postponed or rescheduled, the short
half-life of the seeds makes them unsuitable for use and therefore they must
be
re-ordered.
Due
to
the lead time for obtaining and processing the Cs-131 isotope and the short
half-life, the Company relies on sales forecasts and historical knowledge to
estimate the proper inventory levels of isotope needed to fulfill all customer
orders. Consequently, some portion of the isotope is lost through decay and
is
not used in an end product. Management continues to reduce the variances between
ordered isotope and isotope deliveries and is continually improving its ordering
process efficiencies.
Automated
Manufacturing Process
Based
on
evaluations of automation options by management, IsoRay has elected to automate
its current manufacturing process in phases. Phased implementation of automation
is expected to be less costly than fully automated production lines and will
benefit IsoRay by reducing labor costs and ensuring consistent manufacturing
quality. The Company has purchased some automation equipment and is reviewing
options for the development of additional automated equipment. The Company
also
has a contract with a third party to outsource certain sub-processes.
Manufacturing
Facility
The
Company has replaced its original manufacturing facility located at PEcoS-IsoRay
Radioisotope Laboratory (PIRL)
with a
production facility located at Applied Process Engineering Laboratory (APEL).
The APEL facility became operational in September 2007, which was three months
earlier than the original scheduled opening. The facility has over 15,000 square
feet and includes space for isotope separation, seed production, order
dispensing, a clean room for radiopharmacy work, and a dedicated shipping area.
A description of the lease terms for the APEL facility is located in the Other
Commitments and Contingencies section of Item 7 below. Management believes
that
the APEL facility will be utilized for manufacturing space through fiscal year
2016 which is the original lease term plus the two three-year renewal options.
Management currently anticipates exercising both three-year renewal options
to
extend the APEL facility lease through April 2016.
Isotope
Testing in Idaho
On
December 14, 2005, IsoRay and Idaho’s Advanced Test Reactor (ATR) entered into a
collaboration and partnership agreement for the design, analysis and fabrication
of a capsule containing barium carbonate, to be irradiated at the ATR and then
shipped to IsoRay for processing and analysis of the Cs-131 product. As an
adjunct to this testing, IsoRay and the Pocatello Development Authority entered
into an Economic Development Agreement, dated December 14, 2005, under which
the
Pocatello Development Authority provided IsoRay with $200,000 (subject to
repayment under certain conditions) to apply to the cost of testing at the
ATR. ATR is currently working to install a shuttle system that would make
the production of Cs-131 possible in the reactor. There is no assurance that
even though the capsules irradiated in 2006 performed as designed that the
shuttle system will provide adequate conditions for Cs-131 production. The
Company has no agreement with ATR to either produce Cs-131 or irradiate Ba-130
and there is no assurance that this will ultimately occur.
Repackaging
Services
Most
brachytherapy manufacturers offer their seed product to the end user packaged
in
four principal configurations provided in a sterile or non-sterile package
depending on the customer’s preference. These include:
|
§
|
Loose
seeds
|
|
§
|
Pre-loaded
needles
(loaded typically with three to five seeds and
spacers)
|
|
§
|
Strands
of seeds
(consists of seeds and spacers in a biocompatible “shrink wrap”)
|
|
§
|
Pre-loaded
Mick cartridges
(fits the Mick applicator)
|
In
2008,
the Millenium Research Group reported that the estimated market shares for
each
of the four packaging types are: loose seeds and preloaded loose seeds (8%),
Mick cartridges (26%), and all strand configurations including preloaded strands
(66%). Market trends indicate significant movement toward the stranded
configuration, as there are some clinical data suggesting less potential for
post-implant seed migration when a stranded configuration is used.
The
role
of the preloading service is to package, assay and certify the contents of
the
final product configuration shipped to the customer. A commonly used method
of
providing this service is through independent radiopharmacies. Manufacturers
send loose seeds along with the physician's instructions to the radiopharmacy
which, in turn, loads needles and/or strands the seeds according to the doctor's
instructions. These radiopharmacies then sterilize the product and certify
the
final packaging prior to shipping directly to the end user.
IsoRay
currently has agreements with several independent radiopharmacies to assay,
preload, and sterilize loose seeds. This creates additional loss of our isotope
due to decay and is prohibitive on a long-term basis. While the Company
pre-loads many of its current orders, we have continued to utilize these
services to supplement our own custom preloading operation and when they are
requested by the ordering physician.
We
currently load most Mick cartridges in our own facility which in recent months
accounted for approximately 53% of total orders.
The
remaining approximately 47% of total orders are strand configurations including
preloaded strands.
During
fiscal year 2008, the
Company began offering a 100% confirmation assay performed by in-house
analytical services.
Providing the assay and ultimately the preloading services in-house allows
the
Company to eliminate approximately 25% loss in isotope activity due to
radioactive decay. The cost of priority overnight shipment of each order of
seeds to a third-party provider is also eliminated. However, we
will
continue to utilize the independent radiopharmacies to back up our own
preloading operation, to handle periodic increases in demand, and to cater
to
certain doctor’s preferences.
Independent
radiopharmacies usually provide the final packaging of the product delivered
to
the end user thereby eliminating the opportunity for reinforcing the "branding"
of our seed product. By providing our own repackaging service, we will preserve
the product branding opportunity and eliminate any concerns related to the
handling of our product by a third party prior to delivery to the end
user.
Providing
custom packaging configurations enhances our product while providing an
additional revenue stream and incremental margins to the Company through pricing
premiums charged to our customers. The end users of these packaging options
are
willing to pay a premium because of the savings they
realize by eliminating the need for loose seed handling and loading capabilities
on site, eliminating the need for additional staffing to sterilize seeds and
needles, and eliminating the expense of additional assaying of the
seeds.
Marketing
and Sales
Marketing
Strategy
The
Company is marketing Proxcelan Cesium-131 brachytherapy seeds as the “seed of
choice” for prostate brachytherapy. Based on current and preliminary clinical
studies, management believes there is no apparent clinical reason to use other
isotopes when Cs-131 is available. The advantages associated with a higher
energy and shorter half-life isotope are generally accepted within the clinical
community and the Company intends to help educate potential patients about
the
clinical benefits from Cs-131 for their brachytherapy seed
treatment.
IsoRay
has chosen to identify its proprietary Cs-131 seed with the brand of
“Proxcelan.” Management is using this brand to differentiate Cs-131 seeds from
seeds using the other isotopes. We continue to target the competing isotope
products of iodine and palladium rather than the various manufacturers and
distributors of these isotopes. Using this strategy, the choice of brachytherapy
isotopes should be less dependent on the name and distribution strengths of
the
various iodine and palladium manufacturers and distributors and more dependent
on the therapeutic benefits of Cs-131.
The
professional and patient market segments each play a role in the ultimate choice
of cancer treatment and the specific isotope chosen for seed brachytherapy
treatment. The Company has developed a customized brand message for each
audience. For medical professionals, IsoRay has created print and visual medias
(including physician brochures discussing the clinical advantages of Cs-131,
clinical information binders, informational DVDs, single sheet glossies with
targeted clinical data, etc.), advertisements in the leading medical journals
and a physician targeted website. In addition, the Company attends national
professional meetings, including the following:
|
§
|
American
Brachytherapy Society (ABS),
|
|
§
|
American
Society for Therapeutic Radiation and Oncology (ASTRO),
and
|
|
§
|
Association
of American Physicists in Medicine
(AAPM).
|
The
Company also continues to consult with noted contributors from the medical
physics community and will have articles submitted to professional journals
such
as Medical
Physics, the Brachytherapy Journal,
and the
International
Journal of Radiation Oncology,
Biology, and Physics
regarding the benefits of and clinical trials involving Cs-131.
Beginning
in January 2008, IsoRay implemented a variety of physician Cs-131 training
outreach programs including the following: a two day training course held
approximately three times per year at Chicago Prostate Cancer Center (CPCC);
proctoring and mentoring programs led by Steve Kurtzman, MD, IsoRay’s Medical
Director; and a training DVD for physicians who choose not to leave their
practices to attend a training course.
The
objective of the training programs is to increase the physician’s confidence in
using the product. To track the impact of the courses held in January 2008
and
in May 2008, IsoRay has compared physicians’ average monthly order activity for
the six month periods prior to and after attending the course. To date there
has
been a 42% increase in average monthly order activity when comparing these
two
time periods for those physicians participating in the January and May training
courses.
In today’s U.S. health care market, patients are more informed and involved in the management of their health than in the past. Many physicians relate incidents of their patients coming for consultations armed with articles researched on the Internet and other sources describing new treatments and medications. In many cases, these patients are demanding a certain therapy or drug and the physicians are complying when medically appropriate.
Because
of this consumer-driven market factor, we also promote our products directly
to
the general public. We target the prostate cancer patient, his spouse, family
and care givers. We emphasize to these segments the specific advantages of
the
Proxcelan Cesium-131 brachytherapy seed through our websites (located at
www.isoray.com, www.cesium.com, and www.proxcelan.com), patient advocacy
efforts, informational patient brochures and DVDs with patient testimonials,
patient focused informational website (www.proxcelan.com), and advertisements
in
specific markets supporting brachytherapy. None of the websites mentioned in
the
preceding sentence are part of this report.
In
addition, the Company continues to promote the clinical findings of the various
protocols through presentations by respected thought leaders. The Company will
continually review and update all marketing materials as more clinical
information is gathered from the protocols and studies.
Apart
from clinical studies and papers sponsored by the Company, several physicians
across the country are now independently publishing papers and studies extolling
the benefits of Cs-131.
Sales
and Distribution
According
to a recent industry survey, approximately 2,000 hospitals and free standing
clinics are currently offering radiation oncology services in the United States.
Not all of these facilities offer seed brachytherapy services. These
institutions are staffed with radiation oncologists and medical physicists
who
provide expertise in radiation therapy treatments and serve as consultants
for
urologists and prostate cancer patients. We target the radiation oncologists
and
the medical physicists as well as urologists as key clinical decision-makers
in
the type of radiation therapy offered to prostate cancer patients.
IsoRay
has a direct sales organization to introduce Proxcelan Cesium-131 brachytherapy
seeds to radiation oncologists and medical physicists. Currently IsoRay has
six
direct sales persons and a National Sales Director. These sales people include
those experienced in the brachytherapy market and the medical device market.
IsoRay is evaluating all options for distribution of the Proxcelan Cesium-131
seed and may in the future add additional distribution channels.
With
the
restructuring of the compensation structure by new management, the Company
lost
several members of its sales force who did not want to rely on a reduced base
salary and increased commissions approach. From the date of the changes in
compensation structure until September 22, 2008, the Company has lost four
sales
representatives and replaced them with four new sales representatives. As
management increasingly focuses on improving sales, additional changes may
be
necessary.
The
Company expects to continue to expand its customer base in fiscal year 2009.
When the Company implements its plans to expand outside the U.S. market, it
plans to use established distributors in the key markets in these other
countries. This strategy should reduce the time and expenses required to
identify, train and penetrate the key implant centers and establish
relationships with the key opinion leaders in these markets. Using established
distributors also should reduce the time spent acquiring the proper radiation
handling licenses and other regulatory requirements of these
markets.
Reimbursement
Payment
for IsoRay products comes from third-party payers including the Centers for
Medicare and Medicaid Services (CMS) and private insurance companies. These
payers reimburse the hospitals and clinics via well-established payment
procedures. In 2003, the Company was approved for an initial HCPCS code for
Cs-131 brachytherapy seeds. In July 2007 CMS divided the HCPCS code into two
codes for all manufacturers of brachytherapy seeds. The current method has
assigned one HCPCS code for loose seeds and a second HCPCS code for stranded
seeds. Medicare is the most significant U.S. payer for prostate brachytherapy
services, and is the payer in approximately 65% of all U.S. prostate
brachytherapy cases.
Prostate
brachytherapy is typically performed in an outpatient setting, and as such,
is
covered by the CMS Outpatient Prospective Payment System. Currently, when
charges for the seeds are correctly submitted to CMS, the total cost of the
seeds is reimbursed to the hospital or clinic by CMS. CMS had proposed that
a
fixed price per seed be reimbursed; however, Congress (after postponing a
decision on the Medical Bill which included brachytherapy seed reimbursement)
voted on July 15, 2008 to continue the pass-through reimbursement for
brachytherapy seeds through December 31, 2009. Other insurance companies have
historically followed CMS’s reimbursement policies.
Other
Information
Customers
Customers
representing ten percent or more of total Company sales for the twelve months
ended June 30, 2008 include:
|
Various
Northern California facilities (a)
|
18.6%
of revenue
|
|
Chicago
Prostate Cancer Center Westmont, IL
|
15.7%
of revenue
|
|
(a)
|
The
following facilities located in northern California are used by one
doctor
(the Company’s Medical Director): Community Hospital of Los Gatos (11.0%
of total revenue), Mills Peninsula Health Services (4.3%), and all
others
used by this doctor combined
(3.3%).
|
The
loss
of any of these significant customers would have an adverse effect on the
Company’s revenues, which would continue until the Company located new customers
to replace them.
Proprietary
Rights
The
Company relies on a combination of patent, copyright and trademark laws, trade
secrets, software security measures, license agreements and nondisclosure
agreements to protect its proprietary rights. Some of the Company’s proprietary
information may not be patentable.
The
Company intends to vigorously defend its proprietary technologies, trademarks,
and trade secrets. Members of management, employees, and certain equity holders
have previously signed non-disclosure, non-compete agreements, and future
employees, consultants, advisors, with whom the Company engages, and who are
privy to this information, will be required to do the same. A patent for the
cesium separation and purification process was granted on May 23, 2000 by the
U.S. Patent and Trademark Office (USPTO) under Patent Number 6,066,302, with
an
expiration date of May 23, 2020. The process was developed by Lane Bray, Chief
Chemist and a shareholder of the Company, and has been assigned exclusively
to
IsoRay. IsoRay’s predecessor also filed for patent protection in four European
countries under the Patent Cooperation Treaty. Those patents have been assigned
to IsoRay.
Our management believes that certain aspects of the IsoRay seed design and construction techniques are patentable innovations. These innovations have been documented in IsoRay laboratory records, and a patent application was filed with the USPTO on November 12, 2003. In August 2008, this patent was granted by the USPTO under Patent Number 7,410,458, with an expiration date of November 12, 2023. Certain methodologies regarding isotope production, separation, and seed manufacture are retained as trade secrets and are embodied in IsoRay’s procedures and documentation. In June 2004, July 2004, and February 2007, five patent applications were filed relating to methods of deriving Cs-131 developed by IsoRay employees. The Company is currently working on developing and patenting additional methods of deriving Cs-131 and other isotopes.
There
are
specific conditions attached to the assignment of the Cs-131 patent from Lane
Bray. In particular, the associated Royalty Agreement provides for 1% of gross
profit payment from seed sales to Lane Bray and 1% of gross profit from any
use
of the Cs-131 process patent for non-seed products. If IsoRay reassigns the
Royalty Agreement to another company, these royalties increase to 2%. The
Royalty Agreement has an anti-shelving clause which requires IsoRay to return
the patent if IsoRay permanently abandons sales of products using the invention.
During fiscal years 2008 and 2007, the Company recorded royalty expense of
$21,219 and $2,161, respectively, related to this patent.
The
terms
of a license agreement with the Lawrence Family Trust (successor to Don
Lawrence) for a patent application and related “know-how” require the payment of
a royalty based on the Net Factory Sales Price, as defined in the agreement,
of
licensed product sales. Because the licensor’s patent application was ultimately
abandoned, only a 1% “know-how” royalty remains applicable. To date, management
believes that there have been no product sales incorporating the “know-how;” and
therefore believes no royalty is due pursuant to the terms of the agreement.
Management believes that ultimately no royalties should be paid under this
agreement as there is no intent to use this “know-how” in the
future.
The
Lawrence Family Trust has disputed management’s contention that it is not using
this “know-how”. On September 25, 2007 and again on October 31, 2007, the
Company participated in nonbinding mediation regarding this matter; however,
no
settlement was reached with the Lawrence Family Trust. After additional
settlement discussions, which ended in April 2008, the parties failed to reach
a
settlement. The parties may demand binding arbitration at any time.
The
Company’s Proxcelan trademark has been preliminarily approved and the Company is
currently waiting for the final approval letter from the USPTO.
Research
and Development
During
the three-year period ended June 30, 2008, IsoRay and its predecessor companies
incurred more than $3.2 million in costs related to research and development
activities. The Company expects to continue ongoing research and development
activities for the foreseeable future.
Whether
successful or not, the Company anticipates ending its major research and
development project to develop a proprietary separation process to manufacture
enriched barium during fiscal year 2009. During fiscal year 2008, the Company
spent approximately $483,000 on this project. The remaining project costs are
anticipated to be approximately $150,000.
Government
Regulation
The
Company's present and future intended activities in the development, manufacture
and sale of cancer therapy products are subject to extensive laws, regulations,
regulatory approvals and guidelines. Within the United States, the Company's
therapeutic radiological devices must comply with the U.S. Federal Food, Drug
and Cosmetic Act, which is enforced by the FDA. The Company is also required
to
adhere to applicable FDA Quality System Regulations, also known as the Good
Manufacturing Practices, which include extensive record keeping and periodic
inspections of manufacturing facilities. The Company's predecessor obtained
FDA
510(k) clearance in March 2003 to market the Proxcelan Cs-131 seed for the
treatment of localized solid tumors and other malignant disease and IsoRay
obtained FDA 510(k) clearance in November 2006 to market preloaded brachytherapy
seeds.
In
the
United States, the FDA regulates, among other things, new product clearances
and
approvals to establish the safety and efficacy of these products. We are also
subject to other federal and state laws and regulations, including the
Occupational Safety and Health Act and the Environmental Protection
Act.
The
Federal Food, Drug, and Cosmetic Act and other federal statutes and regulations
govern or influence the research, testing, manufacture, safety, labeling,
storage, record keeping, approval, distribution, use, reporting, advertising
and
promotion of such products. Noncompliance with applicable requirements can
result in civil penalties, recall, injunction or seizure of products, refusal
of
the government to approve or clear product approval applications,
disqualification from sponsoring or conducting clinical investigations,
preventing us from entering into government supply contracts, withdrawal of
previously approved applications, and criminal prosecution.
In
the
United States, medical devices are classified into three different categories
over which the FDA applies increasing levels of regulation: Class I, Class
II,
and Class III. Most Class I devices are exempt from premarket notification
(510(k)); most Class II devices require premarket notification (510(k)); and
most Class III devices require premarket approval. Our Proxcelan Cs-131 seed
is
a Class II device and received 510(k) clearance in March 2003.
Approval
of new Class III medical devices is a lengthy procedure and can take a number
of
years and require the expenditure of significant resources. There is a shorter
FDA review and clearance process for Class II medical devices, the premarket
notification or 510(k) process, whereby a company can market certain Class
II
medical devices that can be shown to be substantially equivalent to other
legally marketed devices. Since brachytherapy seeds have been classified by
the
FDA as a Class II device, we have been able to achieve market clearance for
our
Cs-131 seed using the 510(k) process.
As
a
registered medical device manufacturer with the FDA, we are subject to
inspection to ensure compliance with their current Good Manufacturing Practices,
or cGMP. These regulations require that we and any of our contract manufacturers
design, manufacture and service products, and maintain documents in a prescribed
manner with respect to manufacturing, testing, distribution, storage, design
control, and service activities. Modifications or enhancements that could
significantly affect the safety or effectiveness of a device or that constitute
a major change to the intended use of the device require a new 510(k) notice
for
any product modification.
The
Medical Device Reporting regulation requires that we provide information to
the
FDA on deaths or serious injuries alleged to be associated with the use of
our
devices, as well as product malfunctions that are likely to cause or contribute
to death or serious injury if the malfunction were to recur. Labeling and
promotional activities are regulated by the FDA and, in some circumstances,
by
the Federal Trade Commission.
As
a
medical device manufacturer, we are also subject to laws and regulations
administered by governmental entities at the federal, state and local levels.
For example, our facility is licensed as a medical product manufacturing
facility in the State of Washington and is subject to periodic state regulatory
inspections. Our customers are also subject to a wide variety of laws and
regulations that could affect the nature and scope of their relationships with
us.
In
support of IsoRay’s global strategy to expand marketing to Canada and Russia, as
well as other foreign markets, we initiated the process in fiscal year 2008
to
obtain the European CE Mark, Canadian registration, and certification to ISO
13485, an internationally recognized quality system. European law requires
that
medical devices sold in any EU Member State comply with the requirements of
the
European Medical Device Directive (MDD) or the Active Implantable Medical Device
Directive (AIMDD). IsoRay’s products are classified in Europe as an active
implantable and are subject to the AIMDD. Compliance with AIMDD and obtaining
a
CE Mark involves being certified to ISO 13485 and obtaining approval of the
product technical file by a notified body that is recognized by competent
authorities of a Member State. Compliance with ISO 13485 is also required for
registration of a company for sale of its products in Canada. Many of the
recognized EU Notified Bodies are also recognized by Health Canada to conduct
the ISO 13485 inspections for Canadian registration. In August 2008, the Company
received its certification to ISO 13485 and is continuing to seek Canadian
registration and the European CE Mark. The Company is now focusing on the
Canadian and Russian markets and is no longer pursuing sales in the European
Union (EU). Management does not believe a strategic alliance with IBt, SA,
a
Belgian company, will be consummated nor will management leverage IBt’s
distribution channels in the EU.
In
the
United States, as a manufacturer of medical devices and devices utilizing
radioactive byproduct material, we are subject to extensive regulation by not
only federal governmental authorities, such as the FDA, but also by state and
local governmental authorities, such as the Washington State Department of
Health, to
ensure
such devices are safe and effective. In Washington State, the Department of
Health, by agreement with the federal Nuclear Regulatory Commission (NRC),
regulates the possession, use, and disposal of radioactive byproduct material
as
well as the manufacture of radioactive sealed sources to ensure compliance
with
state and federal laws and regulations. Our Cs-131 brachytherapy seeds
constitute both medical devices and radioactive sealed sources and are subject
to these regulations.
Moreover,
our use, management, and disposal of certain radioactive substances and wastes
are subject to regulation by several federal and state agencies depending on
the
nature of the substance or waste material. We believe that we are in compliance
with all federal and state regulations for this purpose.
Washington
voters approved Initiative 297 in late 2004, which may impose additional
restrictions on sites at which mixed radioactive and hazardous wastes are
generated and stored, as it prohibits additional mixed radioactive and hazardous
waste from being brought to sites until the existing on-site waste conforms
to
all state and federal environment laws. In June 2006, a U.S. District court
judge ruled that Initiative 297 was unconstitutional in its entirety and the
Ninth Circuit upheld this decision in May 2008. However, the State of Washington
may choose to appeal the decision. If this decision is overturned and Initiative
297 is enforced it could impact our ability to manufacture our seeds in the
State of Washington.
Seasonality
The
Company believes that some seed implantation procedures are deferred around
physician vacations (particularly in the summer months), holidays, and medical
conventions and conferences resulting in a seasonal influence on the Company’s
business. These factors cause a momentary decline in revenue which management
believes is ultimately realized later. Because almost thirty percent (30%)
of
the Company's business relies on three physicians, simultaneous vacations by
these three physicians could cause significant drops in the Company's
productivity during those periods.
Employees
As
of
September 12, 2008, IsoRay employed 49 full-time individuals and one part-time
individual. The Company's future success will depend, in part, on its ability
to
attract, retain, and motivate highly qualified sales, technical and management
personnel. From time to time, the Company may employ independent consultants
or
contractors to support its research and development, marketing, sales, and
administrative organizations. None of the Company's employees are represented
by
any collective bargaining unit. IsoRay estimates that successful implementation
of its growth plan would result in up to five to seven additional employees
by
the end of fiscal year 2009. The significant decrease in anticipated employees
from those projected in fiscal year 2008 is a result of the greater
manufacturing efficiencies realized by the Company and lower than anticipated
sales growth.
Competition
The
Company competes in a market characterized by technological innovation,
extensive research efforts, and significant competition. In general, the
Proxcelan Cesium-131 brachytherapy seed competes with conventional methods
of
treating localized cancer, including, but not limited to, all forms of
prostatectomy surgery and external beam radiation therapy which includes
intensity modulated radiation therapy, as well as competing permanent
brachytherapy devices. Surgery has historically represented the most common
medical treatment for early-stage, localized prostate cancer but radical
prostatectomies have declined in recent years. EBRT is also a well-established
method of treatment and is widely accepted for patients who represent a poor
surgical risk or whose prostate cancer has advanced beyond the stage for which
surgical treatment is indicated. Management believes that if general conversion
from these treatment options (or other established or conventional procedures)
to the Proxcelan Cesium-131 brachytherapy seed does occur, such conversion
will
likely be the result of a combination of equivalent or better efficacy, reduced
incidence and duration of side effects and complications, lower cost, better
quality of life outcomes, and pressure by health care providers and
patients.
History
has shown the advantage of being the first to market a new brachytherapy
product. For example, Theragenics Corp., which introduced the original Pd-103
seed, currently claims over 59% of the Pd-103 market share (through CR Bard,
other distributors, and direct distribution). Although factors other than being
first to market contribute to becoming a market leader, the Company believes
it
has the opportunity to obtain a similar and significant advantage by being
the
first to introduce a Cs-131 seed. (Source: Millennium Research Corp,
2008)
The
Company’s patented Cs-131 separation process is likely to provide a sustainable
competitive advantage. Production of Cs-131 also requires specialized facilities
that represent high cost and long lead time if not readily available. In
addition, a competitor would need to develop a method for isotope attachment
and
seed assembly, would need to conduct testing to meet NRC and FDA requirements,
and would need to obtain regulatory clearances before marketing a competing
device.
Several
companies have obtained regulatory clearance to produce and distribute Pd-103
and I-125 seeds, which compete directly with our seed. Six of those companies
represent nearly 100% of annual brachytherapy seed sales worldwide: CR Bard,
Inc
(32.3%), Oncura (21.7%) (part of GE Healthcare), Theragenics Corp (direct sales
9.5%), North American Scientific, Inc. (13.1%), Core Oncology (10.7%), and
Best
Medical International, Inc. (6.5%) (Source: Millennium Research Corp, 2008).
It
is
possible that three or four of the current I-125 or Pd-103 seed manufacturers
(e.g., CR Bard, Oncura, Theragenics, North American Scientific, etc.) are
capable of producing and marketing a Cs-131 seed, but none have reported efforts
to do so. Best Medical obtained a seed core patent in 1992 that named ten
different isotopes, including Cs-131, for use in their seeds. Best Medical
received FDA 510(k) clearance to market a Cs-131 seed on June 6, 1993 but to
date has not produced any products for sale. In addition to the FDA and the
NRC,
Best Medical would be required to submit a Cs-131 seed to the TG-43 task group
of the American Association of Physicists in Medicine to determine the seed’s
characteristics such as anisotropy, dose rate constant, etc. To date there
has
been no submission to the TG-43 task group for a competing Cs-131
seed.
Additional
Growth Opportunities
Management
of the Company sees growth opportunities through expansion into international
markets and additional treatment applicability to cancers other than prostate.
The Company plans to introduce Cs-131 for prostate brachytherapy initially
into
Canada and Russia and later into Europe and other international markets through
partnerships and strategic alliances with channel partners for manufacturing
and
distribution.
Cs-131
has FDA clearance to be used for treatments for a broad spectrum of cancers
including breast, brain, lung, and liver cancer, and the Company believes that
a
major opportunity exists as an adjunct therapy for the treatment of residual
lung cancer and ocular melanoma. The Company has already begun treating ocular
melanoma. The Company has had discussions with prominent physicians and is
looking at treatment of lung and brain cancer.
There is also an opportunity to develop and market other radioactive isotopes to the United States market, and to market Cs-131 isotope itself, separate from its use in our seeds. The Company is also in the preliminary stages of exploring alternate methods of delivering our isotopes to various organs of the body, as it may be advantageous to use delivery methods other than a titanium-encapsulated seed to deliver radiation to certain organs.
Our
Revenues Depend Upon One Product.
Until
such time as we develop additional products, our revenues depend upon the
successful production, marketing, and sales of the Proxcelan Cs-131
brachytherapy seed. The rate and level of market acceptance of this product
may
vary depending on the perception by physicians and other members of the
healthcare community of its safety and efficacy as compared to that of competing
products, if any; the clinical outcomes of the patients treated; the
effectiveness of our sales and marketing efforts in the United States, Canada,
and Russia; any unfavorable publicity concerning our product or similar
products; our product’s price relative to other products or competing
treatments; any decrease in current reimbursement rates from the Centers for
Medicare and Medicaid Services or third-party payers; regulatory developments
related to the manufacture or continued use of the product; availability of
sufficient supplies of enriched barium (now coming from Russia) for Cs-131
seed
production; ability to produce sufficient quantities of this product; and the
ability of physicians to properly utilize the device and avoid excessive levels
of radiation to patients. Because of our reliance on this product as the sole
source of our revenue, any material adverse developments with respect to the
commercialization of this product may cause us to continue to incur losses
rather than profits in the future.
Although
Cleared To Treat Any Malignant Tissue, Our Sole Product Is Currently Used To
Treat Two Types Of Cancer.
Currently, the Proxcelan Cs-131 seed is used exclusively for the treatment
of
prostate cancer and ocular melanoma (less than one percent of our sales). We
believe the Proxcelan Cs-131 seed will be used to treat other types of cancers,
as is currently the case with our competitors’ I-125 and Pd-103 seeds. However,
we believe that clinical data gathered by select groups of physicians under
treatment protocols specific to other organs will be needed prior to widespread
acceptance of our product for treating other cancer sites. If our current and
future products do not become accepted in treating cancers of other sites,
our
sales will depend solely on treatment of prostate cancer and will require ever
increasing market share to increase revenues.
We
Have Increasing Cash Requirements. IsoRay
has generated material operating losses since inception. We expect to continue
to experience significant net operating losses. Due to previous capital
investments, management believes cash and cash equivalents on hand at
June 30, 2008 will be sufficient to meet our anticipated cash requirements
for operations, debt service, and capital expenditure requirements through
at
least the next twelve months. If operating costs expand proportionately with
revenue increases, other applications are pursued for seed usage outside the
prostate market, if protocols are expanded to support the integrity of our
product, and marketing expenses increase, management believes approximately
$1.5
million in monthly revenue will be needed to reach break-even. This is a
decrease from the previous estimate of $2 million in monthly revenue due to
recent improvements in the Company’s production operating efficiencies and its
cost structure implemented by new management. However, there is no assurance
as
to when break-even will occur. If we are unable to generate profits and
unable to obtain additional financing to meet our working capital requirements,
we may have to curtail our business.
We
Rely Heavily On A Limited Number Of Suppliers.
Some
materials used in our products are currently available only from a limited
number of suppliers. In fiscal 2008, approximately sixty-five percent (65%)
of
our cesium was supplied through either the Institute of Nuclear Materials (INM)
or from the Russian Research Institute of Atomic Reactors (RIAR) both of which
are located in Russia. Beginning in January 2008, we were unable to obtain
any
Cs-131 from INM and instead obtained all of our supply of Cs-131 in Russia
from
RIAR until August 2008, when RIAR was shut down for regularly scheduled
maintenance and we resumed purchasing from INM. However, beginning in October
2008, we will obtain Cs-131 from both INM and RIAR. At current production levels
the Company cannot meet the minimum purchase requirements necessary to purchase
the product at the reduced prices presently offered. Unless the Company
substantially increases its purchase requirements resulting from significant
increases in demand for its product, the cost of Cs-131 in Russia could
significantly increase from current pricing. Management will seek to negotiate
favorable pricing but there is no assurance as to the outcome of these
negotiations.
If
the
development of barium enrichment capabilities is successful, the Company plans
to expand Cs-131 manufacturing capability at the MURR reactor in the United
States. Reliance on any single supplier increases the risks associated with
concentrating isotope production at a single reactor facility which are subject
to unanticipated shutdowns. Failure to obtain deliveries of cesium from multiple
sources could have a material adverse effect on seed production and there may
be
a delay before we could locate alternative suppliers beyond the three currently
used.
We
may
not be able to locate additional suppliers outside of Russia capable of
producing the level of output of cesium at the quality standards we require.
Additional factors that could cause interruptions or delays in our source of
materials include limitations on the availability of raw materials or
manufacturing performance experienced by our suppliers and a breakdown in our
commercial relations with one or more suppliers. Some of these factors may
be
completely out of our and our suppliers’ control.
Virtually
all titanium tubing used in brachytherapy seed manufacture comes from a single
source, Accellent Corporation. We currently obtain a key component of our seed
core from another single supplier. We do not have formal written agreements
with
Accellent Corporation. Any interruption or delay in the supply of materials
required to produce our products could harm our business if we were unable
to
obtain an alternative supplier or substitute equivalent materials in a
cost-effective and timely manner. To mitigate any potential interruptions,
the
Company continually evaluates its inventory levels and management believes
that
the Company maintains a sufficient quantity on hand to alleviate any potential
disruptions.
Future
Production Increases Will Depend on Our Ability to Acquire Larger Quantities
of
Cs-131 and Hire More Employees. IsoRay
currently obtains Cs-131 through its contracts with INM and RIAR, and through
reactor irradiation of natural barium and subsequent separation of cesium from
the irradiated barium targets. The amount of Cs-131 that can be produced from
a
given reactor source is limited by the power level and volume available within
the reactor for irradiating targets. This limitation can be overcome by
utilizing barium feedstock that is enriched in the stable isotope Ba-130.
However, the number of suppliers of enriched barium is limited and they may
be
unable to produce this material in sufficient quantities at a reasonable
price.
IsoRay
has entered into exclusive agreements with INM and RIAR in Russia to provide
Cs-131 in quantities sufficient to supply a significant percentage of future
demand for this isotope. Delivery of the isotope from INM began in January
2006
and delivery from RIAR began in January 2008. INM has unique capabilities due
to
its large irradiation capacity which will allow the Company to meet all of
its
Cs-131 demands without the use of enriched material for the foreseeable future.
Due to the purchase of enriched barium in June 2007, IsoRay has access to
sufficient quantities of enriched barium that may be recycled to increase the
production of Cs-131. Although the agreements provide for supplying Cs-131
in
significant quantities, there is no assurance that this will result in IsoRay
gaining access to a continuing sufficient supply of enriched barium feedstock.
If we were unable to obtain supplies of isotopes from Russia in the future,
our
overall supply of cesium and barium would be reduced significantly unless the
Company has a source of enriched barium for utilization in domestic
reactors.
We
Are Subject To Uncertainties Regarding Reimbursement For Use Of Our
Products.
Hospitals and freestanding clinics may be less likely to purchase our products
if they cannot be assured of receiving favorable reimbursement for treatments
using our products from third-party payers, such as Medicare and private health
insurance plans. Currently, Medicare reimburses hospitals, clinics and
physicians for the cost of seeds used in brachytherapy procedures on a pass
through basis, and will continue this method of reimbursement through December
31, 2009. 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 products. There is no uniform
policy on reimbursement among third-party payers, and we can provide no
assurance that our products 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 likely have a material adverse effect on our revenues.
In
2003,
we applied to the Centers for Medicare and Medicaid Services (CMS) and received
a reimbursement code for use of our Cs-131 seed. As of July 1, 2007, CMS revised
the coding system for brachytherapy seeds and separated the single code into
two
codes – one code for loose seeds and a second code for stranded seeds. This
methodology was applied to all companies manufacturing and distributing
brachytherapy seeds. Reimbursement amounts are reviewed and revised annually.
Adjustments could be made to these reimbursement amounts or policies, which
could result in reduced reimbursement for brachytherapy services, which could
negatively affect market demand for our products.
Furthermore,
any federal and state efforts to reform government and private healthcare
insurance programs could significantly affect the purchase of healthcare
services and products in general and demand for our products in particular.
Medicare is the payer in approximately 70% of all U.S. prostate brachytherapy
cases and management anticipates this percentage to increase annually. We are
unable to predict whether potential healthcare reforms will be enacted, 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.
Our
Operating Results Will Be Subject To Significant Fluctuations.
Our
quarterly revenues, expenses, and operating results are likely to fluctuate
significantly in the future. Fluctuation may result from a variety of factors,
which are discussed in detail throughout this “RISK FACTORS” section,
including:
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our
achievement of product development objectives and
milestones;
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demand
and pricing for the Company’s
products;
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effects
of aggressive competitors;
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hospital,
clinic and physician buying
decisions;
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research
and development and manufacturing
expenses;
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patient
outcomes from our therapy;
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physician
acceptance of our products;
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government
or private healthcare reimbursement
policies;
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our
manufacturing performance and
capacity;
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incidents,
if any, that could cause temporary shutdown of our manufacturing
facility;
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the
amount and timing of sales orders;
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rate
and success of future product
approvals;
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timing
of FDA clearance, if any, of competitive products and the rate of
market
penetration of competing products;
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seasonality
of purchasing behavior in our
market;
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overall
economic conditions; and
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the
successful introduction or market penetration of alternative
therapies.
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We
Have Limited Data on the Clinical Performance of Cs-131.
As of
June 1, 2008, the Proxcelan Cs-131 seed has been implanted in over
2,800 patients
and research papers are being published on the use of the Proxcelan seed.
However, we have less statistical data than is available for I-125 and Pd-103
seeds. While this limited data may prevent us from drawing statistically
significant conclusions, the side effects experienced by these patients were
less severe than side effects observed in seed brachytherapy with I-125 and
Pd-103 and in other forms of treatment such as radical prostatectomy. These
early results indicate that the onset of side effects generally occurs between
one and three weeks post-implant, and the side effects are resolved between
five
and eight weeks post-implant, side effects resolved more quickly than the side
effects that occur with competing seeds or with other forms of treatment. These
limited findings support management’s belief that the Cs-131 seed will result in
less severe side effects than competing treatments, but we may have to gather
data on outcomes from additional patients before we can establish statistically
valid conclusions regarding the incidence of side effects from our
seeds.
We
Are Subject To The Risk That Certain Third Parties May Mishandle Our
Product.
We rely
on third parties, such as Federal Express, to deliver our Proxcelan Cs-131
seed,
and on other third parties, including various radiopharmacies, to package our
Proxcelan Cs-131 seed in certain specialized packaging forms requested by
customers. We are subject to the risk that these third parties may mishandle
our
product, which could result in adverse effects, particularly given the
radioactive nature of our product.
It
Is
Possible That Other Treatments May Be Deemed Superior To
Brachytherapy.
Our
Proxcelan Cs-131 seed faces competition not only from companies that sell other
radiation therapy products, but also from companies that are developing
alternative therapies for the treatment of cancers. It is possible that advances
in the pharmaceutical, biomedical, or gene therapy fields could render some
or
all radiation therapies, whether conventional or brachytherapy, obsolete. If
alternative therapies are proven or even perceived to offer treatment options
that are superior to brachytherapy, physician adoption of our product could
be
negatively affected and our revenues from our product could
decline.
Our
Industry Is Intensely Competitive.
The
medical device industry is intensely competitive. We compete with both public
and private medical device, biotechnology and pharmaceutical companies that
have
been in existence longer than we have, have a greater number of products on
the
market, have greater financial and other resources, and have other technological
or competitive advantages. In addition, centers that wish to offer the Proxcelan
Cs-131 seed must comply with licensing requirements specific to the state in
which they do business and these licensing requirements may take a considerable
amount of time to comply with. Certain centers may choose to not offer our
Proxcelan Cs-131 seed due to the time required to obtain necessary license
amendments. We also compete with academic institutions, government agencies,
and
private research organizations in the development of technologies and processes
and in acquiring key personnel. Although we have patents granted and patents
applied for to protect our isotope separation processes and Cs-131 seed
manufacturing technology, we cannot be certain that one or more of our
competitors will not attempt to obtain patent protection that blocks or
adversely affects our product development efforts. To minimize this potential,
we have entered into exclusive agreements with key suppliers of isotopes and
isotope precursors, which are subject to becoming non-exclusive as we have
failed to meet minimum purchase requirements.
We
May Be Unable To Adequately Protect Or Enforce Our Intellectual Property Rights
Or Secure Rights To Third-Party Patents.
Our
ability and the abilities of our partners to obtain and maintain patent and
other protection for our products will affect our success. We are assigned,
have
rights to, or have exclusive licenses to patents and patents pending in the
U.S.
and numerous foreign countries. The patent positions of medical device companies
can be highly uncertain and involve complex legal and factual questions. Our
patent rights may not be upheld in a court of law if challenged. Our patent
rights may not provide competitive advantages for our products and may be
challenged, infringed upon or circumvented by our competitors. We cannot patent
our products in all countries or afford to litigate every potential violation
worldwide.
Because
of the large number of patent filings in the medical device and biotechnology
field, our competitors may have filed applications or been issued patents and
may obtain additional patents and proprietary rights relating to products or
processes competitive with or similar to ours. We cannot be certain that U.S.
or
foreign patents do not exist or will not be issued that would harm our ability
to commercialize our products and product candidates.
The
Value Of Our Granted Patent, and Our Patents Pending, Is
Uncertain.
Although
our management strongly believes that our patent on the process for producing
Cs-131, our patent pending on the manufacture of the brachytherapy seed, our
patent applications on additional methods for producing Cs-131 and other
isotopes which have been filed, and anticipated future patent applications,
which have not yet been filed, have significant value, we cannot be certain
that
other like-kind processes may not exist or be discovered, that any of these
patents is enforceable, or that any of our patent applications will result
in
issued patents.
Failure
To Comply With Government Regulations Could Harm Our Business.
As a
medical device and medical isotope manufacturer, we are subject to extensive,
complex, costly, and evolving governmental rules, regulations and restrictions
administered by the FDA, by other federal and state agencies, and by
governmental authorities in other countries. Compliance with these laws and
regulations is expensive and time-consuming, and changes to or failure to comply
with these laws and regulations, or adoption of new laws and regulations, could
adversely affect our business.
In
the
United States, as a manufacturer of medical devices and devices utilizing
radioactive by-product material, we are subject to extensive regulation by
federal, state, and local governmental authorities, such as the FDA and the
Washington State Department of Health, to
ensure
such devices are safe and effective. Regulations promulgated by the FDA under
the U.S. Food, Drug and Cosmetic Act, or the FDC Act, govern the design,
development, testing, manufacturing, packaging, labeling, distribution,
marketing and sale, post-market surveillance, repairs, replacements, and recalls
of medical devices. In Washington State, the Department of Health, by agreement
with the federal Nuclear Regulatory Commission (NRC), regulates the possession,
use, and disposal of radioactive byproduct material as well as the manufacture
of radioactive sealed sources to ensure compliance with state and federal laws
and regulations. Our Proxcelan Cs-131 brachytherapy seeds constitute both
medical devices and radioactive sealed sources and are subject to these
regulations.
Under
the
FDC Act, medical devices are classified into three different categories, over
which the FDA applies increasing levels of regulation: Class I,
Class II, and Class III. Our Proxcelan Cs-131 seed has been classified
as a Class II device and has received clearance from the FDA through the 510(k)
pre-market notification process. Any modifications to the device that would
significantly affect safety or effectiveness, or constitute a major change
in
intended use, would require a new 510(k) submission. As with any submittal
to
the FDA, there is no assurance that a 510(k) clearance would be granted to
the
Company.
In
addition to FDA-required market clearances and approvals for our products,
our
manufacturing operations are required to comply with the FDA's Quality System
Regulation, or QSR, which addresses requirements for a company's quality program
such as management responsibility, good manufacturing practices, product and
process design controls, and quality controls used in manufacturing. Compliance
with applicable regulatory requirements is monitored through periodic
inspections by the FDA Office of Regulatory Affairs (ORA). We anticipate both
announced and unannounced inspections by the FDA. Such inspections could result
in non-compliance reports (Form 483) which, if not adequately responded to,
could lead to enforcement actions. The FDA can institute a wide variety of
enforcement actions, ranging from public warning letters to more severe
sanctions such as fines, injunctions, civil penalties, recall of our products,
operating restrictions, suspension of production, non-approval or withdrawal
of
pre-market clearances for new products or existing products, and criminal
prosecution. There can be no assurance that we will not incur significant costs
to comply with these regulations in the future or that the regulations will
not
have a material adverse effect on our business, financial condition and results
of operations.
The
marketing of our products in foreign countries will, in general, be regulated
by
foreign governmental agencies similar to the FDA. Foreign regulatory
requirements vary from country to country. The time and cost required to obtain
regulatory approvals could be longer than that required for FDA clearance in
the
United States and the requirements for licensing a product in another country
may differ significantly from FDA requirements. We will rely, in part, on
foreign distributors to assist us in complying with foreign regulatory
requirements. We may not be able to obtain these approvals without incurring
significant expenses or at all, and the failure to obtain these approvals would
prevent us from selling our products in the applicable countries. This could
limit our sales and growth.
Our
Business Exposes Us To Product Liability Claims.
Our
design, testing, development, manufacture, and marketing of products involve
an
inherent risk of exposure to product liability claims and related adverse
publicity. Insurance coverage is expensive and difficult to obtain, and,
although we currently have a five million dollar policy, in the future we may
be
unable to obtain or renew coverage on acceptable terms, if at all. If we are
unable to obtain or renew sufficient insurance at an acceptable cost or if
a
successful product liability claim is made against us, whether fully covered
by
insurance or not, our business could be harmed.
Our Business Involves Environmental Risks. Our business involves the controlled use of hazardous materials, chemicals, biologics, and radioactive compounds. Manufacturing is extremely susceptible to product loss due to radioactive, microbial, or viral contamination; material or equipment failure; vendor or operator error; or due to the very nature of the product’s short half-life. Although we believe that our safety procedures for handling and disposing of such materials comply with state and federal standards there will always be the risk of accidental contamination or injury. In addition, radioactive, microbial, or viral contamination may cause the closure of the respective manufacturing facility for an extended period of time. By law, radioactive materials may only be disposed of at state-approved facilities. At our leased facility we use commercial disposal contractors. We may incur substantial costs related to the disposal of these materials. If we were to become liable for an accident, or if we were to suffer an extended facility shutdown, we could incur significant costs, damages, and penalties that could harm our business.
We
Rely Upon Key Personnel.
Our
success will depend, to a great extent, upon the experience, abilities and
continued services of our executive officers, sales staff and key scientific
personnel. If we lose the services of several officers, sales personnel, or
key
scientific personnel, our business could be harmed. Our success also will depend
upon our ability to attract and retain other highly qualified scientific,
managerial, sales, and manufacturing personnel and their ability to develop
and
maintain relationships with key individuals in the industry. Competition for
these personnel and relationships is intense and we compete with numerous
pharmaceutical and biotechnology companies as well as with universities and
non-profit research organizations. We may not be able to continue to attract
and
retain qualified personnel.
Our
Ability To Operate In Foreign Markets Is Uncertain. Our
future growth will depend in part on our ability to establish, grow and maintain
product sales in foreign markets, particularly in Canada and Russia. However,
we
have limited experience in marketing and distributing products in other
countries. Any foreign operations would subject us to additional risks and
uncertainties, including our customers’ ability to obtain reimbursement for
procedures using our products in foreign markets; the burden of complying with
complex and changing foreign regulatory requirements; speedy delivery
requirements due to the short half-life of our product; language barriers and
other difficulties in providing long-range customer service; potentially longer
accounts receivable collection times; significant currency fluctuations, which
could cause third-party distributors to reduce the number of products they
purchase from us because the cost of our products to them could fluctuate
relative to the price they can charge their customers; reduced protection of
intellectual property rights in some foreign countries; and the possibility
that
contractual provisions governed by foreign laws would be interpreted differently
than intended in the event of a contract dispute. Any future foreign sales
of
our products could also be adversely affected by export license requirements,
the imposition of governmental controls, political and economic instability,
trade restrictions, changes in tariffs, and difficulties in staffing and
managing foreign operations. Many of these factors may also affect our ability
to import Cs-131 from Russia under our contracts with INM and RIAR.
Our
Ability To Expand Operations And Manage Growth Is Uncertain.
Our
efforts to expand our operations will result in new and increased
responsibilities for management personnel and will place a strain upon the
entire company. To compete effectively and to accommodate growth, if any, we
may
be required to continue to implement and to improve our management,
manufacturing, sales and marketing, operating and financial systems, procedures
and controls on a timely basis and to expand, train, motivate and manage our
employees. There can be no assurance that our personnel, systems, procedures,
and controls will be adequate to support our future operations. If the Proxcelan
Cs-131 seed were to rapidly become the “seed of choice,” it is unlikely that we
could meet demand. We could experience significant cash flow difficulties and
may have difficulty obtaining the working capital required to manufacture our
products and meet demand. This would cause customer discontent and invite
competition.
Our
Reporting Obligations As A Public Company Are Costly. Operating
a public company involves substantial costs to comply with reporting obligations
under federal securities laws that are continuing to increase as provisions
of
the Sarbanes Oxley Act of 2002 are implemented. As a smaller reporting company,
the Company needs to implement additional provisions of the Sarbanes Oxley
Act
during fiscal year 2009. These reporting obligations will increase our operating
costs.
Our
Stock Price Is Likely To Be Volatile.
There is
generally significant volatility in the market prices and limited liquidity
of
securities of early stage companies, and particularly of early stage medical
product companies. Contributing to this volatility are various events that
can
affect our stock price in a positive or negative manner. These events include,
but are not limited to: governmental approvals of or refusals to approve
regulations or actions; market acceptance and sales growth of our products;
litigation involving the Company or our industry; developments or disputes
concerning our patents or other proprietary rights; changes in the structure
of
healthcare payment systems; departure of key personnel; future sales of our
securities; fluctuations in our financial results or those of companies that
are
perceived to be similar to us; swings in seasonal demands of purchasers;
investors’ general perception of us; and general economic, industry and market
conditions. If any of these events occur, it could cause our stock price to
fall.
Future
Sales By Shareholders, Or The Perception That Such Sales May Occur, May Depress
The Price Of Our Common Stock. The
sale
or availability for sale of substantial amounts of our shares in the public
market, including shares issuable upon conversion of outstanding preferred
stock
or exercise of common stock warrants and options, or the perception that such
sales could occur, could adversely affect the market price of our common stock
and also could impair our ability to raise capital through future offerings
of
our shares. As of June 30, 2008, we had 22,942,088 outstanding shares of common
stock, and the following additional shares were reserved for issuance: 2,803,393
shares upon exercise of outstanding options, 3,245,082 shares upon exercise
of
outstanding warrants, and 59,065 shares upon conversion of preferred stock.
Any
decline in the price of our common stock may encourage short sales, which could
place further downward pressure on the price of our common stock and may impair
our ability to raise additional capital through the sale of equity
securities.
The
Issuance Of Shares Upon Exercise Of Derivative Securities May Cause Immediate
And Substantial Dilution To Our Existing Shareholders.
The
issuance of shares upon conversion of the preferred stock and the exercise
of
common stock warrants and options may result in substantial dilution to the
interests of other shareholders since these selling shareholders may ultimately
convert or exercise and sell all or a portion of the full amount issuable upon
exercise. If all derivative securities were converted or exercised into shares
of common stock, there would be approximately an additional 6,100,000 shares
of
common stock outstanding as a result. The issuance of these shares will have
the
effect of further diluting the proportionate equity interest and voting power
of
holders of our common stock.
We
Do
Not Expect To Pay Any Dividends For The Foreseeable Future.
We do
not anticipate paying any dividends to our shareholders for the foreseeable
future. The terms of certain of our and our subsidiary's outstanding
indebtedness substantially restrict the ability of either company to pay
dividends. Accordingly, shareholders must be prepared to rely on sales of their
common stock after price appreciation to earn an investment return, which may
never occur. Any determination to pay dividends in the future will be made
at
the discretion of our Board of Directors and will depend on our results of
operations, financial conditions, contractual restrictions, restrictions imposed
by applicable laws and other factors our Board deems relevant.
Certain Provisions of Minnesota Law and Our Charter Documents Have an Anti-Takeover Effect. There exist certain mechanisms under Minnesota law and our charter documents that may delay, defer or prevent a change of control. Anti-takeover provisions of our articles of incorporation, bylaws and Minnesota law could diminish the opportunity for shareholders to participate in acquisition proposals at a price above the then-current market price of our common stock. For example, while we have no present plans to issue any preferred stock, our Board of Directors, without further shareholder approval, may issue shares of undesignated preferred stock and fix the powers, preferences, rights and limitations of such class or series, which could adversely affect the voting power of the common shares. In addition, our bylaws provide for an advance notice procedure for nomination of candidates to our Board of Directors that could have the effect of delaying, deterring or preventing a change in control. Further, as a Minnesota corporation, we are subject to provisions of the Minnesota Business Corporation Act, or MBCA, regarding “business combinations,” which can deter attempted takeovers in certain situations. Pursuant to the terms of a shareholder rights plan adopted in February 2007, each outstanding share of common stock has one attached right. The rights will cause substantial dilution of the ownership of a person or group that attempts to acquire the Company on terms not approved by the Board of Directors and may have the effect of deterring hostile takeover attempts. The effect of these anti-takeover provisions may be to deter business combination transactions not approved by our Board of Directors, including acquisitions that may offer a premium over the market price to some or all shareholders. We may, in the future, consider adopting additional anti-takeover measures. The authority of our Board to issue undesignated preferred or other capital stock and the anti-takeover provisions of the MBCA, as well as other current and any future anti-takeover measures adopted by us, may, in certain circumstances, delay, deter or prevent takeover attempts and other changes in control of the Company not approved by our Board of Directors.
None.
The
Company’s executive offices are located at 350 Hills Street, Suite 106,
Richland, WA 99354, (509) 375-1202, where IsoRay currently leases approximately
17,600 square feet of office and laboratory space for approximately $24,200
per
month plus monthly janitorial expenses of approximately $600 from Energy
Northwest, the owner of the Applied Process Engineering Laboratory (the APEL
facility). The Company is not affiliated with this lessor. The monthly rent
is
subject to annual increases based on the Consumer Price Index. The current
lease
was entered into in May 2007, expires on April 30, 2010, and has two three-year
renewal options.
The
Company’s management believes that all facilities occupied by the Company are
adequate for present requirements, and that the Company’s current equipment is
in good condition and is suitable for the operations involved.
The
Company is not involved in any material legal proceedings as of the date of
this
Report.
No
matter
was submitted to a vote of the Company’s security holders during the fourth
quarter of the fiscal year covered by this Annual Report.
The
Company’s Articles of Incorporation provide that the Company has the authority
to issue 200,000,000 shares of capital stock, which are currently divided into
two classes as follows: 194,000,000 shares of common stock, par value of $0.001
per share; and 6,000,000 shares of preferred stock, par value of $0.001 per
share. As of September 16, 2008, we had 22,942,088 outstanding shares of Common
Stock and 59,065 outstanding shares of Preferred Stock.
On April 19, 2007, our common stock began trading on the American Stock Exchange (AMEX) under the symbol "ISR." Prior to this our common stock was quoted on the OTC Bulletin Board and the Pink Sheets under the symbols “ISRY.OB” and “ISRY.PK,” respectively. Even though we have obtained our AMEX listing, there is still limited trading activity in our securities.
The
following table sets forth, for the fiscal quarters indicated, the high and
low
sales prices for our common stock as reported on the American Stock Exchange
and
the OTC Bulletin Board. The OTC Bulletin Board quotations are high and low
last
reported bid prices representing inter-dealer prices without retail mark-ups,
mark-downs or commissions, and may not necessarily represent actual
transactions. The quotations may be rounded for presentation. In the
past, there was an absence of an established trading market for the Company's
common stock, as the market was limited, sporadic and highly volatile, which
may
have affected the prices listed below.
|
Year
ended June 30, 2008
|
High
|
Low
|
|||||
|
First
quarter
|
$
|
5.20
|
$
|
3.44
|
|||
|
Second
quarter
|
3.51
|
1.85
|
|||||
|
Third
quarter
|
2.27
|
1.00
|
|||||
|
Fourth
quarter
|
1.00
|
0.55
|
|||||
|
Year
ended June 30, 2007
|
High
|
Low
|
|||||
|
First
quarter
|
$
|
3.50
|
$
|
2.75
|
|||
|
Second
quarter
|
6.00
|
3.00
|
|||||
|
Third
quarter
|
4.90
|
3.80
|
|||||
|
Fourth
quarter
|
5.18
|
3.51
|
|||||
The
Company has never paid any cash dividends on its Common Stock and does not
plan
to pay any cash dividends in the foreseeable future. On February 1, 2007, the
Board of Directors declared a dividend on the Series B Preferred Stock of all
outstanding and cumulative dividends through December 31, 2006. There is no
Series A Preferred Stock outstanding. The total Series B dividends of $38,458
were paid on February 15, 2007. The Company does not plan on paying any cash
dividends on the Series B Preferred Stock in the foreseeable future. There
is no
Series A Preferred Stock outstanding.
As
of
September 16, 2008, we had approximately 365 shareholders of record, exclusive
of shares held in street name.
Equity
Compensation Plans
On
May
27, 2005, the Company adopted the 2005 Stock Option Plan (the Option Plan)
and
the 2005 Employee Stock Option Plan (the Employee Plan), pursuant to which
it
may grant equity awards to eligible persons. On August 15, 2006, the Company
adopted the 2006 Director Stock Option Plan (the Director Plan) pursuant to
which it may grant equity awards to eligible persons. Each of the Plans has
subsequently been amended. The Option Plan allows the Board of Directors to
grant options to purchase up to 1,800,000 shares of common stock to directors,
officers, key employees and service providers of the Company, and the Employee
Plan allows the Board of Directors to grant options to purchase up to 2,000,000
shares of common stock to officers and key employees of the Company. The
Director Plan allows the Board of Directors to grant options to purchase up
to
1,000,000 shares of common stock to directors of the Company. Options granted
under all of the Plans have a ten year maximum term, an exercise price equal
to
at least the fair market value of the Company’s common stock (based on the
trading price on the American Stock Exchange or the OTC Bulletin Board) on
the
date of the grant, and with varying vesting periods as determined by the
Board.
As
of
June 30, 2008, the following options had been granted under the option
plans.
|
Plan
Category
|
Number
of
securities
to
be
issued on
exercise
of
outstanding
options,
warrants,
and
rights
#
|
Weighted-
average
exercise
price
of
outstanding
options,
warrants,
and
rights
$
|
Number
of
securities
remaining
available
for
future
issuance
under
equity
compensation
plans
|
|||||||
|
Equity
compensation plans approved by shareholders
|
N/A
|
N/A
|
N/A
|
|||||||
|
Equity
compensation plans not approved by shareholders
|
2,803,393
|
$
|
2.62
|
1,129,824
|
||||||
|
Total
|
2,803,393
|
$
|
2.62
|
1,129,824
|
||||||
Issuer
Purchases of Equity Securities
In
June
2008, the Board of Directors of Isoray authorized the repurchase of up to
1,000,000 shares of the Company’s common stock (FY2009 Plan). The FY2009 Plan
will expire on June 30, 2009. The table below shows the activity in the FY2009
Plan from inception to June 30, 2008.
|
FY 2009 PLAN
|
Total
Number
of Shares
Purchased
|
Maximum
Number of
Shares that
|
||||||||||||||
|
Period
|
Total
Number
of Shares
|
Average
Price
Paid
|
as Part of
Publicly
Announced
|
May Yet be
Purchased
Under the
|
||||||||||||
|
Beginning
|
Ending
|
Purchased(1)
|
per Share
|
Plan
|
Plan (2)
|
|||||||||||
|
June
1, 2008
|
June
30, 2008
|
5,000
|
$
|
0.731
|
5,000
|
995,000
|
||||||||||
|
Total
|
5,000
|
$
|
0.731
|
5,000
|
995,000
|
|||||||||||
| (1) |
There
were no shares purchased during fiscal year 2008 other than in
June
2008.
|
| (2) |
In
June 2008, the Company announced a new stock repurchase plan to
purchase
up to 1,000,000 shares of the Company's common stock. The Plan
will expire
on June 30, 2009.
|
Sales
of Unregistered Securities
All
sales
of unregistered securities were previously reported.
As
a
smaller reporting company, the Company is not required to provide Item 6
disclosure in this Annual Report.
Critical
Accounting Policies and Estimates
Management’s
discussion and analysis of the Company’s financial condition and results of
operations is based upon its consolidated financial statements, which have
been
prepared in accordance with accounting principles generally accepted in the
United States of America. 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 disclosures of
contingent liabilities. On an on-going basis, management evaluates past
judgments and estimates, including those related to bad debts, inventories,
accrued 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 Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Short-Term
Investments
The
Company invests certain excess cash in marketable securities consisting
primarily of commercial paper, auction rate securities, and money market funds.
The Company classifies all debt securities as “available-for-sale” and records
the debt securities at fair value with unrealized gains and temporary unrealized
losses included in other comprehensive income/loss within shareholders’ equity,
if material. Declines in fair values that are considered other than temporary
are recorded in the Consolidated Statements of Operations.
Accounts
Receivable
Accounts
receivable are stated at the amount that management of the Company expects
to
collect from outstanding balances. Management provides for probable
uncollectible amounts through an allowance for doubtful accounts. Additions
to
the allowance for doubtful accounts are based on management’s judgment,
considering historical write-offs, collections and current credit conditions.
Balances which remain outstanding after management has used reasonable
collection efforts are written off through a charge to the allowance for
doubtful accounts and a credit to the applicable accounts receivable. Payments
received subsequent to the time that an account is written off are considered
bad debt recoveries.
Inventory
Inventory
is reported at the lower of cost or market. Cost of raw materials is determined
using the weighted average method. Cost of work in process and finished goods
is
computed using standard cost, which approximates actual cost, on a first-in,
first-out basis. As the Company has operated at a gross loss throughout the
past
fiscal years, inventories have generally been recorded at market or net
realizable value.
Fixed
Assets
Fixed
assets are capitalized and carried at the lower of cost or net realizable value.
Normal maintenance and repairs are charged to expense as incurred. When assets
are sold or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and any resulting gain or loss is recognized in
operations.
Depreciation
is computed using the straight-line method over the following estimated useful
lives:
|
Production
equipment
|
3
to 7 years
|
|
Office
equipment
|
2
to 5 years
|
|
Furniture
and fixtures
|
2
to 5 years
|
Leasehold
improvements and capital lease assets are amortized over the shorter of the
life
of the lease or the estimated useful life of the asset.
The
Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
The
provisions of SFAS No. 144 require that an impairment loss be recognized when
the estimated future cash flows (undiscounted and without interest) expected
to
result from the use of an asset are less than the carrying amount of the asset.
Measurement of an impairment loss is based on the estimated fair value of the
asset if the asset is expected to be held and used.
Management
of the Company periodically reviews the net carrying value of all of its
equipment on an asset by asset basis. These reviews consider the net realizable
value of each asset, as measured in accordance with the preceding paragraph,
to
determine whether an impairment in value has occurred, and the need for any
asset impairment write-down.
Although
management has made its best estimate of the factors that affect the carrying
value based on current conditions, it is reasonably possible that changes could
occur which could adversely affect management's estimate of net cash flows
expected to be generated from its assets, and necessitate asset impairment
write-downs.
Deferred
Financing Costs
Financing
costs related to the acquisition of debt are deferred and amortized over the
term of the related debt using the effective interest method. Deferred
financing costs include the fair value of common shares issued to certain
shareholders for their guarantee of certain Company debt in accordance with
Accounting Principles Board (APB) Opinion No. 21, Interest
on Receivables and Payables
and
Emerging Issues Task Force (EITF) Issue No. 95-13, Classification
of Debt Issue Costs in the Statement of Cash Flows.
The
value of the shares issued was the estimated market price of the shares as
of
the date of issuance. Amortization of deferred financing costs, totaling $30,504
and $178,633 for the years ended June 30, 2008 and 2007, respectively, is
included in financing expense on the statements of operations.
Licenses
Amortization
of licenses is computed using the straight-line method over the estimated
economic useful lives of the assets. In fiscal year 2006, the Company entered
into an agreement with IBt, SA, a Belgian company (IBt) to use IBt’s proprietary
“Ink Jet” production process and its proprietary polymer seed technology for use
in brachytherapy procedures using Cesium-131 (Cs-131). The Company paid license
fees of $225,000 and $275,000 during fiscal years 2008 and 2006, respectively,
and is amortizing the license over the 15-year term of the license
agreement.
In
the
fourth quarter of fiscal year 2008, the Company reviewed the carrying values
of
licenses. Although the Company has not currently integrated this technology
into
its products, management will reevaluate the potential of this technology during
fiscal year 2009 after the Company has further improved its current processes.
Therefore, the Company did not believe that any impairment had occurred to
this
intangible asset.
Amortization
of licenses was $43,452 and $23,426 for the years ended June 30, 2008 and 2007,
respectively. Based on the licenses recorded at June 30, 2008, and assuming
no
subsequent impairment of the underlying assets, the annual amortization expense
for each fiscal year ending June 30 is expected to be as follows: $47,670 for
2009, $35,354 for 2010, $35,208 for 2011, $35,208 for 2012, $35,208 for 2013,
and $266,998 thereafter.
Other
Assets
Other
assets, which include deferred charges and patents, are stated at cost, less
accumulated amortization. Amortization of patents is computed using the
straight-line method over the estimated economic useful lives of the assets.
The
Company periodically reviews the carrying values of patents and any impairments
are recognized when the expected future operating cash flows to be derived
from
such assets are less than their carrying value.
Based
on
the patents and other intangible assets recorded in other assets at June 30,
2008, and assuming no subsequent impairment of the underlying assets, the annual
amortization expense for each fiscal year ending June 30 is expected to be
as
follows: $7,798 for 2009, $4,353 for 2010, $2,632 for 2011, $2,632 for 2012,
$2,632 for 2013, and $9,560 thereafter.
Asset Retirement Obligation
SFAS
No.
143, Asset
Retirement Obligations,
establishes standards for the recognition, measurement and disclosure of legal
obligations associated with the costs to retire long-lived assets. Accordingly,
under SFAS No. 143, the fair value of the future retirement costs of the
Company’s leased assets are recorded as a liability on a discounted basis when
they are incurred and an equivalent amount is capitalized to property and
equipment. The initial recorded obligation is discounted using the Company’s
credit-adjusted risk free-rate and is reviewed periodically for changes in
the
estimated future costs underlying the obligation. The Company amortizes the
initial amount capitalized to property and equipment and recognizes accretion
expense in connection with the discounted liability over the estimated remaining
useful life of the leased assets.
In
fiscal
year 2006, the Company established an initial asset retirement obligation of
$63,040 which represented the discounted cost of cleanup that the Company
anticipated it would have to incur at the end of its equipment and property
leases in its old production facility. This amount was determined based on
discussions with qualified production personnel and on historical evidence.
During fiscal year 2007, the Company reevaluated its obligations based on
discussions with the Washington Department of Health and determined that the
initial asset retirement obligation should be increased by an additional
$56,120. During the second quarter of fiscal year 2008, the Company removed
all
radioactive residuals and tenant improvements from its old production facility
and returned the facility to the lessor. The Company had an asset retirement
obligation of $135,120 accrued for this facility but total costs incurred to
decommission the facility were $274,163 resulting in an additional expense
of
$139,043 that is included in cost of products sold. The additional expense
was
mainly due to unanticipated construction costs to return the facility to its
previous state. The Company originally believed that the lessor would retain
many of the leasehold improvements in the building, but the lessor instead
required their removal.
In
September 2007, another asset retirement obligation of $473,096 was established
representing the discounted cost of the Company’s estimate of the obligations to
remove any residual radioactive materials and all leasehold improvements at
the
end of the lease term at its new production facility. The estimate was developed
by qualified production personnel and the general contractor of the new
facility. The Company has reviewed the estimate again based on its experience
with decommissioning its old facility and believes that the original estimate
continues to be applicable.
During
the years ended June 30, 2008 and 2007, the asset retirement obligation changed
as follows:
|
2008
|
2007
|
||||||
|
Beginning
balance
|
$
|
131,142
|
$
|
67,425
|
|||
|
New
obligations
|
473,096
|
–
|
|||||
|
Settlement
of existing obligation
|
(135,120
|
)
|
–
|
||||
|
Changes
in estimates of existing obligations
|
–
|
56,120
|
|||||
|
Accretion
of discount
|
36,887
|
7,597
|
|||||
|
Ending
balance
|
$
|
506,005
|
$
|
131,142
|
|||
Because
the Company does not expect to incur any expenses related to its asset
retirement obligations in fiscal year 2009, the entire balance as of June 30,
2008 is classified as a noncurrent liability.
Financial
Instruments
The
Company discloses the fair value of financial instruments, both assets and
liabilities, recognized and not recognized in the balance sheet, for which
it is
practicable to estimate the fair value. The fair value of a financial instrument
is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than a forced liquidation
sale.
The carrying amounts of financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable, notes payable, and capital lease obligations, approximated their fair values at June 30, 2008 and 2007.
Revenue
Recognition
The
Company applies the provisions of SEC Staff Accounting Bulletin (SAB)
No. 104, Revenue
Recognition.
SAB
No. 104, which supersedes SAB No. 101, Revenue
Recognition in Financial Statements,
provides guidance on the recognition, presentation and disclosure of revenue
in
financial statements. SAB No. 104 outlines the basic criteria that must be
met to recognize revenue and provides guidance for the disclosure of revenue
recognition policies. The Company recognizes revenue related to product sales
when (i) persuasive evidence of an arrangement exists, (ii) shipment
has occurred, (iii) the fee is fixed or determinable, and
(iv) collectability is reasonably assured.
Revenue
for the fiscal years ended June 30, 2008 and 2007 was derived solely from sales
of the Proxcelan Cs-131 brachytherapy seed, which is used in the treatment
of
cancer. The Company recognizes revenue once the product has been shipped to
the
customer. Prepayments, if any, received from customers prior to the time that
products are shipped are recorded as deferred revenue. In these cases, when
the
related products are shipped, the amount recorded as deferred revenue is
recognized as revenue. The Company accrues for sales returns and other
allowances at the time of shipment. Although the Company does not have an
extensive operating history upon which to develop sales returns estimates,
we
have used the expertise of our management team, particularly those with
extensive industry experience and knowledge, to develop a proper
methodology.
Stock-Based
Compensation
The
Company measures and recognizes expense for all share-based payments at fair
value in accordance with SFAS No. 123 (Revised 2004), Share-Based
Payment
(SFAS
No. 123R). The Company uses the Black-Scholes option valuation model to estimate
fair value for all stock options on the date of grant. For stock options that
vest over time, the Company recognizes compensation cost on a straight-line
basis over the requisite service period for the entire award.
Research
and Development Costs
Research
and development costs, including salaries, research materials, administrative
expenses and contractor fees, are charged to operations as incurred. The cost
of
equipment used in research and development activities which has alternative
uses
is capitalized as part of fixed assets and not treated as an expense in the
period acquired. Depreciation of capitalized equipment used to perform research
and development is classified as research and development expense in the year
recognized.
Legal
Contingencies
In
the
ordinary course of business, the Company is involved in legal proceedings
involving contractual and employment relationships, product liability claims,
patent rights, environmental matters, and a variety of other matters. The
Company is also subject to various local, state, and federal environmental
regulations and laws due to the isotopes used to produce the Company’s product.
As part of normal operations, amounts are expended to ensure that the Company
is
in compliance with these laws and regulations. While there have been no
reportable incidents or compliance issues, the Company believes that if it
relocates its current production facilities then certain decommissioning
expenses will be incurred and has recorded an asset retirement obligation for
these expenses.
The
Company records contingent liabilities resulting from asserted and unasserted
claims against it, when it is probable that a liability has been incurred and
the amount of the loss is reasonably estimable. Estimating probable losses
requires analysis of multiple factors, in some cases including judgments about
the potential actions of third-party claimants and courts. Therefore, actual
losses in any future period are inherently uncertain. Currently, the Company
does not believe any probable legal proceedings or claims will have a material
adverse effect on its financial position or results of operations. However,
if
actual or estimated probable future losses exceed the Company’s recorded
liability for such claims, it would record additional charges as other expense
during the period in which the actual loss or change in estimate
occurred.
Income
Taxes
Income
taxes are accounted for under the liability method. Under this method, the
Company provides deferred income taxes for temporary differences that will
result in taxable or deductible amounts in future years based on the reporting
of certain costs in different periods for financial statement and income tax
purposes. This method also requires the recognition of future tax benefits
such
as net operating loss carryforwards, to the extent that realization of such
benefits is more likely than not. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in operations in the period that includes the enactment
of
the change.
On
July
1, 2007, the Company adopted Financial Accounting Standards Board Interpretation
No. 48, Accounting
for Uncertainty in Income Taxes
(FIN No.
48). FIN No. 48 clarifies the accounting for uncertainty in income taxes
recognized in accordance with SFAS No. 109, Accounting
for Income Taxes,
prescribing a recognition threshold and measurement attribute for the
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. In the course of its assessment, management has determined that
the
Company, its subsidiary, and its predecessors are subject to examination of
their income tax filings in the United States and state jurisdictions for the
2005 through 2007 tax years. In the event that the Company is assessed penalties
and or interest, penalties will be charged to other operating expense and
interest will be charged to interest expense.
The
Company adopted FIN No. 48 using the modified prospective transition method,
which requires the application of the accounting standard as of July 1, 2007.
There was no impact on the financial statements as of and for the year ended
June 30, 2008 as a result of the adoption of FIN No. 48. In accordance with
the
modified prospective transition method, the financial statements for prior
periods have not been restated to reflect, and do not include, the impact of
FIN
No. 48.
Income
(Loss) Per Common Share
The
Company accounts for its income (loss) per common share according to SFAS No.
128, Earnings
Per Share.
Basic
earnings per share is calculated by dividing net income (loss) available to
common shareholders by the weighted average number of common shares outstanding,
and does not include the impact of any potentially dilutive common stock
equivalents. Common stock equivalents, including warrants and options to
purchase the Company's common stock, are excluded from the calculations when
their effect is antidilutive. At June 30, 2008 and 2007, the calculation of
diluted weighted average shares does not include 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
that could be dilutive in the future as of June 30, 2008 and 2007 are as
follows:
|
2008
|
2007
|
||||||
|
Preferred
stock
|
59,065
|
59,065
|
|||||
|
Common
stock warrants
|
3,245,082
|
3,627,764
|
|||||
|
Common
stock options
|
2,803,393
|
3,683,439
|
|||||
|
Total
potential dilutive securities
|
6,107,540
|
7,370,268
|
|||||
Use of Estimates
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management of the
Company to make estimates and assumptions that affect the amounts reported
in
the financial statements and accompanying notes. Accordingly, actual results
could differ from those estimates and affect the amounts reported in the
financial statements.
Results
of Operations
Financial
Presentation
The
following sets forth a discussion and analysis of the Company’s financial
condition and results of operations for the two years ended June 30, 2008 and
2007. This discussion and analysis should be read in conjunction with our
consolidated financial statements appearing elsewhere in this Annual Report
on
Form 10-K. The following discussion contains forward-looking statements.
Our actual results may differ significantly from the results discussed in such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in
“Item 1A — Risk Factors,” beginning on page 21 of this Annual Report
on Form 10-K.
Year
ended June 30, 2008 compared to year ended June 30, 2007
Product
sales.
Sales
for the year ended June 30, 2008 were $7,158,690 compared to sales of $5,738,033
for the year ended June 30, 2007. The increase of $1,420,657 or 25% was due
to
increased sales volume of the Company’s Proxcelan Cs-131 brachytherapy seeds.
During the year ended June 30, 2008 the Company sold its Cs-131 seeds to 99
different medical centers as compared to 79 centers during the fiscal year
ended
June 30, 2007.
Cost
of product sales.
Cost of
product sales were $7,310,124 for the year ended June 30, 2008 which represents
an increase of $1,517,494 or 26% compared to cost of product sales of $5,792,630
for the year ended June 30, 2007. The major components of the increase were
depreciation, materials, preload expenses, occupancy costs, and expenses related
to the transition to the Company’s new production facility and decommissioning
the Company’s old production facility. These increases were partially offset by
decreases in consulting and shipping expenses.
Depreciation
increased approximately $613,000 due to moving operations into a new production
facility and purchasing new production equipment. This new production facility
allowed the Company to increase its available capacity by approximately 300%
using its current production techniques and should fulfill the Company’s
production needs for the near future. The cost of materials increased
approximately $313,000 mainly due to higher sales volumes. Preload expenses
increased approximately $250,000 due to higher sales volumes and due to the
start-up costs of the Company’s internal preload facility. Occupancy costs
increased approximately $164,000 as the Company entered into a lease for a
new
production facility in March 2007 and continued to pay rent on its old
production facility through mid-December 2007. The Company also recorded an
impairment charge of $85,000 in fiscal year 2008 for a hot cell that is not
currently in use.
The
Company also experienced increases in cost of product sales expenditures
directly related to the new facility that was opened in September 2007. To
ensure a smooth transition with no missed order shipments, the Company ordered
an additional $38,000 of isotope in September 2007 that was not utilized as
the
removal and transportation of the isotope from the old facility to the new
facility presented logistical challenges that made it cost prohibitive. As
part
of opening the new facility, the Company incurred approximately $20,000 of
wages
and related taxes for personnel to perform equipment set-up and validation.
The
Company also expensed approximately $82,000 of production materials and small
tools for the new facility, none of which individually exceeded the $2,500
threshold the Company uses in determining whether to capitalize production
equipment.
The
Company removed all radioactive residuals and tenant improvements from its
old
production facility and returned the facility to the lessor. The Company had
an
asset retirement obligation of $135,120 accrued for this facility but total
costs incurred to decommission the facility were $274,163 resulting in an
additional expense of $139,043 that is included in cost of products sold. The
additional expense was mainly due to unanticipated construction costs to return
the facility to its previous state. The Company originally believed that the
lessor would retain many of the leasehold improvements in the building, but
instead required their removal.
These
increases were partially offset by a decrease of approximately $75,000 in
consulting expenses as the previous year included costs related to medical
physics and equipment design and approximately $72,000 in shipping and freight
as the Company eliminated certain shipping services.
Gross
loss.
Gross
loss was $151,434 for the year ended June 30, 2008. This represents an increase
of $96,837 or 177% over the prior year’s gross loss of $54,597. The increase is
due to the increase in production costs more than offsetting the increase in
revenues. However, the Company has worked to reduce its production costs over
the past six months and is producing its Proxcelan Cs-131 brachytherapy seeds
more efficiently now.
Research
and development expenses.
Research
and development expenses for the year ended June 30, 2008 were $1,358,075 which
represents an increase of $12,912 or 1% over the research and development
expenses of $1,345,163 for the year ended June 30, 2007. Although the overall
research and development expenses were consistent with the prior year,
consulting expenses increased approximately $189,000 due to the Company’s
ongoing project to increase the efficiency of isotope production and travel
expenses increased approximately $25,000 due to work in Russia regarding isotope
efficiencies. These increases were offset by a decrease of approximately
$205,000 in legal expenses as the Company continues to focus on its key patents
and trademarks in strategic countries and deemphasized the protection of patents
and trademarks in less strategic countries.
Sales
and marketing expenses.
Sales
and marketing expenses were $3,725,164 for the year ended June 30, 2008. This
represents an increase of $340,692 or 10% compared to the year ended June 30,
2007 sales and marketing expenses of $3,384,472. The change is mainly due to
increased personnel costs and consulting expenses partially offset by a decrease
in conventions and tradeshows. Personnel costs increased approximately $333,000
due to higher commissions paid on increased revenues and an increase in the
average headcount. Consulting expenses increased approximately
$103,000 mainly
due to payments to consultants to develop technical publications and other
materials, to represent the Company at professional society meetings, to serve
as members of the Company’s Cesium Advisory Group, and increased expenses for a
lobbying group. Conventions and tradeshows decreased approximately $130,000
as
the Company has reduced its budgets for many of the tradeshows, particularly
the
smaller tradeshows.
General
and administrative expenses.
General
and administrative expenses for the year ended June 30, 2008 were $3,568,048
compared to general and administrative expenses of $4,915,598 for the year
ended
June 30, 2007. The decrease of $1,347,550 or 27% is primarily due to a decrease
in share-based compensation, personnel costs, and travel. These decreases were
partially offset by an increase in legal expenses. Share-based compensation
decreased approximately $1.2 million due to reduced option awards in fiscal
year
2008 and the reversal of expense for unvested and forfeited options for Roger
Girard, the former CEO. Personnel costs decreased approximately $115,000 mainly
due to the resignation of Mr. Girard in February 2008. Travel decreased
approximately $104,000. Legal expenses increased approximately $159,000 due
to
costs to draft contracts regarding the Company’s interest in UralDial, LLC, a
new Russian entity, the IBt strategic global alliance agreements, and mediation
costs related to negotiations to settle a dispute with the Lawrence Family
Trust.
Operating
loss.
The
Company continues to focus its resources on marketing and sales and retaining
the administrative infrastructure to increase the level of demand for the
Company’s product. These costs, coupled with product revenues not covering
production costs, and significant research and development expenditures, have
resulted in operating losses since its inception. For the year ended June 30,
2008, the Company had an operating loss of $8,802,721 which is a decrease of
$897,109 or 9% below the operating loss of $9,699,830 for the year ended June
30, 2007.
Interest
and investment income.
Interest
and investment income was $612,077 for the year ended June 30, 2008 compared
to
interest income of $406,921 for the year ended June 30, 2007. Interest and
investment income is mainly derived from excess funds held in money market
and
investment accounts. The increase of $205,156 or 50% was due to the higher
average cash and short-term investment balances during the year ended June
30,
2008 partially offset by decreasing interest rates.
Loss
on short-term investments.
The loss
of $274,000 for the year ended June 30, 2008 is due to the recent uncertainties
in the credit markets particularly for certain auction rate securities held
by
the Company. The loss represents the amount to write-down these securities
to
their estimated fair market value. The Company has recognized these losses
as
other than temporary and recorded them in the statement of operations rather
than in other comprehensive income as the Company may need access to these
funds
before the uncertainties in the credit markets are fully resolved.
Financing
expense.
Financing expense for the year ended June 30, 2008 was $92,863 or a decrease
of
$219,383 or 70% compared to financing expense of $312,246 for the year ended
June 30, 2008. Included in financing expense is interest expense of
approximately $62,000 and $134,000 for the years ended June 30, 2008 and 2007,
respectively. The decrease is due to the lower average debt balances in the
year
ended June 30, 2008. The remaining balance of financing expense represents
the
amortization of deferred financing costs which decreased due to the write-off
in
fiscal year 2007 of the deferred financing costs relating to the Columbia River
Bank line of credit.
Liquidity
and capital resources.
We have
historically financed our operations through the sale of common stock and
related warrants. During fiscal year 2008, the Company’s primary source of cash
was the exercise of common stock warrants and options for $1,022,813 and the
Company used existing cash reserves to fund its operations and capital
expenditures.
Cash
flows from operating activities
Cash
used
in operating activities was $7.7 million in fiscal year 2008 compared to $7.2
million in fiscal year 2007, an increase of approximately $500,000. Cash used
by
operating activities is net loss adjusted for non-cash items and changes in
operating assets and liabilities.
Cash
flows from investing activities
In
2008,
the Company invested its excess cash generated from shareholder investments.
During 2008, the Company purchased approximately $13.3 million of various
short-term investments (mainly commercial paper and municipal auction rate
securities) and sold approximately $19.4 million of short-term investments.
As
of June 30, 2008, short-term investments held by the Company amounted to
approximately $3.7 million.
Cash
expenditures for fixed assets were approximately $3.1 million in fiscal 2008
and
approximately $2.4 million in fiscal 2007. The increase is mainly due to
construction to complete our new production facility and equipment purchases
for
the new facility.
Cash
flows from financing activities
The
Company issued 300,876 shares of common stock pursuant to the exercise of common
stock options and warrants. The Company received $1,022,813 in cash pursuant
to
these exercises.
Projected
2009 Liquidity and Capital Resources
At
June
30, 2008, cash and cash equivalents amounted to $4,820,033 and short-term
investments amounted to $3,726,000 compared to $9,335,730 of cash and cash
equivalents and $9,942,840 of short-term investments at June 30,
2007.
The
Company had approximately $4.0 million of cash and $3.7 million of short-term
investments as of September 16, 2008. As of that date management believed that
the Company’s monthly required cash operating expenditures were approximately
$400,000. Management believes that approximately $200,000 to $500,000 will
be
spent on capital expenditures during fiscal year 2009, but there is no assurance
that unanticipated needs for capital equipment may not arise.
If
the
Company is able to complete its major research and development project to
develop a proprietary separation process to manufacture enriched barium, this
process should improve isotope production efficiency during fiscal year 2009.
Regardless of whether the Company is ultimately successful in developing this
process, the remaining project costs are anticipated to be approximately
$150,000.
During
fiscal year 2009, the Company intends to continue its existing protocol studies
and is currently budgeting approximately $278,000 for protocol expense in fiscal
year 2009.
Assuming
operating costs expand proportionately with revenue increases, other
applications are pursued for seed usage outside the prostate market, protocols
are continued supporting the integrity of our product and sales and marketing
expenses remain steady, management believes the Company will reach breakeven
with revenues of approximately $1.5 million per month. This is a decrease from
the previous estimate of $2 million in monthly revenue based on actions taken
by
new management that have over the past six months begun to improve the Company’s
production operating efficiencies and its cost structure.
Based
on
the foregoing assumptions, management believes cash, cash equivalents, and
short-term investments on hand at June 30, 2008 will be sufficient to meet
our anticipated cash requirements for operations, debt service, and capital
expenditure requirements through at least the next twelve months. Management’s
plans to attain breakeven and generate additional cash flows include increasing
revenues from both new and existing customers and maintaining cost control.
However, there can be no assurance that the Company will attain profitability
or
that the Company will be able to attain its aggressive revenue targets. If
we do
not experience the necessary increases in sales or if we experience unforeseen
manufacturing constraints, we may need to obtain additional
funding.
The
Company expects to finance its future cash needs through the sale of equity
securities and possibly strategic collaborations or debt financing or through
other sources that may be dilutive to existing shareholders. If the Company
needs to raise additional money to fund its operations, funding may not be
available to it on acceptable terms, or at all. If the Company is unable to
raise additional funds when needed, it may not be able to market its products
as
planned or continue development and regulatory approval of its future products.
If the Company raises additional funds through equity sales, these sales may
be
dilutive to existing investors.
Long-Term
Debt and Capital Lease Agreements
The
Company has two loan facilities in place as of June 30, 2008. The first loan
is
from the Benton-Franklin Economic Development District (BFEDD) in an original
principal amount of $230,000 and was funded in December 2004. It bears interest
at eight percent and has a 60-month term with a final balloon payment. As of
June 30, 2008, the principal balance owed was $145,745. This loan is secured
by
certain equipment, materials and inventory of IsoRay, and also required personal
guarantees, for which the guarantors were issued approximately 70,455 shares
of
common stock. The second loan is from the Hanford Area Economic Investment
Fund
Committee (HAEIFC) and was originated in June 2006. The loan originally had
a
total facility of $1,400,000 which was reduced in September 2007 to the amount
of the Company’s initial draw of $418,670. The principal balance owed on the
loan as of June 30, 2008 was $263,639. This loan is secured by receivables,
equipment, materials and inventory, and certain life insurance policies and
also
required personal guarantees.
The
BFEDD
has granted the Company a waiver from enforcing violations of paying officers
in
excess of $100,000 per year and maintaining a certain current asset ratio.
The
waiver is effective through June 30, 2009 and also waives non-compliance with
covenants prohibiting fixed asset or lease obligations in excess of $24,000
per
year, covenants prohibiting mergers, and covenants requiring maintenance of
a
certain long-term debt to equity ratio.
HAEIFC
has also granted the Company a waiver from enforcing a fixed charge coverage
ratio. The waiver is effective through June 30, 2009.
The
Company has certain capital leases for production equipment that expire at
various times from September 2008 to April 2009. These leases currently call
for
total monthly payments of $3,876. The total of all capital lease obligations
at
June 30, 2008 was $25,560.
Principal
maturities on notes payable as of June 30, 2008 are due as follows:
|
Year
ending June 30,
|
||||
|
2009
|
$
|
64,486
|
||
|
2010
|
168,008
|
|||
|
2011
|
49,736
|
|||
|
2012
|
54,379
|
|||
|
2013
|
59,503
|
|||
|
Thereafter
|
13,272
|
|||
|
$
|
409,384
|
|||
Future
minimum lease payments under capital lease obligations are as follows:
|
Year
ending June 30, 2009
|
$
|
27,627
|
||
|
Total
future minimum lease payments
|
27,627
|
|||
|
Less
amounts representing interest
|
(2,067
|
)
|
||
|
Present
value of net minimum lease payments
|
25,560
|
|||
|
Less
amounts due in one year
|
(25,560
|
)
|
||
|
Amounts
due after one year
|
$
|
–
|
Other
Commitments and Contingencies
On
May 2,
2007, Medical entered into a lease for its new production facility with Energy
Northwest, the owner of the Applied Process Engineering Laboratory (the APEL
lease). The
APEL
lease has a three-year term expiring on April 30, 2010, an option to renew
for
two additional three-year terms, and original monthly rent of approximately
$26,700, subject to annual increases based on the Consumer Price Index, plus
monthly janitorial expenses of approximately $700. This new facility became
operational in September 2007.
Future
minimum lease payments under operating leases, including the two three-year
renewals of the APEL lease, are as follows:
|
Year
ending June 30,
|
||||
|
2009
|
$
|
315,027
|
||
|
2010
|
314,884
|
|||
|
2011
|
310,782
|
|||
|
2012
|
299,540
|
|||
|
2013
|
297,015
|
|||
|
Thereafter
|
841,541
|
|||
|
$
|
2,378,789
|
|||
On
October 12, 2007, the Company entered into Amendment No. 1 (the Amendment)
to
its License Agreement dated February 2, 2006 with IBt. The original License
Agreement provided the Company with access to IBt’s proprietary polymer based
seed encapsulation technology for use in brachytherapy procedures using
Cesium-131 in the United States for a fifteen year term. A payment of $225,000
was made on October 12, 2007 pursuant to the Amendment. As the parties agreed
that the ink jet technology was not viable for Cesium-131 seeds, the Amendment
eliminated the previously required royalty payments based on net sales revenue,
and the parties intend to negotiate terms for future payments by the Company
for
polymer seed components to be purchased from IBt at IBt's cost plus a
to-be-determined profit percentage. No agreement has been reached on these
terms
and there is no assurance that the parties will consummate an agreement pursuant
to such terms.
The
Company is subject to various local, state, and federal environmental
regulations and laws due to the isotopes used to produce the Company’s product.
As part of normal operations, amounts are expended to ensure that the Company
is
in compliance with these laws and regulations. While there have been no
reportable incidents or compliance issues, the Company believes that if it
relocates its current production facilities then certain decommissioning
expenses will be incurred. An asset retirement obligation was established in
the
first quarter of fiscal year 2008 for the Company’s obligations at its new
production facility. This asset retirement obligation will be for obligations
to
remove any residual radioactive materials and to remove all leasehold
improvements.
The
industry that the Company operates in is subject to product liability
litigation. Through its production and quality assurance procedures, the Company
works to mitigate the risk of any lawsuits concerning its product. The Company
also carries product liability insurance to help protect it from this
risk.
The
Company has no off-balance sheet arrangements.
Inflation
Management
does not believe that the current levels of inflation in the United States
have
had a significant impact on the operations of the Company. If current levels
of
inflation hold steady, management does not believe future operations will be
negatively impacted.
New
Accounting Standards
In
December 2007, FASB issued SFAS No. 141(R), Business
Combinations
(“SFAS 141R”), which replaces SFAS No. 141, Business
Combinations (“SFAS 141”).
SFAS 141R applies to all transactions and other events in which one entity
obtains control over one or more other businesses. The standard requires the
fair value of the purchase price, including the issuance of equity securities,
to be determined on the acquisition date. SFAS 141R requires an acquirer to
recognize the assets acquired, the liabilities assumed, and any noncontrolling
interests in the acquiree at the acquisition date, measured at their fair values
as of that date, with limited exceptions specified in the statement.
SFAS 141R requires acquisition costs to be expensed as incurred and
restructuring costs to be expensed in periods after the acquisition date.
Earn-outs and other forms of contingent consideration are to be recorded at
fair
value on the acquisition date. Changes in accounting for deferred tax asset
valuation allowances and acquired income tax uncertainties after the measurement
period will be recognized in earnings rather than as an adjustment to the cost
of the acquisition. SFAS 141R generally applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the
first annual reporting period beginning on or after December 15, 2008 with
early adoption prohibited. The implementation of this standard did not have
a
material impact on the Company’s consolidated financial position or results of
operations.
In
December 2007, the FASB issued statement No. 160, Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51
(SFAS
160). The statement requires noncontrolling interests or minority interests
to
be treated as a separate component of equity, not as a liability or other item
outside of permanent equity. Upon a loss of control, the interest sold, as
well
as any interest retained, is required to be measured at fair value, with any
gain or loss recognized in earnings. Based on SFAS 160, assets and liablities
will not change for subsequent purchase of sales transactions with
noncontrolling interests as long as control is maintained. Differences between
the fair value of consideration paid or received and the carrying value of
noncontrolling interests are to be recognized as an adjustment to the parent
interest’s equity. SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008 and earlier adoption is prohibited. The Company is currently
evaluating the impact that the implementation of SFAS 160 will have with respect
to the Company’s interest in UralDial.
In
February 2007, the FASB issued statement No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities Including
an
Amendment of FASB Statement No. 115
(SFAS
159). The statement allows entities to value financial instruments and certain
other items at fair value. The statement provides guidance over the election
of
the fair value option, including the timing of the election and specific items
eligible for the fair value accounting. Changes in fair values would be recorded
in earnings. The statement is effective for fiscal years beginning after
November 15, 2007. The Company does not believe the adoption of SFAS 159
will have a material effect on its consolidated financial
statements.
In
September 2006, the FASB issued statement No. 157, Fair
Value Measurements,
(SFAS 157). SFAS 157 defines fair value, establishes a framework for
measuring fair value in accordance with accounting principles generally accepted
in the United States, and expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after November 15,
2007, with earlier application encouraged. Any amounts recognized upon adoption
as a cumulative effect adjustment will be recorded to the opening balance of
retained earnings in the year of adoption. The Company does not believe the
adoption of SFAS 157 will have a material effect on its consolidated financial
statements.
As
a
smaller reporting company, the Company is not required to provide Item 7A
disclosure in this Annual Report.
The
required accompanying financial statements begin on page F-1 of this
document.
There
were no disagreements or reportable events with DeCoria, Maichel & Teague,
P.S.
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 June 30, 2008. 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 in timely
alerting them to material information required to be included in the Company's
periodic reports filed with the SEC under the Exchange Act. 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.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f)
of
the Exchange Act. 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 effectiveness of our internal control
over financial reporting based on the framework in Internal
Control – Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on our evaluation under the framework in Internal
Control – Integrated Framework,
our
management concluded that our internal control over financial reporting was
effective as of June 30, 2008.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.
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.
Limitations
on the Effectiveness of Controls
Our
management, including our principal executive officer and principal financial
officer, does not expect that our disclosure controls and internal controls
will
prevent all errors and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of
the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud,
if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision making can be faulty, and that
breakdowns can occur because of a simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management or board override of the
control.
The design of any system of controls also 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; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
There
were no items required to be disclosed in a report on Form 8-K during the fourth
quarter of the fiscal year ended June 30, 2008 that have not been already
disclosed on a Form 8-K filed with the SEC.
Each
member of the Board of Directors serves a one-year term and is subject to
reelection at the Company’s Annual Meeting of Shareholders held each
year.
Board
Committees
The
Board
has established an Audit Committee consisting of Thomas LaVoy (Chairman), Robert
Kauffman, and Albert Smith; a Compensation Committee consisting of Albert Smith
(Chairman) and Robert Kauffman; and a Nominating Committee consisting of Robert
Kauffman (Chairman), Thomas LaVoy, and Albert Smith. No other committees have
been formed.
Audit
Committee
The
Audit
Committee was established on December 8, 2006, the date on which its Charter
was
adopted. The Audit Committee Charter lists the purposes of the Audit Committee
as overseeing the accounting and financial reporting processes of the Company
and audits of the financial statements of the Company and providing assistance
to the Board of Directors in monitoring (1) the integrity of the Company’s
financial statements, (2) the Company’s compliance with legal and regulatory
requirements, (3) the independent auditor’s qualifications and independence, and
(4) the performance of the Company’s internal audit function, if any, and
independent auditor.
The
Board
of Directors has determined that Mr. LaVoy and Mr. Kauffman are each
an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation
S-K promulgated by the Securities and Exchange Commission, and each Audit
Committee member is independent. The Board’s conclusions regarding the
qualifications of Mr. LaVoy as an audit committee financial expert were
based on his service as a chief financial officer of a public company, his
experience as a certified public accountant and his degree in accounting. The
Board’s conclusions regarding the qualifications of Mr. Kauffman as an
audit committee financial expert were based on his service as a chief executive
officer of multiple public companies, his active supervision of the principal
financial and accounting officers of the public companies for which he served
as
chief executive officer, and his M.B.A. in Finance.
Executive
Officers and Directors
The
executive officers and directors serving the Company as of June 30, 2008 were
as
follows:
|
Name
|
|
Age
|
|
Position
Held
|
Term*
|
|
|
|
|
|
|
|||
|
Dwight
Babcock
|
|
60
|
|
Chairman,
Interim Chief Executive Officer
|
Annual
|
|
|
Jonathan
Hunt
|
|
41
|
|
Chief
Financial Officer, Treasurer
|
||
|
Lori
Woods
|
46
|
Acting
Chief Operating Officer
|
||||
|
Robert
Kauffman
|
|
67
|
|
Vice-Chairman
|
Annual
|
|
|
Thomas
LaVoy
|
|
48
|
|
Director
|
Annual
|
|
|
Albert
Smith
|
64
|
Director
|
Annual
|
*
For
directors only
Dwight
Babcock – Mr. Babcock was appointed Chairman and Interim CEO of the Company on
February 26, 2008 and has served as a Director of the Company since 2006. Mr.
Babcock has served as Chairman and Chief Executive Officer of Apex Data Systems,
Inc. an information technology company, since 1975. Apex Data Systems automates
the administration and claims adjudication needs of insurance companies both
nationally and internationally. Mr. Babcock was formerly President and CEO
of
Babcock Insurance Corporation (BIC) from 1974 until 1985. BIC was a nationally
recognized third party administrator operating within 35 states. Mr. Babcock
has
knowledge and experience in the equity arena and has participated in various
activities within the venture capital, private and institutional capital
markets. Mr. Babcock studied marketing and economics at the University of
Arizona where he currently serves on the University of Arizona Astronomy
Board.
Jonathan
Hunt – Mr. Hunt has over 15 years of finance and accounting experience,
including financial reporting, SEC knowledge, and operational analysis. Before
joining IsoRay in 2006, he was employed by Hypercom Corporation, a global
provider of electronic payment solutions and manufacturer of credit card
terminals, serving as its Assistant Corporate Controller from 2005 to 2006.
His
finance background also includes serving as both a Manager and Director of
Financial Reporting and a Director of Operational Planning and Analysis for
Circle K Corporation and its affiliates from 2000 to 2005 and working for
PricewaterhouseCoopers LLP from 1992 to 1999 where his last position held was
Business Assurance Manager. Mr. Hunt holds Masters of Accountancy and Bachelor
of Science degrees from Brigham Young University and is a Certified Public
Accountant.
Lori
Woods – Ms. Woods joined the Company in July 2006 and was appointed Acting Chief
Operating Officer on February 26, 2008. Ms. Woods has over 20 years experience
in medical device technology and healthcare services. Ms. Woods served as the
CEO of Pro-Qura, a medical services company focusing on brachytherapy quality
assurance and education, from 2002 until joining the Company. During her tenure
at Pro-Qura, Ms. Woods developed its business strategy, expanded its business
portfolio in quality assurance beyond prostate brachytherapy into other areas
of
cancer, and increased funding by 50%. Prior to this, she served as the Vice
President of Sales at ATI Medical in 2002, Vice President of Sales – West and
Vice President of Marketing and Business Development for Imagyn Medical
Technologies from 2000 to 2002, Director of Business Development for Seattle
Prostate Institute from 1998 to 2000, and Regional Vice President and Regional
Manager of Interdent from 1994 to 1998. Ms. Woods holds a Bachelor of Science
degree in Business Administration – Marketing from Loma Linda
University.
Robert
Kauffman – Mr. Kauffman has been a Director of the Company since 2005 and was
appointed Vice-Chairman of the Company on February 26, 2008. Mr. Kauffman
has served as Chief Executive Officer and Chairman of the Board of Alanco
Technologies, Inc. (NASDAQ: ALAN), an Arizona-based information technology
company, since July 1, 1998. Mr. Kauffman was formerly President and Chief
Executive Officer of NASDAQ-listed Photocomm, Inc., from 1988 until 1997 (since
renamed Kyocera Solar, Inc.). Photocomm was the nation’s largest publicly owned
manufacturer and marketer of wireless solar electric power systems with annual
revenues in excess of $35 million. Prior to Photocomm, Mr. Kauffman was a
senior executive of the Atlantic Richfield Company (ARCO) whose varied
responsibilities included Senior Vice President of ARCO Solar, Inc., President
of ARCO Plastics Company and Vice President of ARCO Chemical Company.
Mr. Kauffman earned an M.B.A. in Finance at the Wharton School of the
University of Pennsylvania, and holds a B.S. in Chemical Engineering from
Lafayette College, Easton, Pennsylvania.
Thomas
LaVoy – Mr. LaVoy has been a Director of the Company since 2005. Mr. LaVoy has
served as Chief Financial Officer of SuperShuttle International, Inc., since
July 1997 and as Secretary since March 1998. SuperShuttle is one of the largest
providers of shuttle services in major cities throughout the West and Southwest
regions of the United States. He has also served as a director of Alanco
Technologies, Inc. (NASDAQ: ALAN) since 1998. From September 1987 to February
1997, Mr. LaVoy served as Chief Financial Officer of NASDAQ-listed Photocomm,
Inc. Mr. LaVoy was a Certified Public Accountant with the firm of KPMG Peat
Marwick from 1980 to 1983. Mr. LaVoy has a Bachelor of Science degree in
Accounting from St. Cloud University, Minnesota, and is a Certified Public
Accountant.
Albert
Smith – Mr. Smith has been a Director of the Company since 2006. Mr. Smith was
the co-founder of and served as Vice Chairman of CSI Leasing, Inc., a private
computer leasing company from 1972 until March 2005. He founded Extreme Video
Solutions, LLC, a private video conferencing company with headquarters in
Scottsdale, Arizona in December 2005. In January 2008, he formed Face to Face
Live, Inc. where he presently serves as CEO. Mr. Smith presently serves as
Chairman of the Board for Doulos Ministries, Inc. Mr. Smith has extensive
experience in marketing and sales having managed a national sales force of
over
fifty people while at CSI Leasing, Inc. Mr. Smith holds a BS in Business
Administration from Ferris State College.
The
Company’s directors, as named above, will serve until the next annual meeting of
the Company’s shareholders or until their successors are duly elected and have
qualified. Directors will be elected for one-year terms at the annual
shareholders meeting. There is no arrangement or understanding between any
of
the directors or officers of the Company and any other person pursuant to which
any director or officer was or is to be selected as a director or officer,
and
there is no arrangement, plan or understanding as to whether non-management
shareholders will exercise their voting rights to continue to elect the current
directors to the Company’s board. There are also no arrangements, agreements or
understandings between non-management shareholders that may directly or
indirectly participate in or influence the management of the Company’s
affairs.
There
are
no agreements or understandings for any officer or director to resign at the
request of another person, and none of the officers or directors are acting
on
behalf of, or will act at the direction of, any other person. There are no
family relationships among our executive officers and directors.
Significant
Employees
Certain
significant employees of our subsidiary, IsoRay Medical, Inc., and their
respective ages as of the date of this report are set forth in the table below.
Also provided is a brief description of the experience of each significant
employee during the past five years.
|
Name
|
|
Age
|
|
Position
Held and Tenure
|
|
Fredric
Swindler
|
60
|
VP,
Regulatory Affairs and Quality Assurance
|
||
|
Lane
Bray
|
|
80
|
|
Chemist
|
|
Oleg
Egorov
|
38
|
Director
of Research and Development
|
Fredric
Swindler – Mr. Swindler joined the Company in October 2006 and has over 30 years
experience in manufacturing and regulatory compliance. Mr. Swindler served
as
VP, Quality Assurance and Regulatory Affairs for Medisystems Corporation, a
manufacturer and distributor of medical devices, from 1994 until joining the
Company. During his tenure at Medisystems Corporation, Mr. Swindler developed
a
quality system to accommodate vertically integrated manufacturing, developed
regulatory strategies, policies and procedures, and submitted nine pre-market
notifications (510(k)) to the FDA. Prior to this, Mr. Swindler held various
positions with Marquest Medical Products from 1989 to 1994, Sherwood Medical
Products from 1978 to 1989, Oak Park Pharmaceuticals in 1978, and Mead Johnson
& Company from 1969 to 1978. Mr. Swindler holds a Bachelor of Science degree
in Biomedical Engineering from Rose Hulman Institute of Technology and a Masters
of Business Administration from the University of Evansville.
Lane
Bray
– Mr. Bray is known nationally and internationally as a technical expert in
separations, recovery, and purification of isotopes and is a noted authority
in
the use of cesium and strontium ion exchange for Department of Energy’s West
Valley and Hanford nuclear waste cleanup efforts. In 2000, Mr. Bray
received the ’Radiation Science and Technology’ award from the American Nuclear
Society. Mr. Bray has authored or co-authored over 110 research
publications, 12 articles for nine technical books, and holds 24 U.S. and
foreign patents. Mr. Bray patented the USDOE/PNNL process for purifying
medical grade Yttrium-90 that was successfully commercialized in 1999.
Mr. Bray also invented and patented the proprietary isotope separation and
purification process that is assigned to IsoRay. Mr. Bray was elected
‘Tri-Citian of the Year’ in 1988, nominated for ‘Engineer of the Year’ by the
American Nuclear Society in 1995, and was elected ‘Chemist of the Year for 1997’
by the American Chemical Society, Eastern Washington Section. Mr. Bray
retired from the Pacific Northwest National Laboratory in 1998. Since retiring
in 1998, Mr. Bray worked part time for PNNL on special projects until
devoting all of his efforts to IsoRay in 2004. Mr. Bray has been a
Washington State Legislator, a Richland City Councilman, and a Mayor of
Richland. Mr. Bray has a B.A. in Chemistry from Lake Forest
College.
Oleg
Egorov – Dr. Egorov is recognized nationally and internationally for his work in
radiochemistry, radioanalytical chemistry, analytical chemistry and
instrumentation. Prior to joining IsoRay in December of 2005 as Director of
Radiochemical Development and then Director of Research and Development, Dr.
Egorov worked from May 1998 as a Senior Research Scientist at the Pacific
Northwest National Laboratory (PNNL). Prior to that time, he served the
Environmental Molecular Sciences Laboratory at PNNL as a Graduate Research
Fellow from August 1994 to May 1998 and as a Graduate Research Assistant to
the
University of Washington’s Center for Process Analytical Chemistry from
September 1992 to August 1993. Former positions included a tenure as a Research
Engineer at the Department of Radiochemistry at the Moscow State University,
Moscow, Russia between September 1998 to August 1992, and Field Chemist at
the
Institute of Volcanology, at the Russian Academy of Science at
Petropavlovsk-Kamchatsky, Russia, during the summers of 1989 and 1990 concurrent
to studies that lead to his acquisition of Master of Science in Radiochemistry
from the Moscow State University. During his tenure at PNNL, Dr. Egorov had
led
world-class basic and applied R&D programs directed at new chemistries and
instrumentation for automated production of short-lived medical isotopes for
the
treatment of cancer, automated process monitoring, radionuclide sensors for
groundwater monitoring, and laboratory automation. Dr. Egorov pioneered the
application of flow-based techniques for automating radiochemical analyses
of
nuclear wastes, renewable surface sensing and separations, and
equilibration-based radionuclide sensing. He has authored/co-authored numerous
peer-reviewed publications in these areas, including several book chapters.
Dr.
Egorov holds four U.S./international patents, three of which have been licensed
to industry. Dr. Egorov has been a recipient of numerous outstanding performance
and key contributor awards. In 2003, Dr. Egorov was nominated for the American
Chemical Society Arthur F. Findeis Award for Achievements by a Young Analytical
Scientist. In 2004, Dr. Egorov was a recipient of a Federal Laboratory
Consortium Award for Excellence in Technology Transfer for “Alpha Particle
Immunotherapy for Treating Leukemia and Solid-Tumor Metastases”. Dr. Egorov
holds a M.S. in Radiochemistry from Moscow State University, Moscow, Russia;
a
M.S. in Environmental and Analytical Chemistry; and a Ph.D. in Analytical
Chemistry from the University of Washington.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 (the Exchange Act) requires the
Company’s directors and executive officers, and persons who beneficially own
more than ten percent of a registered class of our equity securities, to file
with the Securities and Exchange Commission (the Commission) initial reports
of
beneficial ownership and reports of changes in beneficial ownership of our
Common Stock. The rules promulgated by the Commission under Section 16(a) of
the
Exchange Act require those persons to furnish us with copies of all reports
filed with the Commission pursuant to Section 16(a). The information in this
section is based solely upon a review of Forms 3, Forms 4, and Forms 5 received
by us.
We
believe that IsoRay’s executive officers, directors and 10% shareholders timely
complied with their filing requirements during the year ended June 30, 2008
except as follows: Albert Smith (two Form 4s) and Dwight Babcock (one Form
4).
We believe all of these forms have been filed as of the date of this
Report.
Code
of Ethics
We
have
adopted a Code of Conduct and Ethics that applies to all of our officers,
directors and employees and a separate Code of Ethics for Chief Executive
Officer and Senior Financial Officers that supplements our Code of Conduct
and
Ethics. The Code of Conduct and Ethics was previously filed as Exhibit 14.1
to
our Form 10-KSB for the period ended June 30, 2006, and the Code of Ethics
for
Chief Executive Officer and Senior Financial Officers was previously filed
as
Exhibit 14.2 to this same report. The Code of Ethics for Chief Executive Officer
and Senior Financial Officers is also available to the public on our website
at
http://www.isoray.com/ethicsForCeo.htm. Each of these policies comprises written
standards that are reasonably designed to deter wrongdoing and to promote the
behavior described in Item 406 of Regulation S-K promulgated by the Securities
and Exchange Commission.
Nominating
Procedures
There
have been no material changes to the procedures by which our shareholders may
recommend nominees to the Board of Directors during our last fiscal
year.
The
following summary compensation table sets forth information concerning
compensation for services rendered in all capacities during our past two fiscal
years awarded to, earned by or paid to each of the following individuals. Salary
and other compensation for these officers, employees and former officers are
set
by the Compensation Committee of the Board of Directors, except for employee
compensation which is set by officers of the Company.
|
Summary
Compensation Table
|
|||||||||
|
Name
and principal position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
awards
($)
|
Option
awards
($)
(1)
|
Nonequity
incentive plan compensation ($)
|
Nonqualified
deferred compensation earnings
($)
|
All
other compensation ($)
|
Total
($)
|
|
Dwight
Babcock, Chairman
|
2008
|
22,000
|
—
|
—
|
70,000
|
—
|
—
|
—
|
92,000
|
| and Interim CEO (2) |
2007
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|
Roger
Girard, former Chairman
|
2008
|
204,231
|
—
|
—
|
—
|
—
|
—
|
250,000
|
454,231
|
| and CEO (3) (4) |
2007
|
298,042
|
—
|
—
|
600,500
|
—
|
—
|
—
|
898,542
|
|
David
Swanberg, former Executive
|
2008
|
179,615
|
50,000
|
—
|
—
|
—
|
—
|
25,962
|
255,577
|
|
Vice
President - Operations (3) (5)
|
2007
|
161,539
|
—
|
—
|
372,228
|
—
|
—
|
—
|
533,767
|
| (6) | |||||||||
|
Lori
Woods, Vice President (7)
|
2008
|
179,615
|
—
|
—
|
—
|
—
|
—
|
—
|
179,615
|
|
2007
|
155,692
|
—
|
—
|
327,150
|
—
|
—
|
—
|
482,842
|
|
|
Fred
Swindler, VP - Regulatory
|
2008
|
159,808
|
—
|
—
|
—
|
—
|
—
|
—
|
159,808
|
| Affairs and Quality Assurance (8) |
2007
|
109,615
|
—
|
—
|
57,200
|
—
|
—
|
9,973
|
176,788
|
|
Robert
Bilella, Territory
|
2008
|
117,283
|
121,150
|
—
|
—
|
—
|
—
|
—
|
238,433
|
| Sales Manager |
2007
|
131,557
|
78,927
|
—
|
—
|
—
|
—
|
—
|
210,484
|
|
(1)
|
Amounts
represent the FAS 123R valuation for the fiscal years ended June
30, 2008
and 2007, respectively. All such options were awarded under one of
the
Company’s stock option plans. All options awarded (with the exception of
Mr. Babcock’s fiscal year 2008 stock option grant that was immediately
vested on the grant date) vest in three equal annual installments
beginning with the first anniversary from the date of grant and expire
ten
years after the date of grant. All options were granted at the fair
market
value of the Company’s stock on the date of grant and the Company used a
Black-Scholes methodology as discussed in the footnotes to the financial
statements to value the options.
|
|
(2)
|
Mr.
Babcock became the Chairman and Interim CEO on February 26, 2008.
He is
serving as Interim CEO on a contract basis. Mr. Babcock also received
compensation as a Director of the Company during fiscal year 2008
which is
disclosed in the Non-Employee Director Compensation
table.
|
|
(3)
|
Mr.
Girard and Mr. Swanberg were granted 150,000 and 100,000 options,
respectively, on June 1, 2007. These options have an exercise price
of
$4.14 and vest over three years. On July 25, 2007, the Board discussed
the
issue of director compensation and each director (including Mr. Girard
and
Mr. Swanberg) elected to cancel 50,000 of their options from the
June 1,
2007 grant. After the cancellation, Mr. Girard and Mr. Swanberg had
100,000 and 50,000 options, respectively, from the June 1, 2007 grant.
The
terms of these options were not changed as part of the cancellation.
Under
FAS 123R, the value of the cancelled options to Mr. Girard and Mr.
Swanberg were $128,500 each. The value of these options has been
included
in the table above in fiscal year
2007.
|
|
(4)
|
On
February 26, 2008, Mr. Girard resigned from all positions held with
the
Company and its subsidiaries, including resigning from Board service.
In
connection with Mr. Girard’s resignation, the Company made a one time
payment to Mr. Girard of $250,000 and this amount is included in
the “All
other compensation” column.
|
|
(5)
|
The
value of Mr. Swanberg’s options includes $7,728 relating to options
granted to his wife who was an employee of the Company at the time
of the
grant.
|
|
(6)
|
Mr.
Swanberg resigned from the Company on June 11, 2008. In connection
with
Mr. Swanberg’s resignation, the Company agreed to continue paying Mr.
Swanberg his salary for an additional six months subject to the conditions
of his agreement. These amounts have not been included in this table
as
the amounts had not been paid as of June 30, 2008. In addition, Mr.
Swanberg was paid the balance of his vacation in a lump sum and this
amount is included in the “All other compensation”
column.
|
|
(7)
|
Ms.
Woods became an employee of the Company in July
2006.
|
|
(8)
|
Mr.
Swindler became an employee of the Company in October 2006. The Company
reimbursed Mr. Swindler for certain of his relocation costs and this
amount is included in the “All other compensation” column for fiscal year
2007.
|
Ms.
Woods
has an employment contract with the Company dated February 14, 2007. The
agreement is for an initial term of two years but will be automatically extended
for an additional year on each anniversary date unless terminated in accordance
with the provisions of the agreement. The agreement entitles Ms. Woods to a
salary of at least $160,000 with increases as determined by the Compensation
Committee of the Board and annual bonus payments under a bonus plan as
established by the Compensation Committee. In the event that Ms. Woods is
terminated without cause, becomes disabled, or terminates her employment for
good reason, she will be entitled to her salary and benefits for the remaining
term of the agreement or 18 months, whichever is shorter. Good reason is defined
in the agreement to mean a reduction of salary or benefits, a change in Ms.
Woods’ title, position, authority, or responsibilities, causing Ms. Woods to
relocate, or any breach by the Company of this agreement. If Ms. Woods is
terminated within one year of a change of control then she shall be entitled
to
her salary and benefits for the remaining term of the agreement or 18 months,
whichever is longer, in addition to a one-time payment equal to her most
recently received bonus. In the event of Ms. Woods’ termination without cause or
termination within one year of a change of control, all of her unvested stock
options shall immediately vest in full and shall be exercisable as provided
in
the applicable stock option plan. The agreement also includes certain
restrictive covenants that prohibit Ms. Woods from providing services to a
competing business for the period of this agreement plus one year.
|
Outstanding
Equity Awards at Fiscal Year-End
|
||||||
|
Option
awards
|
||||||
|
Name
|
Number
of securities underlying unexercised options
(#)
exercisable
|
Number
of securities underlying unexercised options
(#)
unexercisable
|
Equity
incentive plan awards: Number of securities underlying unexercised
unearned options
(#)
|
Option
exercise price
($)
|
Option
expiration date
|
|
|
Dwight
Babcock, Chairman and Interim CEO
|
50,000
|
—
|
—
|
6.30
|
3/31/2016
|
|
|
50,000
|
—
|
—
|
3.80
|
6/23/2016
|
||
|
50,000
|
—
|
—
|
3.11
|
8/15/2016
|
||
|
100,000
|
—
|
—
|
0.75
|
5/13/2018
|
||
|
Roger
Girard, former Chairman and CEO
|
513,840
|
—
|
—
|
1.19
|
5/31/2009
|
|
|
33,333
|
—
|
—
|
3.11
|
5/31/2009
|
||
|
David
Swanberg, former Executive Vice President - Operations
|
150,000
|
—
|
—
|
1.00
|
8/18/2015
|
|
|
|
16,666
|
—
|
—
|
3.11
|
8/15/2016
|
|
|
16,666
|
—
|
—
|
4.14
|
6/1/2017
|
||
|
Lori
Woods, Vice President
|
16,666
|
33,334
|
(1)
|
—
|
3.50
|
7/5/2016
|
|
16,666
|
33,334
|
(2)
|
—
|
3.10
|
10/17/2016
|
|
|
5,000
|
15,000
|
(3)
|
—
|
4.40
|
3/2/2017
|
|
|
6,666
|
13,334
|
(4)
|
—
|
4.14
|
6/1/2017
|
|
|
Fred
Swindler, VP - Regulatory Affairs and Quality Assurance
|
3,333
|
6,667
|
(3)
|
—
|
4.40
|
3/2/2017
|
|
3,333
|
6,667
|
(4)
|
—
|
4.14
|
6/1/2017
|
|
|
Robert
Bilella, Territory Sales Manager
|
84,236
|
—
|
—
|
4.15
|
6/23/2015
|
|
|
(1)
|
Represents
a July 5, 2006 grant, one-third of which became exercisable on
July 1,
2007, one-third of which will become exercisable on July 1, 2008,
and the
final third will become exercisable on July 1,
2009.
|
|
(2)
|
Represents
the October 17, 2006 grant, one-third of which became exercisable
on
October 17, 2007, one-third of which will become exercisable on
October
17, 2008, and the final third will become exercisable on October
17,
2009.
|
|
(3)
|
Represents
the March 2, 2007 grant, one-third of which became exercisable
on March 2,
2008, one-third of which will become exercisable on March 2, 2009,
and the
final third will become exercisable on March 2,
2010.
|
|
(4)
|
Represents
the June 1, 2007 grant, one-third of which became exercisable on
June 1,
2008, one-third of which will become exercisable on June 1, 2009,
and the
final third will become exercisable on June 1,
2010.
|
The
Company has a 401(k) plan that covers all eligible full-time employees of
the
Company. Contributions to the 401(k) plan are made by participants to their
individual accounts through payroll withholding. Additionally, the 401(k)
plan
provides for the Company to make contributions to the 401(k) plan in amounts
at
the discretion of management. The Company has not made any contributions
to the
401(k) plan and does not maintain any other retirement plans for its executives
or employees.
|
Non-Employee
Director Compensation
|
|||||||
|
Name
|
Fees
earned or paid in cash
($)
|
Stock
awards
($)
|
Option
awards
($)
|
Non-equity
incentive plan compensation
($)
|
Non-qualified
deferred compensation earnings
($)
|
All
other compensation
($)
|
Total
($)
|
|
Dwight
Babcock
|
52,000
|
—
|
—
|
—
|
—
|
—
|
52,000
|
|
Stephen
Boatwright
|
11,500
|
—
|
—
|
—
|
—
|
—
|
11,500
|
|
Robert
Kauffman
|
48,000
|
—
|
—
|
—
|
—
|
—
|
48,000
|
|
Thomas
LaVoy
|
43,500
|
—
|
—
|
—
|
—
|
—
|
43,500
|
|
Albert
Smith
|
39,500
|
—
|
—
|
—
|
—
|
—
|
39,500
|
Beginning
in fiscal year 2008, each non-employee director received cash compensation
of
$3,000 per month, except for Mr. Boatwright who received $1,000 per month
until
his resignation in February 2008. In addition, each non-employee director
received $1,000 per Board meeting attended in person or $500 per Board meeting
attended via telephone and $500 per committee meeting attended. Beginning
in
March 2008, Mr. Babcock began receiving an additional $3,000 per month for
serving as Chairman, Mr. Kauffman began receiving an additional $2,000 per
month
for serving as Vice-Chairman, and Mr. LaVoy began receiving an additional
$1,000
per month for serving as Audit Committee Chairman.
Each
director had stock options to purchase 150,000 shares of the Company’s common
stock outstanding as of June 30, 2008, except for Mr. Babcock who was granted
options to purchase an additional 100,000 shares of the Company’s common stock
on May 13, 2008 for serving as Interim CEO. This grant of 100,000 shares
is
noted in the executives’ Outstanding Equity Awards at Fiscal Year-End table
above.
Compensation
Committee Interlocks and Insider Participation
As
a
smaller reporting company, the Company is not required to provide this
disclosure.
Compensation
Committee Report
As
a
smaller reporting company, the Company is not required to provide this
disclosure.
The
following tables set forth certain information regarding the beneficial
ownership of the Company’s common stock and preferred stock as of September 16,
2008 for (a) each person known by the Company to be a beneficial owner of
five
percent or more of the outstanding common or preferred stock of the Company,
(b)
each executive officer, director and nominee for director of the Company,
and
(c) directors and executive officers of the Company as a group. As of September
16, 2008, the Company had 22,942,088 shares of common stock and 59,065 shares
of
preferred stock outstanding.
|
Common
Stock Share Ownership
|
||||
|
Name
of Beneficial Owner
|
Common
Shares
Owned
|
Common
Stock Options Exercisable Within 60 Days
|
Common
Warrants
|
Percent
of
Class
(1)
|
|
Dwight
Babcock (2)
|
66,002
|
250,000
|
12,500
|
1.42%
|
|
Roger
Girard
|
222,922
|
547,173
|
—
|
3.28%
|
|
David
Swanberg (3)
|
343,627
|
196,665
|
5,500
|
2.36%
|
|
Lori
Woods
|
8,000
|
78,332
|
—
|
—%
|
|
Jonathan
Hunt
|
—
|
64,999
|
—
|
—%
|
|
Robert
Kauffman
|
63,802
|
150,000
|
—
|
—%
|
|
Thomas
LaVoy
|
8,423
|
150,000
|
—
|
—%
|
|
Albert
Smith
|
122,147
|
150,000
|
—
|
1.18%
|
|
Directors
and Executive Officers as a group
|
268,374
|
843,331
|
12,500
|
4.72%
|
|
(1)
|
Percentage
ownership is based on 22,942,088 shares of Common Stock outstanding
on
September 16, 2008. Shares of Common Stock subject to stock options
which
are currently exercisable or will become exercisable within 60
days after
September 16, 2008 are deemed outstanding for computing the percentage
ownership of the person or group holding such options, but are
not deemed
outstanding for computing the percentage ownership of any other
person or
group.
|
|
(2)
|
Mr.
Babcock’s common shares owned include 2,695 shares owned by his
spouse.
|
|
(3)
|
Mr.
Swanberg’s options include 13,333 options granted to his
spouse.
|
|
Preferred
Stock Share Ownership
|
||
|
Name
of Beneficial Owner
|
Preferred
Shares
Owned
|
Percent
of
Class
(1)
|
|
Aissata
Sidibe (2)
|
20,000
|
33.86%
|
|
William
and Karen Thompson Trust (3)
|
14,218
|
24.07%
|
|
Jamie
Granger (4)
|
10,529
|
17.83%
|
|
Hostetler
Living Trust (5)
|
9,479
|
16.05%
|
|
Leslie
Fernandez (6)
|
3,688
|
6.24%
|
|
(1)
|
Percentage
ownership is based on 59,065 shares of Preferred Stock outstanding
on
September 16, 2008.
|
|
(2)
|
The
address of Ms. Sidibe is 229 Lasiandra Ct, Richland, WA
99352.
|
|
(3)
|
The
address of the William and Karen Thompson Trust is 285 Dondero
Way, San
Jose, CA 95119.
|
|
(4)
|
The
address of Jamie Granger is 53709 South Nine Canyon Road, Kennewick,
WA
99337.
|
|
(5)
|
The
address of the Hostetler Living Trust is 9257 NE 175th Street,
Bothell, WA
98011.
|
|
(6)
|
The
address of Leslie Fernandez is 2615 Scottsdale Place, Richland,
WA
99352.
|
No
officers or directors beneficially own shares of Preferred Stock.
IsoRay
Medical, Inc.’s patent rights to its Cs-131 process were acquired from Lane
Bray, a shareholder and employee of the Company, and are subject to a 1%
royalty
on gross profits and certain contractual restrictions. Pursuant to the royalty
agreement, the Company must also pay a royalty of 2% of Gross Sales, as defined,
for any sub-assignments of the aforesaid patented process to any third parties.
The royalty agreement will remain in force until the expiration of the patents
on the assigned technology, unless earlier terminated in accordance with
the
terms of the underlying agreement. During fiscal year 2007, the Company achieved
its first gross margin and began making quarterly payments to Mr. Bray as
outlined in the royalty agreement. The Company recorded royalty expense of
$21,219 and $2,161 for the years ended June 30, 2008 and 2007, respectively,
related to these payments.
Roger Girard, the Company’s former Chairman and CEO, had personally guaranteed $20,000 of the BFEDD loan, which was funded in December 2004. In exchange for his personal guaranty, Mr. Girard received 5,728 shares of common stock. As a condition of his resignation in February 2008, the Company prepaid $20,000 on the BFEDD loan and obtained Mr. Girard’s release and Mr. Girard in turn surrendered the 5,728 shares to the Company. As part of his settlement, Mr. Girard also surrendered 30,072 shares of common stock he had received in 2004 for personally guaranteeing a portion of a line of credit for the Company.
Mr.
Girard and David Swanberg, the Company’s former Executive VP – Operations,
personally guaranteed a portion of the HAEIFC loan. As part of their
resignations, the Company obtained their releases from these personal guarantees
by prepaying $60,000 and $40,000, respectively.
Mr. Stephen
Boatwright, a former Company director, has been actively involved in providing
various legal services to the Company and IsoRay Medical, Inc. through the
law
firm of Keller Rohrback, PLC. During the fiscal years ended June 30, 2008
and
2007, the Company paid Keller Rohrback, PLC approximately $426,000 and $459,000,
respectively, for legal services. In addition, the Company had accrued at
June
30, 2008 approximately $10,000 in legal fees to be paid.
Patent
and Know-How Royalty License Agreement
Effective
August 1, 1998, Pacific Management Associates Corporation (PMAC) transferred
its
entire right, title and interest in an exclusive license agreement with Donald
Lawrence to IsoRay, LLC (a predecessor company) in exchange for a membership
interest. The terms of the license agreement require the payment of a royalty
based on the Net Factory Sales Price, as defined in the agreement, of licensed
product sales. Because the licensor’s patent application was ultimately
abandoned, only a 1% “know-how” royalty based on Net Factory Sales Price, as
defined, remains applicable. To
date,
management believes that there have been no product sales incorporating the
“know-how” and that therefore no royalty is due pursuant to the terms of the
agreement. Management believes that ultimately no royalties should be paid
under
this agreement as there is no intent to use this “know-how” in the
future.
The
licensor of the Lawrence “know-how” has disputed management’s contention that it
is not using this “know-how”. On September 25, 2007 and again on October 31,
2007, the Company participated in nonbinding mediation regarding this matter;
however, no settlement was reached with the Lawrence Family Trust. After
additional settlement discussions which ended in April 2008, the parties
still
failed to reach a settlement. The parties may demand binding arbitration
at any
time.
Director
Independence
Using
the
standards of the American Stock Exchange, the Company's Board has
determined that Mr. Kauffman, Mr. LaVoy, and Mr. Smith each
qualify under such standards as an independent director. Mr. Kauffman, Mr.
LaVoy and Mr. Smith each meet the American Stock Exchange listing standards
for
independence both as a director and as a member of the Audit Committee, and
Mr.
Kauffman and Mr. Smith each meet the American Stock Exchange listing standards
for independence both as a director and as a member of the Compensation
Committee. No other directors are independent under these standards. The
Company
did not consider any relationship or transaction between itself and these
independent directors not already disclosed in this report in making this
determination.
The
Company paid or accrued the following fees in each of the prior two fiscal
years
to its principal accountant, DeCoria, Maichel & Teague, P.S.:
|
Year
ended
|
Year
ended
|
||||||
|
June
30,
|
June
30,
|
||||||
|
2008
|
2007
|
||||||
|
1.
Audit fees
|
$
|
42,107
|
$
|
41,016
|
|||
|
2.
Audit-related fees
|
–
|
1,800
|
|||||
|
3.
Tax fees
|
7,750
|
4,250
|
|||||
|
4.
All other fees
|
–
|
–
|
|||||
|
Totals
|
$
|
49,857
|
$
|
47,066
|
|||
Audit
fees include fees for the audit of our annual financial statements, reviews
of
our quarterly financial statements, and related consents for documents filed
with the SEC. Audit-related fees include fees related to work on common stock
offering memorandums. Tax fees include fees for the preparation of our federal
and state income tax returns.
As
part
of its responsibility for oversight of the independent registered public
accountants, the Audit Committee has established a pre-approval policy for
engaging audit and permitted non-audit services provided by our independent
registered public accountants, DeCoria, Maichel & Teague, P.S. In accordance
with this policy, each type of audit, audit-related, tax and other permitted
service to be provided by the independent auditors is specifically described
and
each such service, together with a fee level or budgeted amount for such
service, is pre-approved by the Audit Committee. The Audit Committee has
delegated authority to its Chairman to pre-approve additional non-audit services
(provided such services are not prohibited by applicable law) up to a
pre-established aggregate dollar limit. All services pre-approved by the
Chairman of the Audit Committee must be presented at the next Audit Committee
meeting for review and ratification. All of the services provided by DeCoria,
Maichel & Teague, P.S. described above were approved by our Audit
Committee.
The
Company’s principal accountant, DeCoria, Maichel & Teague P.S., did not
engage any other persons or firms other than the principal accountant’s
full-time, permanent employees.
(except
as otherwise indicated, all exhibits were previously filed)
|
Exhibit #
|
Description
|
|
|
2.1
|
Merger
Agreement dated as of May 27, 2005, by and among Century Park
Pictures
Corporation, Century Park Transitory Subsidiary, Inc., certain
shareholders and IsoRay Medical, Inc. incorporated by reference
to the
Form 8-K filed on August 3, 2005.
|
|
|
2.2
|
Certificate
of Merger, filed with the Delaware Secretary of State on July
28, 2005
incorporated by reference to the Form 8-K filed on August 3,
2005.
|
|
|
3.1
|
Articles
of Incorporation and By-Laws are incorporated by reference to
the Exhibits
to the Company's Registration Statement of September 15,
1983.
|
|
|
3.2
|
Certificate
of Designation of Rights, Preferences and Privileges of Series
A and B
Convertible Preferred Stock, filed with the Minnesota Secretary
of State
on June 29, 2005 incorporated by reference to the Form 8-K filed
on August
3, 2005.
|
|
|
3.3
|
Restated
and Amended Articles of Incorporation incorporated by reference
to the
Form 10-KSB filed on October 11, 2005.
|
|
|
3.4
|
Text
of Amendments to the Amended and Restated By-Laws of the Company,
incorporated by reference to the Form 8-K filed on February 7,
2007.
|
|
|
3.5
|
Amended
and Restated By-Laws of the Company dated as of January 8, 2008,
incorporated by reference to the Form 8-K filed on January 14,
2008.
|
|
|
4.2
|
Intentionally
Omitted
|
|
|
4.3
|
Intentionally
Omitted
|
|
4.4
|
Intentionally
Omitted
|
|
|
4.5
|
Intentionally
Omitted
|
|
|
4.6
|
Intentionally
Omitted
|
|
|
4.7
|
Amended
and Restated 2005 Stock Option Plan incorporated by reference
to the Form
S-8 filed on August 19, 2005.
|
|
|
4.8
|
Amended
and Restated 2005 Employee Stock Option Plan incorporated by
reference to
the Form S-8 filed on August 19, 2005.
|
|
|
4.9
|
Form
of Registration Right Agreement among IsoRay Medical, Inc., Meyers
Associates, L.P. and the other signatories thereto, dated October
15,
2004, incorporated by reference to the Form SB-2 filed on November
10,
2005.
|
|
|
4.10
|
Form
of Registration Rights Agreement among IsoRay, Inc., Meyers Associates,
L.P. and the other signatories thereto, dated February 1, 2006,
incorporated by reference to the Form SB-2/A1 filed on March
24,
2006.
|
|
|
4.11
|
Form
of IsoRay, Inc. Common Stock Purchase Warrant, incorporated by
reference
to the Form SB-2/A1 filed on March 24, 2006.
|
|
|
4.12
|
2006
Director Stock Option Plan, incorporated by reference to the
Form S-8
filed on August 18, 2006.
|
|
|
4.13
|
Form
of Registration Rights Agreement among IsoRay, Inc. and the other
signatories thereto, dated August 9, 2006, incorporated by reference
to
the Form 8-K filed on August 18, 2006.
|
|
|
4.14
|
Form
of IsoRay, Inc. Common Stock Purchase Warrant, dated August 9,
2006,
incorporated by reference to the Form 8-K filed on August 18,
2006.
|
|
|
4.15
|
Form
of Registration Rights Agreement among IsoRay, Inc., Meyers Associates,
L.P. and the other signatories thereto, dated October 17, 2005,
incorporated by reference to the Form SB-2 filed on October 16,
2006.
|
|
|
4.16
|
Amended
and Restated 2006 Director Stock Option Plan, incorporated by
reference to
the Form S-8/A1 filed on December 18, 2006.
|
|
|
4.17
|
Amended
and Restated 2005 Stock Option Plan, incorporated by reference
to the Form
S-8/A1 filed on December 18, 2006.
|
|
|
4.18
|
Intentionally
omitted.
|
|
|
4.19
|
Rights
Agreement, dated as of February 1, 2007, between the Computershare
Trust
Company N.A., as Rights Agent, incorporated by reference to Exhibit
1 to
the Company’s Registration Statement on Form 8-A filed on February 7,
2007.
|
|
|
4.20
|
Certificate
of Designation of Rights, Preferences and Privileges of Series
C Junior
Participating Preferred Stock, incorporated by reference to Exhibit
1 to
the Company’s Registration Statement on Form 8-A filed February 7,
2007.
|
|
|
4.21
|
2008
Employee Stock Option Plan, incorporated by reference to the
Form S-8
filed on January 14, 2008.
|
|
|
10.2
|
Universal
License Agreement, dated November 26, 1997 between Donald C.
Lawrence and
William J. Stokes of Pacific Management Associates Corporation,
incorporated by reference to the Form SB-2 filed on November
10,
2005.
|
|
|
10.3
|
Royalty
Agreement of Invention and Patent Application, dated July 12,
1999 between
Lane A. Bray and IsoRay LLC, incorporated by reference to the
Form SB-2
filed on November 10, 2005.
|
|
|
10.4
|
Intentially
Omitted
|
|
|
10.5
|
Section
510(k) Clearance from the Food and Drug Administration to market
Lawrence
CSERION Model CS-1, dated March 28, 2003, incorporated by reference
to the
Form SB-2 filed on November 10, 2005.
|
|
|
10.6
|
Battelle
Project No. 45836 dated June 20, 2003, incorporated by reference
to the
Form SB-2/A2 filed on April 27, 2006.
|
|
|
10.7
|
Intentionally
Omitted
|
|
|
10.8
|
Work
for Others Agreement No. 45658, R2, dated April 27, 2004 between
Battelle
Memorial Institute, Pacific Northwest Division and IsoRay Products
LLC,
incorporated by reference to the Form SB-2/A2 filed on April
27,
2006.
|
|
|
10.9
|
Development
Loan Agreement for $230,000, dated September 15, 2004 between
Benton-Franklin Economic Development District and IsoRay Medical,
Inc.,
incorporated by reference to the Form SB-2/A2 filed on April
27,
2006.
|
|
10.10
|
Registry
of Radioactive Sealed Sources and Devices Safety Evaluation of
Sealed
Source, dated September 17, 2004, incorporated by reference to
the Form
SB-2/A2 filed on April 27, 2006.
|
|
|
10.11
|
CRADA
PNNL/245, "Y-90 Process Testing for IsoRay", dated December 22,
2004
between Pacific Northwest National Laboratory and IsoRay Medical
Inc.,
including Amendment No. 1, incorporated by reference to the Form
SB-2/A2
filed on April 27, 2006.
|
|
|
10.12
|
Intentionally
Omitted
|
|
|
10.13
|
Amendment
1 to Agreement 45658, dated February 23, 2005 between Battelle
Memorial
Institute Pacific Northwest Division and IsoRay Medical, Inc.,
incorporated by reference to the Form SB-2/A2 filed on April
27,
2006.
|
|
|
10.14
|
Equipment
Lease Agreement dated April 14, 2005 between IsoRay Medical,
Inc. and
Nationwide Funding, LLC, incorporated by reference to the Form
SB-2/A2
filed on April 27, 2006.
|
|
|
10.15
|
Intentionally
Omitted
|
|
|
10.16
|
Master
Lease Agreement Number 5209, dated May 7, 2005 between VenCore
Solutions
LLC and IsoRay Medical, Inc., incorporated by reference to the
Form
SB-2/A2 filed on April 27, 2006.
|
|
|
10.17
|
Contract
#840/08624332/04031 dated August 25, 2005 between IsoRay, Inc.
and the
Federal State Unitary Enterprise << Institute of Nuclear Materials
>>, Russia, incorporated by reference to the Form SB-2 filed on
November 10, 2005.
|
|
|
10.18
|
State
of Washington Radioactive Materials License dated October 6,
2005,
incorporated by reference to the Form SB-2 filed on November
10,
2005.
|
|
|
10.19
|
Express
Pricing Agreement Number 219889, dated October 5, 2005 between
FedEx and
IsoRay Medical, Inc., incorporated by reference to the Form 10-QSB
filed
on November 21, 2005.
|
|
|
10.20
|
Intentionally
Omitted
|
|
|
10.21
|
Contract
Modification Quality Class G, dated October 25, 2005 to Contract
Number
X40224 between Energy Northwest and IsoRay, Inc., incorporated
by
reference to the Form 10-QSB filed on November 21,
2005.
|
|
|
10.22
|
Agreement
dated August 9, 2005 between the Curators of the University of
Missouri
and IsoRay Medical, Inc., incorporated by reference to the Form
SB-2/A2
filed on April 27, 2006 (confidential treatment
requested).
|
|
|
10.23
|
Intentionally
Omitted
|
|
|
10.24
|
Intentionally
Omitted
|
|
|
10.25
|
Economic
Development Agreement, dated December 14, 2005, by and between
IsoRay,
Inc. and the Pocatello Development Authority, incorporated by
reference to
the Form 8-K filed on December 20, 2005.
|
|
|
10.26
|
License
Agreement, dated February 2, 2006, by and between IsoRay Medical,
Inc. and
IBt SA, incorporated by reference to the Form 8-K filed on March
24, 2006
(confidential treatment requested).
|
|
|
10.27
|
Intentionally
Omitted.
|
|
|
10.28
|
Service
Agreement between IsoRay, Inc. and Advanced Care Medical, Inc.,
dated
March 1, 2006, incorporated by reference to the Form SB-2/A2
filed on
April 27, 2006.
|
|
|
10.29
|
Intentionally
Omitted.
|
|
|
10.30
|
Intentionally
Omitted.
|
|
|
10.31
|
Loan
Agreement, dated June 15, 2006, by and between IsoRay Medical,
Inc. and
the Hanford Area Economic Investment Fund Committee, incorporated
by
reference to the Form 8-K filed on June 21, 2006.
|
|
|
10.32
|
Commercial
Security Agreement, dated June 15, 2006, by and between IsoRay
Medical,
Inc. and the Hanford Area Economic Investment Fund Committee,
incorporated
by reference to the Form 8-K filed on June 21, 2006.
|
|
|
10.33
|
Common
Stock and Warrant Purchase Agreement among IsoRay, Inc. and the
other
signatories thereto, dated August 9, 2006, incorporated by reference
to
the Form 8-K filed on August 18,
2006.
|
|
10.34
|
Intentionally
Omitted.
|
|
|
10.35
|
Form
of Officer and Director Indemnification Agreement, incorporated
by
reference to the Form SB-2 Post Effective Amendment No. 2 filed
on October
13, 2006.
|
|
|
10.36
|
Contract
No. 840/20553876/11806-32, dated October 6, 2006, by and between
IsoRay
Medical, Inc. and FSUE “SSC-Research Institute of Atomic Reactors,”
incorporated by reference to the Form 8-K filed on November 6,
2006
(confidential treatment requested for redacted
portions).
|
|
|
10.37
|
Agreement
for Exclusive Right to Buy, dated October 6, 2006, by and between
IsoRay
Medical, Inc. and FSUE “SSC-Research Institute of Atomic Reactors,”
incorporated by reference to the Form 8-K filed on November 6,
2006
(confidential treatment requested for redacted
portions).
|
|
|
10.38
|
Form
of Securities Purchase Agreement by and among IsoRay, Inc. and the
Buyers dated March 22, 2007, incorporated by reference to the Form
8-K filed on March 23, 2007.
|
|
|
10.39
|
Form
of Common Stock Purchase Warrant dated March 21, 2007, incorporated
by
reference to the Form 8-K filed on March 23, 2007.
|
|
|
10.40
|
Placement
Agent Agreement by and between the Company and Punk, Ziegel & Company,
L.P. dated March 14, 2007, incorporated by reference to the Form
8-K filed
on March 23, 2007.
|
|
|
10.41
|
Placement
Agent Agreement by and between the Company and Maxim Group LLC
dated
February 2, 2006, incorporated by reference to the Form 8-K filed
on March
23, 2007.
|
|
|
10.42
|
Intentionally
Omitted.
|
|
|
10.43
|
Intentionally
Omitted.
|
|
|
10.44
|
Intentionally
Omitted.
|
|
|
10.45
|
Lease
Agreement, dated effective as of September 1, 2007, by and between
IsoRay,
Inc. and Perma-Fix Northwest Richland, Inc., incorporated by
reference to
the Form 8-K filed on October 16, 2007.
|
|
|
10.46
|
Amendment
No. 1 to License Agreement, dated October 12, 2007, by and between
IsoRay
Medical, Inc. and IBt, SA, incorporated by reference to the Form
8-K filed
on October 17, 2007.
|
|
|
Loan
Covenant Waiver Letter dated August 18, 2008 from the Benton-Franklin
Economic Development District, filed herewith.
|
||
|
Loan
Covenant Waiver Letter dated August 26, 2008 from the Hanford
Area
Economic Investment Fund Committee, filed herewith.
|
||
|
Subsidiaries
of the Company, filed herewith.
|
||
|
Consent
of DeCoria, Maichel & Teague, P.S., filed herewith.
|
||
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief
Executive Officer, filed herewith.
|
||
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief
Financial Officer, filed herewith.
|
||
|
Certifications
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed
herewith.
|
Reports
on Form 8-K
On
May
13, 2008, the Company filed a Current Report on Form 8-K announcing its
financial results for the third quarter of fiscal year 2008.
On
August
20, 2008, the Company filed a Current Report on Form 8-K announcing its
financial results for the fourth quarter of fiscal year 2008.
IsoRay,
Inc.
Index
to Financial Statements
|
Page
|
||
|
F-2
|
||
|
Financial
Statements:
|
||
|
F-3
|
||
|
F-4
|
||
|
F-5
|
||
|
F-6
|
||
|
|
F-7
|
Board
of
Directors and Shareholders
IsoRay,
Inc.
Richland,
Washington
We
have
audited the accompanying consolidated balance sheets of IsoRay, Inc. and
Subsidiaries (“the Company”) (see Note 1) as of June 30, 2008 and 2007, and the
related consolidated statements of operations, changes in shareholders’ equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of IsoRay, Inc. and
Subsidiaries as of June 30, 2008 and 2007, and the consolidated results of
their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
/s/
DeCoria, Maichel & Teague, P.S.
Spokane,
Washington
September
29, 2008
IsoRay,
Inc. and Subsidiaries
|
June
30,
|
|||||||
|
2008
|
2007
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
4,820,033
|
$
|
9,355,730
|
|||
|
Short-term
investments
|
3,726,000
|
9,942,840
|
|||||
|
Accounts
receivable, net of allowance for doubtful accounts of $33,031 and
$99,789,
respectively
|
1,016,495
|
1,092,925
|
|||||
|
Inventory
|
899,964
|
880,834
|
|||||
|
Prepaid
expenses and other current assets
|
267,001
|
458,123
|
|||||
|
Total
current assets
|
10,729,493
|
21,730,452
|
|||||
|
Fixed
assets, net of accumulated depreciation and amortization
|
6,040,641
|
3,665,551
|
|||||
|
Deferred
financing costs, net of accumulated amortization
|
65,221
|
95,725
|
|||||
|
Licenses,
net of accumulated amortization
|
455,646
|
262,074
|
|||||
|
Restricted
cash
|
175,852
|
—
|
|||||
|
Other
assets, net of accumulated amortization
|
345,040
|
322,360
|
|||||
|
Total
assets
|
$
|
17,811,893
|
$
|
26,076,162
|
|||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
751,402
|
$
|
1,947,980
|
|||
|
Accrued
payroll and related taxes
|
344,612
|
459,068
|
|||||
|
Deferred
revenue
|
—
|
23,874
|
|||||
|
Notes
payable, due within one year
|
64,486
|
49,212
|
|||||
|
Capital
lease obligations, due within one year
|
25,560
|
194,855
|
|||||
|
Asset
retirement obligation, current portion
|
—
|
131,142
|
|||||
|
Total
current liabilities
|
1,186,060
|
2,806,131
|
|||||
|
Notes
payable, due after one year
|
344,898
|
528,246
|
|||||
|
Capital
lease obligations, due after one year
|
—
|
25,560
|
|||||
|
Asset
retirement obligation, noncurrent
|
506,005
|
—
|
|||||
|
Total
liabilities
|
2,036,963
|
3,359,937
|
|||||
|
Commitments
and contingencies (Note 16)
|
|||||||
|
Shareholders'
equity:
|
|||||||
|
Preferred
stock, $.001 par value; 6,000,000 shares authorized:
|
|||||||
|
Series
A: 1,000,000 shares allocated; no shares issued and
outstanding
|
—
|
—
|
|||||
|
Series
B: 5,000,000 shares allocated; 59,065 shares issued and
outstanding
|
59
|
59
|
|||||
|
Common
stock, $.001 par value; 194,000,000 shares authorized; 22,942,088
and
22,789,324 shares issued and outstanding
|
22,942
|
22,789
|
|||||
|
Treasury
stock, at cost, 5,000 and 0 shares
|
(3,655
|
)
|
—
|
||||
|
Additional
paid-in capital
|
47,464,507
|
45,844,793
|
|||||
|
Accumulated
deficit
|
(31,708,923
|
)
|
(23,151,416
|
)
|
|||
|
Total
shareholders' equity
|
15,774,930
|
22,716,225
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
17,811,893
|
$
|
26,076,162
|
|||
The
accompanying notes are an integral part of these financial
statements.
IsoRay,
Inc. and Subsidiaries
|
June
30,
|
|||||||
|
2008
|
2007
|
||||||
|
Product
sales
|
$
|
7,158,690
|
$
|
5,738,033
|
|||
|
Cost
of product sales
|
7,310,124
|
5,792,630
|
|||||
|
Gross
loss
|
(151,434
|
)
|
(54,597
|
)
|
|||
|
Operating
expenses:
|
|||||||
|
Research
and development expenses
|
1,358,075
|
1,345,163
|
|||||
|
Sales
and marketing expenses
|
3,725,164
|
3,384,472
|
|||||
|
General
and administrative expenses
|
3,568,048
|
4,915,598
|
|||||
|
Total
operating expenses
|
8,651,287
|
9,645,233
|
|||||
|
Operating
loss
|
(8,802,721
|
)
|
(9,699,830
|
)
|
|||
|
Non-operating
income (expense):
|
|||||||
|
Interest
and investment income
|
612,077
|
406,921
|
|||||
|
Loss
on short-term investments
|
(274,000
|
)
|
—
|
||||
|
Financing
expense
|
(92,863
|
)
|
(312,246
|
)
|
|||
|
Non-operating
income, net
|
245,214
|
94,675
|
|||||
|
Net
loss
|
$
|
(8,557,507
|
)
|
$
|
(9,605,155
|
)
|
|
|
Basic
and diluted loss per share
|
$
|
(0.37
|
)
|
$
|
(0.54
|
)
|
|
|
Weighted
average shares used in computing net loss per share:
|
|||||||
|
Basic
and diluted
|
23,028,075
|
17,827,522
|
|||||
The
accompanying notes are an integral part of these financial
statements.
IsoRay,
Inc. and Subsidiaries
|
Series B Preferred Stock
|
Common Stock
|
Treasury Stock
|
Subscriptions
|
Additional
Paid-in
|
Accumulated
|
||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Receivable
|
Capital
|
Deficit
|
Total
|
||||||||||||||||||||||
|
Balances
at June 30, 2006
|
144,759
|
$
|
145
|
15,157,901
|
$
|
15,158
|
—
|
$
|
—
|
$
|
(6,122,007
|
)
|
$
|
22,538,675
|
$
|
(13,546,261
|
)
|
$
|
2,885,710
|
||||||||||||
|
Issuance
of preferred stock pursuant to exercise of warrants
|
37,322
|
37
|
41,642
|
41,679
|
|||||||||||||||||||||||||||
|
Issuance
of common stock pursuant to exercise of warrants
|
2,295,506
|
2,295
|
6,857,385
|
6,859,680
|
|||||||||||||||||||||||||||
|
Issuance
of common stock pursuant to exercise of options
|
755,499
|
755
|
873,937
|
874,692
|
|||||||||||||||||||||||||||
|
Conversion
of preferred stock to common stock
|
(123,016
|
)
|
(123
|
)
|
123,016
|
123
|
—
|
||||||||||||||||||||||||
|
Cancellation
of common stock issued to Mercatus subject to a subscription
receivable
agreement
|
(1,748,146
|
)
|
(1,748
|
)
|
6,122,007
|
(6,120,259
|
)
|
—
|
|||||||||||||||||||||||
|
Exchange
of convertible debentures payable for common stock
|
12,048
|
12
|
49,987
|
49,999
|
|||||||||||||||||||||||||||
|
Issuance
of common stock pursuant to the August 2006 Stock Purchase Agreement,
net
of offering costs (see Note 12)
|
2,063,000
|
2,063
|
4,700,870
|
4,702,933
|
|||||||||||||||||||||||||||
|
Issuance
of common stock pursuant to the Public Equity Offering, net of
offering
costs (see Note 12)
|
4,130,500
|
4,131
|
15,112,900
|
15,117,031
|
|||||||||||||||||||||||||||
|
Payment
of dividend to Preferred shareholders (see Note 12)
|
(38,458
|
)
|
(38,458
|
)
|
|||||||||||||||||||||||||||
|
Share-based
compensation
|
1,828,114
|
1,828,114
|
|||||||||||||||||||||||||||||
|
Net
loss
|
(9,605,155
|
)
|
(9,605,155
|
)
|
|||||||||||||||||||||||||||
|
Balances
at June 30, 2007
|
59,065
|
59
|
22,789,324
|
22,789
|
—
|
—
|
—
|
45,844,793
|
(23,151,416
|
)
|
22,716,225
|
||||||||||||||||||||
|
Issuance
of common stock pursuant to exercise of warrants
|
290,876
|
291
|
1,010,622
|
1,010,913
|
|||||||||||||||||||||||||||
|
Issuance
of common stock pursuant to exercise of options
|
10,000
|
10
|
11,890
|
11,900
|
|||||||||||||||||||||||||||
|
Repurchase
of Company common stock (see Note 13)
|
5,000
|
(3,655
|
)
|
(3,655
|
)
|
||||||||||||||||||||||||||
|
Cancellation
of shares (see Note 20)
|
(148,112
|
)
|
(148
|
)
|
148
|
—
|
|||||||||||||||||||||||||
|
Share-based
compensation
|
597,054
|
597,054
|
|||||||||||||||||||||||||||||
|
Net
loss
|
(8,557,507
|
)
|
(8,557,507
|
)
|
|||||||||||||||||||||||||||
|
Balances
at June 30, 2008
|
59,065
|
$
|
59
|
22,942,088
|
$
|
22,942
|
5,000
|
$
|
(3,655
|
)
|
$
|
—
|
$
|
47,464,507
|
$
|
(31,708,923
|
)
|
$
|
15,774,930
|
||||||||||||
The
accompanying notes are an integral part of these financial
statements.
IsoRay,
Inc. and Subsidiaries
|
Year ended June 30,
|
|||||||
|
2008
|
2007
|
||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
|
Net
loss
|
$
|
(8,557,507
|
)
|
$
|
(9,605,155
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used by operating
activities:
|
|||||||
|
Depreciation
and amortization of fixed assets
|
1,103,940
|
491,643
|
|||||
|
Impairment
of fixed assets
|
85,000
|
—
|
|||||
|
Amortization
of deferred financing costs and other assets
|
107,555
|
223,604
|
|||||
|
Amortization
of discount on short-term investments
|
(150,621
|
)
|
—
|
||||
|
Loss
on short-term investments
|
274,000
|
—
|
|||||
|
Settlement
of asset retirement obligation
|
(135,120
|
)
|
—
|
||||
|
Accretion
of asset retirement obligation
|
36,887
|
7,597
|
|||||
|
Share-based
compensation
|
597,054
|
1,828,114
|
|||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
receivable, net
|
76,430
|
(496,478
|
)
|
||||
|
Inventory
|
(19,130
|
)
|
(719,453
|
)
|
|||
|
Prepaid
expenses and other current assets
|
191,122
|
(296,577
|
)
|
||||
|
Accounts
payable and accrued expenses
|
(1,196,578
|
)
|
1,351,698
|
||||
|
Accrued
payroll and related taxes
|
(114,456
|
)
|
(10,577
|
)
|
|||
|
Deferred
revenue
|
(23,874
|
)
|
23,874
|
||||
|
Net
cash used by operating activities
|
(7,725,298
|
)
|
(7,201,710
|
)
|
|||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
|
Purchases
of fixed assets
|
(3,090,934
|
)
|
(2,445,850
|
)
|
|||
|
Additions
to licenses and other assets
|
(293,303
|
)
|
(29,874
|
)
|
|||
|
Change
in restricted cash
|
(175,852
|
)
|
—
|
||||
|
Purchase
of short-term investments
|
(13,273,653
|
)
|
(10,931,920
|
)
|
|||
|
Proceeds
from the sale or maturity of short-term investments
|
19,367,114
|
989,080
|
|||||
|
Net
cash provided (used) by investing activities
|
2,533,372
|
(12,418,564
|
)
|
||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Repayment
of convertible debentures payable
|
—
|
(405,001
|
)
|
||||
|
Principal
payments on notes payable
|
(168,074
|
)
|
(55,450
|
)
|
|||
|
Principal
payments on capital lease obligations
|
(194,855
|
)
|
(183,554
|
)
|
|||
|
Proceeds
from cash sales of common shares, net of offering costs
|
—
|
19,819,962
|
|||||
|
Proceeds
from cash sales of preferred stock, pursuant to exercise of
warrants
|
—
|
41,679
|
|||||
|
Proceeds
from cash sales of common stock, pursuant to exercise of
warrants
|
1,010,913
|
6,859,682
|
|||||
|
Proceeds
from cash sales of common stock, pursuant to exercise of
options
|
11,900
|
729,692
|
|||||
|
Repurchase
of Company common stock
|
(3,655
|
)
|
—
|
||||
|
Payments
of dividends to preferred shareholders
|
—
|
(38,458
|
)
|
||||
|
Net
cash provided by financing activities
|
656,229
|
26,768,552
|
|||||
|
Net
(decrease) increase in cash and cash equivalents
|
(4,535,697
|
)
|
7,148,278
|
||||
|
Cash
and cash equivalents, beginning of period
|
9,355,730
|
2,207,452
|
|||||
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
$
|
4,820,033
|
$
|
9,355,730
|
|||
|
Supplemental
disclosures of cash flow information:
|
|||||||
|
Cash
paid for interest
|
$
|
63,818
|
$
|
143,662
|
|||
|
Non-cash
investing and financing activities:
|
|||||||
|
Increase
in fixed assets related to asset retirement obligation
|
$
|
473,096
|
$
|
56,120
|
|||
|
Cashless
exercise of common stock options in lieu of severance pay
|
—
|
145,000
|
|||||
|
Exchange
of convertible debentures payable for shares of common
stock
|
—
|
49,999
|
|||||
The
accompanying notes are an integral part of these financial
statements.
IsoRay,
Inc.
For
the years ended June 30, 2008 and 2007
1. Organization
Century
Park Pictures Corporation (Century) was organized under Minnesota law in 1983.
Century had no operations during the period from September 30, 1999 through
June
30, 2005.
On
July
28, 2005, IsoRay Medical, Inc. (Medical) became a wholly-owned subsidiary of
Century pursuant to a merger. Century changed its name to IsoRay, Inc. (IsoRay
or the Company). In the merger, the Medical stockholders received approximately
82% of the then outstanding securities of the Company.
Medical,
a Delaware corporation, was incorporated effective June 15, 2004 to develop,
manufacture and sell isotope-based medical products and devices for the
treatment of cancer and other malignant diseases. Medical is headquartered
in
Richland, Washington.
IsoRay
International LLC, a Washington limited liability company, was formed on
November 27, 2007 to serve as an owner in a Russian LLC that will distribute
the
Company’s products to the Russian market and also license the Company’s
technology for use in manufacturing Cs-131 brachytherapy seeds in
Russia.
2. Summary
of Significant Accounting Policies
Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries (collectively the Company). All
significant intercompany accounts and transactions have been
eliminated.
Cash
Equivalents
The
Company considers all highly liquid investments with maturities of three months
or less when purchased to be cash equivalents.
Short-Term
Investments
The
Company invests certain excess cash in marketable securities consisting
primarily of commercial paper, auction rate securities, and money market funds.
The Company classifies all debt securities as “available-for-sale” and records
the debt securities at fair value with unrealized gains and temporary unrealized
losses included in other comprehensive income/loss within shareholders’ equity,
if material. Declines in fair values that are considered other than temporary
are recorded in the Consolidated Statements of Operations.
Accounts
Receivable
Accounts
receivable are stated at the amount that management of the Company expects
to
collect from outstanding balances. Management provides for probable
uncollectible amounts through an allowance for doubtful accounts. Additions
to
the allowance for doubtful accounts are based on management’s judgment,
considering historical write-offs, collections and current credit conditions.
Balances which remain outstanding after management has used reasonable
collection efforts are written off through a charge to the allowance for
doubtful accounts and a credit to the applicable accounts receivable. Payments
received subsequent to the time that an account is written off are considered
bad debt recoveries.
Inventory
Inventory
is reported at the lower of cost or market. Cost of raw materials is determined
using the weighted average method. Cost of work in process and finished goods
is
computed using standard cost, which approximates actual cost, on a first-in,
first-out basis. As the Company has operated at a gross loss throughout the
past
fiscal years, inventories have generally been recorded at market or net
realizable value.
Fixed
Assets
Fixed
assets are capitalized and carried at the lower of cost or net realizable value.
Normal maintenance and repairs are charged to expense as incurred. When assets
are sold or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and any resulting gain or loss is recognized in
operations.
Depreciation
is computed using the straight-line method over the following estimated useful
lives:
|
Production
equipment
|
3
to 7 years
|
|
Office
equipment
|
2
to 5 years
|
|
Furniture
and fixtures
|
2
to 5 years
|
Leasehold improvements and capital lease assets are amortized over the shorter of the life of the lease or the estimated useful life of the asset.
The
Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
The
provisions of SFAS No. 144 require that an impairment loss be recognized when
the estimated future cash flows (undiscounted and without interest) expected
to
result from the use of an asset are less than the carrying amount of the asset.
Measurement of an impairment loss is based on the estimated fair value of the
asset if the asset is expected to be held and used.
Management
of the Company periodically reviews the net carrying value of all of its
equipment on an asset by asset basis. These reviews consider the net realizable
value of each asset, as measured in accordance with the preceding paragraph,
to
determine whether an impairment in value has occurred, and the need for any
asset impairment write-down.
Although
management has made its best estimate of the factors that affect the carrying
value based on current conditions, it is reasonably possible that changes could
occur which could adversely affect management's estimate of net cash flows
expected to be generated from its assets, and necessitate asset impairment
write-downs.
Deferred
Financing Costs
Financing
costs related to the acquisition of debt are deferred and amortized over the
term of the related debt using the effective interest method. Deferred
financing costs include the fair value of common shares issued to certain
shareholders for their guarantee of certain Company debt (see Note 9) in
accordance with Accounting Principles Board (APB) Opinion No. 21, Interest
on Receivables and Payables
and
Emerging Issues Task Force (EITF) Issue No. 95-13, Classification
of Debt Issue Costs in the Statement of Cash Flows.
The
value of the shares issued was the estimated market price of the shares as
of
the date of issuance. Amortization of deferred financing costs, totaling $30,504
and $178,633 for the years ended June 30, 2008 and 2007, respectively, is
included in financing expense on the statements of operations.
Licenses
Amortization
of licenses is computed using the straight-line method over the estimated
economic useful lives of the assets. In fiscal year 2006, the Company entered
into an agreement with IBt, SA, a Belgian company (IBt) to use IBt’s proprietary
“Ink Jet” production process and its proprietary polymer seed technology for use
in brachytherapy procedures using Cesium-131 (Cs-131). The Company paid license
fees of $225,000 and $275,000 during fiscal years 2008 and 2006, respectively,
and is amortizing the license over the 15-year term of the license
agreement.
In
the
fourth quarter of fiscal year 2008, the Company reviewed the carrying values
of
licenses. Although the Company has not currently integrated this technology
into
its products, management will reevaluate the potential of this technology during
fiscal year 2009 after the Company has further improved its current processes.
Therefore, the Company did not believe that any impairment had occurred to
this
intangible asset.
Amortization
of licenses was $43,452 and $23,426 for the years ended June 30, 2008 and 2007,
respectively. Based on the licenses recorded at June 30, 2008, and assuming
no
subsequent impairment of the underlying assets, the annual amortization expense
for each fiscal year ending June 30 is expected to be as follows: $47,670 for
2009, $35,354 for 2010, $35,208 for 2011, $35,208 for 2012, $35,208 for 2013,
and $266,998 thereafter.
Other
Assets
Other
assets, which include deferred charges and patents, are stated at cost, less
accumulated amortization. Amortization of patents is computed using the
straight-line method over the estimated economic useful lives of the assets.
The
Company periodically reviews the carrying values of patents and any impairments
are recognized when the expected future operating cash flows to be derived
from
such assets are less than their carrying value.
Based
on
the patents and other intangible assets recorded in other assets at June 30,
2008, and assuming no subsequent impairment of the underlying assets, the annual
amortization expense for each fiscal year ending June 30 is expected to be
as
follows: $7,798 for 2009, $4,353 for 2010, $2,632 for 2011, $2,632 for 2012,
$2,632 for 2013, and $9,560 thereafter.
Asset
Retirement Obligation
SFAS
No.
143, Asset
Retirement Obligations,
establishes standards for the recognition, measurement and disclosure of legal
obligations associated with the costs to retire long-lived assets. Accordingly,
under SFAS No. 143, the fair value of the future retirement costs of the
Company’s leased assets are recorded as a liability on a discounted basis when
they are incurred and an equivalent amount is capitalized to property and
equipment. The initial recorded obligation is discounted using the Company’s
credit-adjusted risk free-rate and is reviewed periodically for changes in
the
estimated future costs underlying the obligation. The Company amortizes the
initial amount capitalized to property and equipment and recognizes accretion
expense in connection with the discounted liability over the estimated remaining
useful life of the leased assets.
In
fiscal
year 2006, the Company established an initial asset retirement obligation of
$63,040 which represented the discounted cost of cleanup that the Company
anticipated it would have to incur at the end of its equipment and property
leases in its old production facility. This amount was determined based on
discussions with qualified production personnel and on historical evidence.
During fiscal year 2007, the Company reevaluated its obligations based on
discussions with the Washington Department of Health and determined that the
initial asset retirement obligation should be increased by an additional
$56,120. During the second quarter of fiscal year 2008, the Company removed
all
radioactive residuals and tenant improvements from its old production facility
and returned the facility to the lessor. The Company had an asset retirement
obligation of $135,120 accrued for this facility but total costs incurred to
decommission the facility were $274,163 resulting in an additional expense
of
$139,043 that is included in cost of products sold. The additional expense
was
mainly due to unanticipated construction costs to return the facility to its
previous state. The Company originally believed that the lessor would retain
many of the leasehold improvements in the building, but the lessor instead
required their removal.
In
September 2007, another asset retirement obligation of $473,096 was established
representing the discounted cost of the Company’s estimate of the obligations to
remove any residual radioactive materials and all leasehold improvements at
the
end of the lease term at its new production facility. The estimate was developed
by qualified production personnel and the general contractor of the new
facility. The Company has reviewed the estimate again based on its experience
with decommissioning its old facility and believes that the original estimate
continues to be applicable.
During
the years ended June 30, 2008 and 2007, the asset retirement obligations changed
as follows:
|
2008
|
2007
|
||||||
|
Beginning
balance
|
$
|
131,142
|
$
|
67,425
|
|||
|
New
obligation
|
473,096
|
—
|
|||||
|
Settlement
of existing obligation
|
(135,120
|
)
|
—
|
||||
|
Changes
in estimates of existing obligation
|
—
|
56,120
|
|||||
|
Accretion
of discount
|
36,887
|
7,597
|
|||||
|
Ending
balance
|
$
|
506,005
|
$
|
131,142
|
|||
Because
the Company does not expect to incur any expenses related to its asset
retirement obligations in fiscal year 2009, the entire balance as of June 30,
2008 is classified as a noncurrent liability.
Financial
Instruments
The
Company discloses the fair value of financial instruments, both assets and
liabilities, recognized and not recognized in the balance sheet, for which
it is
practicable to estimate the fair value. The fair value of a financial instrument
is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than a forced liquidation
sale.
The
carrying amounts of financial instruments, including cash and cash equivalents,
short-term investments, accounts receivable, accounts payable, notes payable,
and capital lease obligations, approximated their fair values at June 30, 2008
and 2007.
Revenue
Recognition
The
Company applies the provisions of SEC Staff Accounting Bulletin (SAB)
No. 104, Revenue
Recognition.
SAB
No. 104, which supersedes SAB No. 101, Revenue
Recognition in Financial Statements,
provides guidance on the recognition, presentation and disclosure of revenue
in
financial statements. SAB No. 104 outlines the basic criteria that must be
met to recognize revenue and provides guidance for the disclosure of revenue
recognition policies. The Company recognizes revenue related to product sales
when (i) persuasive evidence of an arrangement exists, (ii) shipment
has occurred, (iii) the fee is fixed or determinable, and
(iv) collectability is reasonably assured.
Revenue
for the fiscal years ended June 30, 2008 and 2007 was derived solely from sales
of the Proxcelan Cs-131 brachytherapy seed, which is used in the treatment
of
cancer. The Company recognizes revenue once the product has been shipped to
the
customer. Prepayments, if any, received from customers prior to the time that
products are shipped are recorded as deferred revenue. In these cases, when
the
related products are shipped, the amount recorded as deferred revenue is then
recognized as revenue. The Company accrues for sales returns and other
allowances at the time of shipment. Although the Company does not have an
extensive operating history upon which to develop sales returns estimates,
we
have used the expertise of our management team, particularly those with
extensive industry experience and knowledge, to develop a proper
methodology.
Stock-Based
Compensation
The
Company measures and recognizes expense for all share-based payments at fair
value in accordance with SFAS No. 123 (Revised 2004), Share-Based
Payment
(SFAS
No. 123R). The Company uses the Black-Scholes option valuation model to estimate
fair value for all stock options on the date of grant. For stock options that
vest over time, the Company recognizes compensation cost on a straight-line
basis over the requisite service period for the entire award.
Research
and Development Costs
Research
and development costs, including salaries, research materials, administrative
expenses and contractor fees, are charged to operations as incurred. The cost
of
equipment used in research and development activities which has alternative
uses
is capitalized as part of fixed assets and not treated as an expense in the
period acquired. Depreciation of capitalized equipment used to perform research
and development is classified as research and development expense in the year
recognized.
Advertising
and Marketing Costs
Advertising
costs are expensed as incurred except for the cost of tradeshows and related
marketing materials which are deferred until the tradeshow occurs. Advertising
and marketing costs expensed (including tradeshows) were $598,663 and $441,196
for the years ended June 30, 2008 and 2007, respectively. Marketing costs of
$15,800 were included in prepaid expenses at June 30, 2008.
Legal
Contingencies
In
the
ordinary course of business, the Company is involved in legal proceedings
involving contractual and employment relationships, product liability claims,
patent rights, environmental matters, and a variety of other matters. The
Company is also subject to various local, state, and federal environmental
regulations and laws due to the isotopes used to produce the Company’s product.
As part of normal operations, amounts are expended to ensure that the Company
is
in compliance with these laws and regulations. While there have been no
reportable incidents or compliance issues, the Company believes that if it
relocates its current production facilities then certain decommissioning
expenses will be incurred and has recorded an asset retirement obligation for
these expenses.
The
Company records contingent liabilities resulting from asserted and unasserted
claims against it, when it is probable that a liability has been incurred and
the amount of the loss is reasonably estimable. Estimating probable losses
requires analysis of multiple factors, in some cases including judgments about
the potential actions of third-party claimants and courts. Therefore, actual
losses in any future period are inherently uncertain. Currently, the Company
does not believe any probable legal proceedings or claims will have a material
adverse effect on its financial position or results of operations. However,
if
actual or estimated probable future losses exceed the Company’s recorded
liability for such claims, it would record additional charges as other expense
during the period in which the actual loss or change in estimate
occurred.
Income
Taxes
Income
taxes are accounted for under the liability method. Under this method, the
Company provides deferred income taxes for temporary differences that will
result in taxable or deductible amounts in future years based on the reporting
of certain costs in different periods for financial statement and income tax
purposes. This method also requires the recognition of future tax benefits
such
as net operating loss carryforwards, to the extent that realization of such
benefits is more likely than not. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in operations in the period that includes the enactment
of
the change.
On
July
1, 2007, the Company adopted Financial Accounting Standards Board Interpretation
No. 48, Accounting
for Uncertainty in Income Taxes
(FIN No.
48). FIN No. 48 clarifies the accounting for uncertainty in income taxes
recognized in accordance with SFAS No. 109 Accounting
for Income Taxes,
prescribing a recognition threshold and measurement attribute for the
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. In the course of its assessment, management has determined that
the
Company, its subsidiary, and its predecessors are subject to examination of
their income tax filings in the United States and state jurisdictions for the
2004 through 2007 tax years. In the event that the Company is assessed penalties
and or interest, penalties will be charged to other operating expense and
interest will be charged to interest expense.
The
Company adopted FIN No. 48 using the modified prospective transition method,
which requires the application of the accounting standard as of July 1, 2007.
There was no impact on the financial statements as of and for the year ended
June 30, 2008 as a result of the adoption of FIN No. 48. In accordance with
the
modified prospective transition method, the financial statements for prior
periods have not been restated to reflect, and do not include, the impact of
FIN
No. 48.
Income
(Loss) Per Common Share
The
Company accounts for its income (loss) per common share according to SFAS No.
128, Earnings
Per Share.
Basic
earnings per share is calculated by dividing net income (loss) available to
common shareholders by the weighted average number of common shares outstanding,
and does not include the impact of any potentially dilutive common stock
equivalents. Common stock equivalents, including warrants and options to
purchase the Company's common stock, are excluded from the calculations when
their effect is antidilutive. At June 30, 2008 and 2007, the calculation of
diluted weighted average shares does not include 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
that could be dilutive in the future as of June 30, 2008 and 2007 are as
follows:
|
2008
|
2007
|
||||||
|
Preferred
stock
|
59,065
|
59,065
|
|||||
|
Common
stock warrants
|
3,245,082
|
3,627,764
|
|||||
|
Common
stock options
|
2,803,393
|
3,683,439
|
|||||
|
Total
potential dilutive securities
|
6,107,540
|
7,370,268
|
|||||
Use
of
Estimates
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management of the
Company to make estimates and assumptions that affect the amounts reported
in
the financial statements and accompanying notes. Accordingly, actual results
could differ from those estimates and affect the amounts reported in the
financial statements.
Reclassifications
Certain
amounts in the prior-year financial statements have been reclassified to conform
to the current year presentation.
Impact of Recently Issued Accounting Pronouncements
In
December 2007, FASB issued SFAS No. 141(R), Business
Combinations
(“SFAS 141R”), which replaces SFAS No. 141, Business
Combinations (“SFAS 141”).
SFAS 141R applies to all transactions and other events in which one entity
obtains control over one or more other businesses. The standard requires the
fair value of the purchase price, including the issuance of equity securities,
to be determined on the acquisition date. SFAS 141R requires an acquirer to
recognize the assets acquired, the liabilities assumed, and any noncontrolling
interests in the acquiree at the acquisition date, measured at their fair values
as of that date, with limited exceptions specified in the statement.
SFAS 141R requires acquisition costs to be expensed as incurred and
restructuring costs to be expensed in periods after the acquisition date.
Earn-outs and other forms of contingent consideration are to be recorded at
fair
value on the acquisition date. Changes in accounting for deferred tax asset
valuation allowances and acquired income tax uncertainties after the measurement
period will be recognized in earnings rather than as an adjustment to the cost
of the acquisition. SFAS 141R generally applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the
first annual reporting period beginning on or after December 15, 2008 with
early adoption prohibited. The implementation of this standard did not have
a
material impact on the Company’s consolidated financial position or results of
operations.
In
December 2007, the FASB issued statement No. 160, Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51
(SFAS
160). The statement requires noncontrolling interests or minority interests
to
be treated as a separate component of equity, not as a liability or other item
outside of permanent equity. Upon a loss of control, the interest sold, as
well
as any interest retained, is required to be measured at fair value, with any
gain or loss recognized in earnings. Based on SFAS 160, assets and liablities
will not change for subsequent purchase of sales transactions with
noncontrolling interests as long as control is maintained. Differences between
the fair value of consideration paid or received and the carrying value of
noncontrolling interests are to be recognized as an adjustment to the parent
interest’s equity. SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008 and earlier adoption is prohibited. The Company is currently
evaluating the impact that the implementation of SFAS 160 will have with respect
to the Company’s interest in UralDial.
In
February 2007, the FASB issued statement No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities Including
an
Amendment of FASB Statement No. 115
(SFAS
159). The statement allows entities to value financial instruments and certain
other items at fair value. The statement provides guidance over the election
of
the fair value option, including the timing of the election and specific items
eligible for the fair value accounting. Changes in fair values would be recorded
in earnings. The statement is effective for fiscal years beginning after
November 15, 2007. The Company does not believe the adoption of SFAS No.
159 will have a material effect on its consolidated financial
statements.
In
September 2006, the FASB issued statement No. 157, Fair
Value Measurements
(SFAS 157). SFAS 157 defines fair value, establishes a framework for
measuring fair value in accordance with accounting principles generally accepted
in the United States, and expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after November 15,
2007, with earlier application encouraged. Any amounts recognized upon adoption
as a cumulative effect adjustment will be recorded to the opening balance of
retained earnings in the year of adoption. The Company does not believe the
adoption of SFAS No. 157 will have a material effect on its consolidated
financial statements.
3. Short-Term
Investments
The
Company’s short-term investments consisted of the following at June 30, 2008 and
2007:
|
2008
|
2007
|
||||||
|
Municipal
debt securities
|
$
|
3,726,000
|
$
|
3,000,000
|
|||
|
Corporate
debt securities
|
—
|
6,942,840
|
|||||
|
$
|
3,726,000
|
$
|
9,942,840
|
||||
The
Company’s municipal debt securities consist of auction rate securities (ARS)
that are generally long-term debt instruments that provide liquidity through
a
modified Dutch auction process that resets the applicable interest rate at
predetermined intervals, usually every 28 days. ARS generally trade at par
and
are callable at par on any interest payment date at the option of the issuer.
Interest received during a given period is based upon the interest rate
determined through the auction process. Although these securities are issued
and
rated as long-term bonds, they are priced and traded as short-term instruments
because of the liquidity provided through the interest rate reset. This
mechanism generally allows existing investors to roll over their holdings and
continue to own their respective securities or liquidate their holdings by
selling their securities at par value. The Company generally invests in these
securities for short periods of time as part of its cash management
program.
However,
the uncertainties in the credit markets that began in February 2008 have
prevented the Company and other investors from liquidating their holdings by
selling their securities at par value as the amount of securities submitted
for
sale at recent ARS auctions has exceeded the market demand. These securities
continue to pay interest according to their stated terms. For those securities
that failed to auction, the Company continues to hold these securities and
accrues interest at a higher rate than similar securities for which auctions
have cleared. The Company's ARS are all AAA/Aaa rated investments and consist
of
various student loan portfolios with the vast majority of the student loans
guaranteed by the U.S. Government under the Federal Family Education Loan
Program. These securities were valued using a model that takes into
consideration the financial conditions of the issuer and the bond insurers
as
well as the current illiquidity of the securities. If the credit ratings of
the
issuers deteriorate, the Company may adjust the carrying value of these
investments. The Company is uncertain as to when the liquidity issues relating
to these investments will improve.
None
of
the ARS investments in our portfolio were backed by sub-prime mortgage
loans.
Although
insufficient demand for certain ARS may continue, we anticipate, based on
discussions with our investment advisors, that liquidity may possibly be
realized through the emergence of secondary markets in the near term,
particularly considering the high default interest rates, high credit ratings,
the backing of the Federal Family Education Loan Program, and the historically
low default rates of these securities. As such, we believe that the primary
impact of the failed auctions is reduced liquidity rather than impairment of
principal. In the event that we are unable to sell the investments at or above
our carrying value, these securities may not provide us with a liquid source
of
cash.
Unrealized
gains and temporary unrealized losses on these securities are recorded in other
comprehensive income/loss within Shareholders' Equity. Declines in fair value
that are considered other than temporary are recorded in the Consolidated
Statements of Operations in loss on short-term investments. The Company has
recognized the decline in fair value of the ARS as other than temporary and
recorded the loss in the statement of operations rather than in other
comprehensive income as the Company may need access to these funds before the
uncertainties in the credit markets are fully resolved.
4. Inventory
Inventory
consisted of the following at June 30, 2008 and 2007:
|
2008
|
2007
|
||||||
|
Raw
materials
|
$
|
696,958
|
$
|
682,327
|
|||
|
Work
in process
|
191,684
|
120,242
|
|||||
|
Finished
goods
|
11,322
|
78,265
|
|||||
|
$
|
899,964
|
$
|
880,834
|
||||
The
cost
of materials and production costs contained in inventory that are not useable
due to the passage of time, and resulting loss of bio-effectiveness, are written
off to cost of product sales at the time it is determined that the product
is
not useable.
In
June
2007, the Company purchased $469,758 of enriched barium that will be used in
future production of our isotope. The enriched barium is held by a Russian
vendor and is included in raw materials at June 30, 2008 and
2007.
5. Prepaid
Expenses
Prepaid
expenses consisted of the following at June 30, 2008 and 2007:
|
2008
|
2007
|
||||||
|
Prepaid
contract work
|
$
|
60,107
|
$
|
—
|
|||
|
Prepaid
insurance
|
38,059
|
37,001
|
|||||
|
Prepaid
rent
|
24,199
|
26,693
|
|||||
|
Other
prepaid expenses
|
106,960
|
249,184
|
|||||
|
Other
current assets
|
37,676
|
145,245
|
|||||
|
$
|
267,001
|
$
|
458,123
|
||||
6. Fixed
Assets
Fixed
assets consisted of the following at June 30, 2008 and 2007:
|
2008
|
2007
|
||||||
|
Production
equipment
|
$
|
2,786,748
|
$
|
807,838
|
|||
|
Office
equipment
|
153,215
|
111,218
|
|||||
|
Furniture
and fixtures
|
148,265
|
118,227
|
|||||
|
Leasehold
improvements (a)
|
4,622,136
|
522,951
|
|||||
|
Capital
lease assets (b)
|
222,911
|
655,858
|
|||||
|
Construction
in progress
|
64,219
|
2,217,372
|
|||||
|
7,997,494
|
4,433,464
|
||||||
|
Less
accumulated depreciation
|
(1,956,853
|
)
|
(767,913
|
)
|
|||
|
$
|
6,040,641
|
$
|
3,665,551
|
||||
(a) Balance
includes asset retirement addition of $473,096 as of June 30, 2008.
(b) Balance
includes asset retirement addition of $119,160 as of June 30, 2007.
Depreciation
and amortization expense related to fixed assets totaled $1,103,940 and $491,643
for 2008 and 2007, respectively. Accumulated amortization of capital lease
assets totaled $166,328 and $198,171 at June 30, 2008 and 2007,
respectively.
The
Company recorded an impairment charge of $85,000 in fiscal year 2008 for a
hot
cell that is not currently in use. This impairment charge is included in cost
of
product sales on the Consolidated Statement of Operations. The Company estimated
its fair market value based on values for similar assets.
7. Restricted
Cash
The
Washington Department of Health, effective October 2007, has required the
Company to provide collateral for the decommissioning of its facility. To
satisfy this requirement, the Company funded two certificates of deposits (CDs)
totaling $172,500 in separate banks. The CDs both have original maturities
of
three months but are classified as long-term as the Company does not anticipate
decommissioning the facility until the end of the current lease plus the lease
option periods. Interest earned on the CDs is rolled-over at the maturity of
each CD and becomes part of the restricted cash balance. Interest earned and
added to restricted cash during the fiscal year ended June 30, 2008 was $3,352.
These funds will be used to settle a portion of the Company’s remaining asset
retirement obligations (Note 2).
8. Other Assets
Other
assets, net of accumulated amortization, consisted of the following at June
30,
2008 and 2007:
|
2008
|
2007
|
||||||
|
Deferred
charges
|
$
|
322,319
|
$
|
297,008
|
|||
|
Patents
and trademarks, net of accumulated amortization of $19,094 and
$16,463
|
22,721
|
25,352
|
|||||
|
$
|
345,040
|
$
|
322,360
|
||||
Deferred
charges consist of prepaid legal fees for patents which have not yet been
obtained, and prepayments and deposits on fixed assets and contracts.
Amortization of patents and trademarks was $2,631 and $2,632 for the years
ended
June 30, 2008 and 2007, respectively.
9. Notes
Payable
Notes
payable consisted of the following at June 30, 2008 and 2007:
|
2008
|
2007
|
||||||
|
Benton-Franklin
Economic Development District (BFEDD) note payable (a)
|
$
|
145,745
|
$
|
185,848
|
|||
|
Hanford
Area Economic Investment Fund Committee (HAEIFC) note payable
(b)
|
263,639
|
391,610
|
|||||
|
409,384
|
577,458
|
||||||
|
Less
amounts due within one year
|
(64,486
|
)
|
(49,212
|
)
|
|||
|
Amounts
due after one year
|
$
|
344,898
|
$
|
528,246
|
|||
|
(a)
|
The
note payable to BFEDD, which is collateralized by substantially all
of the
Company’s assets, and guaranteed by certain shareholders, was executed
pursuant to a Development Loan Agreement. The note contains certain
restrictive covenants relating to: working capital; levels of long-term
debt to equity; incurrence of additional indebtedness; payment of
compensation to officers and directors; and payment of dividends.
The note
is payable in monthly installments including interest at 8.0% per
annum
with a final balloon payment due in October 2009. At June 30, 2008,
the
Company was not in compliance with certain of the covenants. The
Company
has obtained a waiver from BFEDD, relating to these covenants, through
June 30, 2009.
|
|
(b)
|
In
June 2006, the Company entered into a note payable with HAEIFC, which
is
collateralized by receivables, inventory, equipment, and certain
life
insurance policies. The loan originally had a total facility of $1,400,000
which was reduced in September 2007 to the amount of the Company’s initial
draw of $418,670. The note contains certain restrictive covenants
relating
to: financial ratios; payment of compensation to officers and directors;
and payment of dividends. The note accrues interest at 9% and is
payable
in monthly installments with the final installment due in July 2016.
At
June 30, 2008, the Company was not in compliance with certain of
the
covenants. The Company has obtained a waiver from HAEIFC, relating
to
these covenants, through June 30,
2009.
|
Principal
maturities on notes payable as of June 30, 2008 are as follows:
|
Year
ending June 30,
|
||||
|
2009
|
$
|
64,486
|
||
|
2010
|
168,008
|
|||
|
2011
|
49,736
|
|||
|
2012
|
54,379
|
|||
|
2013
|
59,503
|
|||
|
Thereafter
|
13,272
|
|||
|
$
|
409,384
|
|||
10. Capital
Lease Obligations
The
Company leases certain equipment under long-term agreements that represent
capital leases. Future minimum lease payments under capital lease obligations
are as follows:
|
Year
ending June 30, 2009
|
$
|
27,627
|
||
|
Total
future minimum lease payments
|
27,627
|
|||
|
Less
amounts representing interest
|
(2,067
|
)
|
||
|
Present
value of net minimum lease payments
|
25,560
|
|||
|
Less
amounts due within one year
|
(25,560
|
)
|
||
|
Amounts
due after one year
|
$
|
—
|
11. Share-Based
Compensation
The
following table presents the share-based compensation expense recognized in
accordance with SFAS 123R during the years ended June 30, 2008 and
2007:
|
Year
ended June 30,
|
|||||||
|
2008
|
2007
|
||||||
|
Cost
of product sales
|
$
|
109,578
|
$
|
120,710
|
|||
|
Research
and development
|
43,885
|
41,481
|
|||||
|
Sales
and marketing expenses
|
238,230
|
216,432
|
|||||
|
General
and administrative expenses
|
205,361
|
1,449,491
|
|||||
|
Total
share-based compensation
|
$
|
597,054
|
$
|
1,828,114
|
|||
The
total
value of the stock options awards is expensed ratably over the service period
of
the employees receiving the awards. As of June 30, 2008, total unrecognized
compensation cost related to stock-based options and awards was $496,868 and
the
related weighted-average period over which it is expected to be recognized
is
approximately 0.75 years.
The
Company currently provides share-based compensation under three equity incentive
plans approved by the Board of Directors: the Amended and Restated 2005 Stock
Option Plan (the Option Plan), the Amended and Restated 2005 Employee Stock
Option Plan (the Employee Plan), and the 2006 Director Stock Option Plan (the
Director Plan). The Option Plan allows the Board of Directors to grant options
to purchase up to 1,800,000 shares of common stock to directors, officers,
key
employees and service providers of the Company. The Employee Plan allows the
Board of Directors to grant options to purchase up to 2,000,000 shares of common
stock to officers and key employees of the Company. The Director Plan allows
the
Board of Directors to grant options to purchase up to 1,000,000 shares of common
stock to directors of the Company. Options granted under all of the plans have
a
ten year maximum term, an exercise price equal to at least the fair market
value
of the Company’s common stock on the date of the grant, and varying vesting
periods as determined by the Board. For stock options with graded vesting terms,
the Company recognizes compensation cost on a straight-line basis over the
requisite service period for the entire award.
On January 8, 2008, the Board of Directors unanimously adopted, subject to shareholder approval, the 2008 Employee Stock Option Plan (2008 Option Plan). The 2008 Option Plan would have allowed the Board of Directors to grant options to purchase up to 2,000,000 shares of common stock to selected employees, consultants, and advisors of the Company. Shareholder approval was not obtained for the 2008 Plan at the Company’s annual meeting held on February 20, 2008, and thus no grants have been or will be made under the 2008 Option Plan.
On
June
1, 2007, the Company issued an option grant to employees and directors. The
options had an exercise price of $4.14 which was the closing market price of
the
Company’s stock on the grant date. The options issued to the employees vest over
three years while the options granted to the non-employee directors were
immediately vested.
The
Company’s former CEO, who also served as Chairman of the Board, was granted
150,000 options, and the former Executive Vice President Operations
(EVP–Operations), who also served as a director, was granted 100,000 options,
and all non-employee directors were granted 50,000 options each. On July 25,
2007, the Board discussed the issue of director compensation and each director
(including the employee directors) elected to cancel 50,000 of their options
from the June 1, 2007 grant. After the cancellation, the former CEO and former
EVP–Operations had 100,000 and 50,000 options, respectively, and the
non-employee directors had no options from the June 1, 2007 grant. The terms
of
these remaining options for the former CEO and former EVP–Operations were not
changed as part of the cancellation.
In
accordance with SFAS 123R, all of the options that were cancelled have been
accounted for as cancellation of options with no consideration. No additional
compensation cost associated with the former CEO’s and EVP–Operations’ options
will be recognized after the cancellation date of July 25, 2007. Cancelled
options that had been granted to non-employee directors were immediately vested
on the date of grant; therefore all related compensation cost was recognized
in
fiscal year 2007. Under SFAS 123R, the value of the cancelled options to each
non-employee director was $128,500.
All
of
these subsequently cancelled options are included in the options granted and
outstanding as of June 30, 2007 and are included in the options cancelled in
fiscal year 2008.
A
summary
of stock option activity within the Company’s share-based compensation plans for
the year ended June 30, 2008 is as follows:
|
Shares
|
Price (a)
|
Life (b)
|
Value (c)
|
||||||||||
|
Outstanding
at June 30, 2008
|
2,803,393
|
$
|
2.62
|
7.63
|
$
|
25,000
|
|||||||
|
Vested
and expected to vest at
|
|||||||||||||
|
June
30, 2008
|
2,768,607
|
$
|
2.60
|
7.63
|
$
|
25,000
|
|||||||
|
Vested
and exercisable at
|
|||||||||||||
|
June
30, 2008
|
2,442,001
|
$
|
2.42
|
7.53
|
$
|
25,000
|
|||||||
|
(a)
|
Weighted
average exercise price per share.
|
|
(b)
|
Weighted
average remaining contractual life.
|
|
(c)
|
Aggregate
intrinsic value.
|
The
aggregate intrinsic value of options exercised during the years ended June
30,
2008 and 2007 was $25,300 and $2,286,370, respectively. The Company’s current
policy is to issue new shares to satisfy option exercises.
The weighted average fair value of stock option awards granted and the key assumptions used in the Black-Scholes valuation model to calculate the fair value are as follows for the year ended June 30, 2008 and 2007:
|
Years
ended June 30,
|
|||||||
|
2008
|
2007
|
||||||
|
Weighted
average fair value of options granted
|
$
|
0.70
|
$
|
2.29
|
|||
|
Key
assumptions used in determining fair value:
|
|||||||
|
Weighted
average risk-free interest rate
|
3.17
|
%
|
4.86
|
%
|
|||
|
Weighted
average life of the option (in years)
|
6.00
|
5.58
|
|||||
|
Weighted
average historical stock price volatility
|
141.67
|
%
|
69.87
|
%
|
|||
|
Expected
dividend yield
|
0.00
|
%
|
0.00
|
%
|
|||
The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
changes in the subjective input assumptions can materially affect the fair
value
estimate, in management’s opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options. The risk-free interest rate is based on the U.S. treasury security
rate
in effect as of the date of grant. The expected option lives, volatility, and
forfeiture assumptions are based on historical data of the Company.
12. Shareholders’
Equity
The
authorized capital structure of the Company consists of $.001 par value
preferred stock and $.001 par value common stock.
Preferred
Stock
The
Company's Certificate of Incorporation authorizes 6,000,000 shares of $0.001
par
value preferred stock available for issuance with such rights and preferences,
including liquidation, dividend, conversion, and voting rights, as described
below.
Series
A
Series
A
preferred shares are entitled to a 10% dividend annually on the stated par
value
per share. These shares are convertible into shares of common stock at the
rate
of one share of common stock for each share of Series A preferred stock, and
are
subject to automatic conversion into common stock upon the closing of an
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933 covering the offer and sale of common stock
in
which the gross proceeds to the Company are at least $4 million. Series A
preferred shareholders have voting rights equal to the voting rights of common
stock, except that the vote or written consent of a majority of the outstanding
preferred shares is required for any changes to the Company’s Certificate of
Incorporation, Bylaws or Certificate of Designation, or for any bankruptcy,
insolvency, dissolution or liquidation of the Company. Upon liquidation of
the
Company, the Company’s assets are first distributed ratably to the Series A
preferred shareholders. At June 30, 2008, there were no Series A preferred
shares outstanding.
Series
B
Series
B
preferred shares are entitled to a cumulative 15% dividend annually on the
stated par value per share. These shares are convertible into shares of common
stock at the rate of one share of common stock for each share of Series B
preferred stock, and are subject to automatic conversion into common stock
upon
the closing of an underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933 covering the offer
and
sale of common stock in which the gross proceeds to the Company are at least
$4
million. Series B preferred shareholders have voting rights equal to the voting
rights of common stock, except that the vote or written consent of a majority
of
the outstanding preferred shares is required for any changes to the Company’s
Certificate of Incorporation, Bylaws or Certificate of Designation, or for
any
bankruptcy, insolvency, dissolution or liquidation of the Company. Upon
liquidation of the Company, the Company’s assets are first distributed ratably
to the Series A preferred shareholders, then to the Series B preferred
shareholders.
On
February 1, 2007, the Board of Directors declared a dividend on the Series
B
Preferred Stock of all outstanding and cumulative dividends through December
31,
2006. The total dividends of $38,458 were paid on February 15, 2007. The Company
does not anticipate paying any cash dividends on the Series B Preferred Stock
in
the foreseeable future. At June 30, 2008, there were 59,065 Series B preferred
shares outstanding and cumulative dividends in arrears were
$15,933.
In
addition to the previously outstanding shares of common stock and Series B
preferred stock, the Company had the following transactions that affected
shareholders’ equity during the years ended June 30, 2008 and 2007.
Cancellation
of Common Shares
In
March
2008, the Company cancelled 148,112 shares of common stock held by Roger
Girard,
the Company’s former CEO, due to the release of Mr. Girard from certain personal
guarantees of Company debt and due to Mr. Girard’s resignation as Chairman,
President, and CEO. The shares were originally issued in connection with
Mr. Girard’s personal guarantee of Company debt or were contingent on his
employment through August 2008.
March
2007 Public Equity Offering
On
March 20, 2007, the Company entered into definitive securities purchase
agreements (the March 2007 Purchase Agreements) with certain institutional
investors pursuant to which the Company agreed to issue and sell an aggregate
of
4,130,500 shares of its common stock at $4.00 per share, through a registered
direct offering, for aggregate gross proceeds of approximately $16,522,000,
before deducting estimated fees and expenses associated with the offering (the
Offering). As part of the Offering, each purchaser of five shares of common
stock received a warrant to purchase one share of common stock at an exercise
price of $5.00 per share with a four-year term. A total of 826,100 warrants
were
issued under these terms. The closing took place on March 22, 2007. The
shares of common stock offered by the Company in this transaction were
registered under the Company’s existing shelf registration statement (File
No. 333-140246) on Form S-3, which was declared effective by the Securities
and Exchange Commission on February 15, 2007, and the prospectus supplement
dated March 21, 2007.
Punk,
Ziegel & Company, L.P. and Maxim Group LLC (the Placement Agents) acted as
the placement agents for the Offering. On March 14, 2007 and February 2, 2006,
the Company executed placement agent agreements (the Placement Agent Agreements)
by and between the Company and Punk, Ziegel & Company, L.P. and Maxim Group
LLC, respectively. The Company paid the Placement Agents an aggregate fee equal
to 6% of the gross proceeds of the Offering or approximately $991,000. In
addition, the Placement Agents also received 206,526 warrants with an exercise
price of $4.40 per share and a five-year term as part of their overall
fee.
The
warrants issued in the March 2007 Purchase Agreements were not accounted for
as
derivatives in accordance SFAS 133 paragraph 11(a), SFAS 150, and EITF
00-19.
March
2007 Warrant Call
As
part
of the August 2006 Stock Purchase Agreement, the Company issued warrants with
an
exercise price of $3.00 per share. The warrants were callable by the Company
for
45 days after a period of 60 trading days in which the closing price of the
underlying stock was at or above $4.50 per share for 30 of the 60
days.
As
of
February 16, 2007, the Company’s common stock had traded at or above $4.50 for
30 of the previous 60 days. On February 21, 2007, the Company sent out notices
to the warrant holders establishing a call date of March 26, 2007. The warrant
holders had the option to either exercise their warrants or permit the Company
to repurchase the warrants for $.01 per share on the call date. All of the
remaining warrants were exercised prior to the call date.
August 2006 Stock Purchase Agreement
On
August
17, 2006, the Company sold certain shares of its common stock and warrants
to
purchase common stock pursuant to a Common Stock and Warrant Purchase Agreement
(the August 2006 Purchase Agreement) dated August 9, 2006. The securities were
issued to 25 accredited investors pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.
MicroCapital, LLC acted as the lead investor for the transaction. Net proceeds
of $4.7 million were received by the Company in exchange for the issuance of
2,063,000 shares of common stock and warrants to purchase 2,063,000 shares
of
common stock. In addition, brokers assisting the Company with the capital raise
were issued warrants to purchase 206,300 shares of common stock on identical
terms as the warrants issued to investors.
Pursuant
to the August 2006 Purchase Agreement, the purchase price per share of the
Company’s common stock was $2.50, and the accompanying warrants were issued with
an exercise price of $3.00 per share. The warrants and the August 2006 Purchase
Agreement contained anti-dilution provisions, including one providing that,
if
the Company issues stock or rights to acquire stock at a price less than $2.00
(excluding certain issuances such as options to employees, directors and certain
consultants and shares issued in connection with licensing or leasing
transactions), the Company is required to issue to each investor additional
shares equal to 25% of what such investor purchased in the original transaction.
The warrants were exercisable by the holder (subject to anti-dilution and
adjustment provisions) for a period of five years from the date of issuance.
The
warrants were callable by the Company for 45 days after a period of 60 trading
days in which the price of the underlying stock exceeds $4.50 per share for
30
of the 60 days, and only if a registration statement covering the underlying
shares is effective.
In
connection with the August 2006 Purchase Agreement, the Company also entered
into a Registration Rights Agreement whereby the Company agreed to file a
registration statement to cover the re-sale of the shares of common stock sold
and issuable upon exercise of the warrants. Under the Registration Rights
Agreement, the Company agreed to file the registration statement within 60
days
of the closing, cure any defect causing the registration statement to fail
to be
effective within ten business days, and cause suspension periods for the
registration statement to not exceed 60 days in any 360 day period. A Form
SB-2
Registration Statement to register these shares was filed with the SEC on
October 16, 2006 and declared effective on December 5, 2006.
The
warrants issued in the August 2006 Purchase Agreement were not accounted for
as
derivatives in accordance SFAS 133 paragraph 11(a), SFAS 150, and EITF
00-19.
Warrants
to Purchase Series B Preferred Stock
Pursuant
to a private placement of debt units during 2003 and 2004, a predecessor company
issued $365,000 of notes payable to investors and granted warrants for the
purchase of 227,750 of its Class A member shares. Through a series of mergers,
these warrants were exchanged for warrants to purchase 323,830 Series B
preferred shares. The warrants activity is summarized as follows:
|
2008
|
2007
|
||||||||||||
|
Warrants
|
Price
(a)
|
Warrants
|
Price
(a)
|
||||||||||
|
Beginning
balance outstanding
|
–
|
$
|
–
|
179,512
|
$
|
0.79
|
|||||||
|
Converted
to common warrants (b)
|
–
|
–
|
(142,190
|
)
|
0.70
|
||||||||
|
Exercised
|
–
|
–
|
(37,322
|
)
|
1.12
|
||||||||
|
Ending
balance outstanding
|
–
|
$
|
–
|
–
|
$
|
–
|
|||||||
|
(a)
|
Weighted
average exercise price per share.
|
|
(b)
|
During
fiscal year 2007, one preferred warrant holder requested the Board
of
Directors to extend the expiration date of his warrants and to convert
them to common warrants. The Board granted this request and set new
expiration dates as noted below. The exercise price was not changed.
The
change in expiration date and the conversion to common warrants was
a
modification of the original warrant based on market conditions and
was
accounted for as a financing transaction similar to a modification
of the
offering price of shares in a stock sale. Therefore there was no
effect on
the statement of operations as the Company had previously determined
that
under SFAS 133 and EITF 00-19 these warrants were equity instruments
rather than derivatives. These converted common warrants are summarized
as
follows:
|
|
Number of Warrants
|
Price
|
New Expiration Date
|
Old Expiration Date
|
|||||||
|
56,876
|
$
|
0.70
|
October
30, 2007
|
October
30, 2006
|
||||||
|
28,438
|
|
0.70
|
January
31, 2009
|
January
31, 2007
|
||||||
|
56,876
|
0.70
|
March
30, 2010
|
March
30, 2007
|
|||||||
|
142,190
|
||||||||||
Warrants
to Purchase Common Stock
In
connection with the various common stock offerings and at other times the
Company has issued warrants for the purchase of common stock. The warrants
activity is summarized as follows:
|
2008
|
2007
|
||||||||||||
|
Warrants
|
Price
(a)
|
Warrants
|
Price
(a)
|
||||||||||
|
Beginning
balance outstanding
|
3,627,764
|
$
|
5.31
|
2,502,769
|
$
|
5.73
|
|||||||
|
Warrants
issued
|
–
|
–
|
3,301,926
|
3.59
|
|||||||||
|
Converted
from preferred (b)
|
–
|
–
|
142,190
|
0.70
|
|||||||||
|
Cancelled/expired
|
(91,806
|
)
|
4.18
|
(23,615
|
)
|
2.54
|
|||||||
|
Exercised
|
(290,876
|
)
|
3.48
|
(2,295,506
|
)
|
2.99
|
|||||||
|
|
|||||||||||||
|
Ending
balance outstanding
|
3,245,082
|
$
|
5.50
|
3,627,764
|
$
|
5.31
|
|||||||
|
(a)
|
Weighted
average exercise price per share.
|
|
(b)
|
During
fiscal year 2007, one preferred warrant holder requested the Board
of
Directors to extend the expiration date of his warrants and to convert
them to common warrants. The Board granted this request and set new
expiration dates as noted in the Warrants to Purchase Series B Preferred
Stock section of this footnote.
|
On
January 8, 2008, the Board of Directors retroactively extended the expiration
dates of warrants issued pursuant to the Company’s private placement memorandums
dated October 17, 2005 and February 1, 2006 for an additional one-year period.
These warrants began expiring in October 2007. Based on the extension, the
warrants will now expire between October 2008 and February 2009. No other terms
or conditions of the warrants were changed. The change in expiration dates
affected outstanding warrants to purchase 2,102,142 shares of common stock.
Of
these outstanding warrants, there were warrants to purchase 18,000 common shares
held by two directors of the Company. Prior to the extension, warrants to
purchase 1,186,219 shares of common stock had passed their original expiration
dates.
The
change in expiration date was a modification of the original warrant based
on
market conditions and was accounted for as a financing transaction similar
to an
extension of time in the offering of shares in a stock sale. Therefore there
was
no effect on the statement of operations as the Company had previously
determined that under SFAS 133 and EITF 00-19 these warrants were equity
instruments rather than derivatives.
The
following table summarizes additional information about the Company’s common
warrants outstanding as of June 30, 2008:
|
Number of Warrants
|
Range of Exercise Prices
|
Expiration Date
|
|||||
|
53,000
|
$
|
6.00
|
October
2008
|
||||
|
162,500
|
$
|
6.00
|
November
2008
|
||||
|
909,469
|
$
|
6.00
|
December
2008
|
||||
|
28,438
|
$
|
0.70
|
January
2009
|
||||
|
700,250
|
$
|
6.00
|
January
2009
|
||||
|
276,923
|
$
|
6.00
to $6.50
|
February
2009
|
||||
|
56,876
|
$
|
0.70
|
March
2010
|
||||
|
826,100
|
$
|
5.00
|
March
2011
|
||||
|
206,526
|
$
|
4.40
|
March
2012
|
||||
|
25,000
|
$
|
2.00
|
July
2015
|
||||
|
3,245,082
|
|||||||
Common
Stock Options
A
summary
of the Company’s stock option activity and related information for the years
ended June 30, 2008 and 2007 is as follows:
|
2008
|
2007
|
||||||||||||
|
Shares
|
Price
(a)
|
Shares
|
Price
(a)
|
||||||||||
|
Beginning
balance outstanding
|
3,683,439
|
$
|
2.86
|
3,129,692
|
$
|
2.05
|
|||||||
|
Granted
(b) (c)
|
100,000
|
0.75
|
1,488,700
|
3.67
|
|||||||||
|
Cancelled
(c)
|
(970,046
|
)
|
3.35
|
(179,454
|
)
|
2.68
|
|||||||
|
Exercised
|
(10,000
|
)
|
1.19
|
(755,499
|
)
|
1.16
|
|||||||
|
Ending
balance outstanding
|
2,803,393
|
$
|
2.62
|
3,683,439
|
$
|
2.86
|
|||||||
|
Exercisable
at end of year
|
2,442,001
|
$
|
2.42
|
2,528,172
|
$
|
2.45
|
|||||||
|
(a)
|
Weighted
average exercise price per share.
|
|
(b)
|
All
options granted had exercise prices equal to the ending market price
of
the Company’s common stock on the grant
date.
|
|
(c)
|
Included
in options granted in fiscal year 2007 are 350,000 options granted
with an
exercise price of $4.14 to members of the Board of Directors that
were
subsequently cancelled on July 25, 2007. 100,000 of these options
were
granted to the Company’s former CEO and former EVP–Operations
and were to vest over three years. The remaining 250,000 options
were
granted to non-employee Directors and were immediately vested. These
options are included in the options cancelled in fiscal year 2008.
See
Note 11 for a further discussion of these cancelled
options.
|
The following table summarizes additional information about the Company’s stock options outstanding as of June 30, 2008:
|
Options Outstanding
|
Options Exercisable
|
|||||||||||||||
|
Range of Exercise Prices
|
Shares
|
Price (a)
|
Life (b)
|
Shares
|
Price (a)
|
|||||||||||
|
$0.75
to $1.19
|
887,184
|
$
|
1.11
|
7.36
yrs
|
887,184
|
$
|
1.11
|
|||||||||
|
$1.96
to $2.00
|
653,791
|
1.98
|
7.09
yrs
|
653,791
|
1.98
|
|||||||||||
|
$3.10
to $3.11
|
512,666
|
3.11
|
8.17
yrs
|
414,862
|
3.11
|
|||||||||||
|
$3.50
to $3.85
|
200,000
|
3.74
|
8.00
yrs
|
149,999
|
3.78
|
|||||||||||
|
$4.14
to $4.15
|
244,702
|
4.14
|
8.26
yrs
|
120,737
|
4.14
|
|||||||||||
|
$4.40
|
83,800
|
4.40
|
8.68
yrs
|
27,928
|
4.40
|
|||||||||||
|
$5.50
to $6.50
|
221,250
|
6.06
|
7.65
yrs
|
187,500
|
6.11
|
|||||||||||
|
Total
options
|
2,803,393
|
|
2,442,001
|
|||||||||||||
|
(a)
|
Weighted
average exercise price.
|
| (b) |
Weighted
average remaining contractual life.
|
13. Treasury
Stock
In
June
2008, the Board of Directors of IsoRay authorized the repurchase of up to
1,000,000 shares of the Company’s common stock. During June 2008, the Company
repurchased 5,000 shares of its common stock for $3,655.
14. Income
Taxes
The
Company recorded no income tax provision or benefit for the years ended June
30,
2008 and 2007.
The
Company had a net deferred tax asset of approximately $9.3 and $6.7 million
as
of June 30, 2008 and 2007, respectively. The deferred tax asset has arisen
principally from net operating loss carryforwards, share-based compensation,
depreciation and amortization, and accrued compensation. The deferred tax asset
was calculated based on the currently enacted 34% statutory income tax rate.
Since management of the Company cannot determine if it is more likely than
not
that the Company will realize the benefit of its net deferred tax asset, a
valuation allowance equal to the full amount of the net deferred tax asset
at
June 30, 2008 and 2007 has been established.
At
June
30, 2008, the Company had tax basis net operating loss carryforwards of
approximately $27 million available to offset future regular taxable income.
These net operating loss carryforwards expire through 2028.
15. 401(k)
and Profit Sharing Plan
The
Company has a 401(k) plan, which commenced in fiscal year 2007, covering all
eligible full-time employees of the Company. Contributions to the 401(k) plan
are made by the participants to their individual accounts through payroll
withholding. The 401(k) plan also allows the Company to make contributions
at
the discretion of management. To date, the Company has not made any
contributions to the 401(k) plan.
16. Related
Party Transactions
The
Company received various legal services for assistance with the common stock
and
warrant offerings, lease and contract review, and other general counsel support
from a law firm in which one of the firm’s partners was formerly a member of the
Company’s Board of Directors (until his resignation in February 2008). The total
amounts paid in 2008 and 2007 to the law firm were $426,430 and $458,534,
respectively. The 2008 amount includes approximately $10,000 accrued in accounts
payable as of June 30, 2008.
17. UralDial, LLC
On
January 23, 2008, the Company, through its subsidiary IsoRay International
LLC,
became a 30% owner in a Russian limited liability company, UralDial, LLC
(UralDial), a new company based in Yekaterinburg, Russia. The Company is
currently working on a distribution agreement with UralDial through which the
Company will sell its Proxcelan Cs-131 brachytherapy seeds to UralDial for
distribution to medical centers in Russia. From its formation through June
30,
2008, UralDial did not have any significant activity and does not have any
significant asset or liabilities.
18. Commitments
and Contingencies
Royalty
Agreement for Invention and Patent Application
A
shareholder of the Company previously assigned his rights, title and interest
in
an invention to IsoRay Products LLC (a predecessor company) in exchange for
a
royalty equal to 1% of the Gross Profit, as defined, from the sale of “seeds”
incorporating the technology. The patent and associated royalty obligations
were
transferred to the Company in connection with the merger transaction (see Note
1).
The
Company must also pay a royalty of 2% of Gross Sales, as defined, for any
sub-assignments of the aforesaid patented process to any third parties. The
royalty agreement will remain in force until the expiration of the patents
on
the assigned technology, unless earlier terminated in accordance with the terms
of the underlying agreement.
During
fiscal years 2008 and 2007, the Company recorded royalty expenses of $21,219
and
$2,161, respectively.
Patent
and Know-How Royalty License Agreement
IsoRay
Products LLC was the holder of an exclusive license with Donald Lawrence to
use
certain “know-how.” This license was transferred to Medical and subsequently to
the Company in connection with the merger transaction (see Note 1). The terms
of
the original license agreement required the payment of a royalty based on the
Net Factory Sales Price, as defined in the agreement, of licensed product sales.
Because the licensor’s patent application was ultimately abandoned, only a 1%
“know-how” royalty based on Net Factory Sales Price, as defined, remains
applicable. To date, management believes that there have been no product sales
incorporating the “know-how” and that therefore no royalty is due pursuant to
the terms of the agreement. Management believes that ultimately no royalties
should be paid under this agreement as there is no intent to use this “know-how”
in the future.
The
licensor of the Lawrence “know-how” has disputed management’s contention that it
is not using this “know-how”. On September 25, 2007 and again on October 31,
2007, the Company participated in nonbinding mediation regarding this matter;
however, no settlement was reached with the Lawrence Family Trust. After
additional settlement discussions, which ended in April 2008, the parties failed
to reach a settlement. The parties may demand binding arbitration at any time.
Battelle
Memorial Institute Production Agreement
In
April
2004, IsoRay Products LLC entered into an agreement with Battelle Memorial
Institute, Pacific Northwest Division (Battelle), the operator of the Pacific
Northwest National Laboratory, for certain production-related services and
facilities. This agreement was assumed by Medical and subsequently by the
Company following the merger transaction (see Note 1). In accordance with the
terms of the agreement, the Company is required to make advance payments, which
are then applied against billings by Battelle as services are provided. During
the years ended June 30, 2008 and 2007, the Company incurred $142,991 and
$151,065, respectively, of costs for production-related services and facilities
provided by Battelle. At June 30, 2008, prepaid expenses included $60,107
related to this agreement. The agreement, which expires December 31, 2008,
may
be terminated at any time by either party, upon giving a 60-day written notice
to the other party.
Operating
Lease Agreements
The
Company leases office and laboratory space and production and office equipment
under noncancelable operating leases. The lease agreements require monthly
lease
payments and expire on various dates through April 2016 (including renewal
dates). The Company’s significant lease is described below.
On
May 2,
2007, Medical entered into a lease for its new production facility with Energy
Northwest, the owner of the Applied Process Engineering Laboratory (the APEL
lease). The new lease originally provided the Company with 19,328 square feet
of
manufacturing and office space and the Company has moved all manufacturing
operations to this new leased space as of September 2007 and vacated its leased
space at the PEcoS-IsoRay Radioisotope Laboratory (PIRL). The
APEL
lease has a three year term expiring on April 30, 2010, plus options to renew
for two additional three-year terms, and monthly rent of approximately $26,700,
subject to annual increases based on the Consumer Price Index, plus monthly
janitorial expenses of approximately $700. Due to the severe economic penalty
associated with not exercising the two lease renewal options, the Company
currently intends to exercise both of the three-year renewal options at the
appropriate time in the lease. Subsequent to the initial signing of this lease,
the Company reconfigured its space requirements and returned some lab space
to
Energy Northwest. This has reduced the Company’s rent to approximately $24,200
per month plus monthly janitorial expenses of approximately $550 per
month.
On
October 10, 2007, the Company executed a Lease Agreement with Perma-Fix
Northwest Richland, Inc. (Perma-Fix). The Lease Agreement had an effective
date of September 1, 2007, and provided for the continuation of the Company's
lease of its PIRL facility located at 2025 Battelle Boulevard, Richland,
Washington. The Company originally leased this facility from Nuvotec USA,
Inc. under a Lease Agreement dated February 9, 2005, but Nuvotec USA, Inc.
subsequently sold the facility to Perma-Fix. The new lease term was
through January 31, 2008, with early termination permitted upon 45 days prior
written notice. The Company terminated this lease in mid-December
2007.
Future
minimum lease payments under operating leases including the two three-year
renewals of the APEL lease, which the Company intends to exercise, are as
follows:
|
Year
ending June 30,
|
||||
|
2009
|
$
|
315,027
|
||
|
2010
|
314,884
|
|||
|
2011
|
310,782
|
|||
|
2012
|
299,540
|
|||
|
2013
|
297,015
|
|||
|
Thereafter
|
841,541
|
|||
|
$
|
2,378,789
|
|||
Rental
expense amounted to $354,202 and $207,044 for the years ended June 30, 2008
and
2007, respectively.
License
Agreement with IBt
In
February 2006, the Company signed a license agreement with International
Brachytherapy SA (IBt), a Belgian company, covering North America and providing
the Company with access to IBt’s Ink Jet production process and its proprietary
polymer seed technology for use in brachytherapy procedures using Cs-131. Under
the original agreement royalty payments were to be paid on net sales revenue
incorporating the technology.
On October 12, 2007, the Company entered into Amendment No. 1 (the Amendment) to its License Agreement dated February 2, 2006 with IBt. The Company paid license fees of $275,000 (under the original agreement) and $225,000 (under the Amendment) during fiscal years 2006 and 2008, respectively. The Amendment eliminates the previously required royalty payments based on net sales revenue, and the parties intend to negotiate terms for future payments by the Company for polymer seed components to be purchased at IBt's cost plus a to-be-determined profit percentage. No agreement has been reached on these terms and there is no assurance that the parties will consummate an agreement pursuant to such terms.
19. Concentrations
of Credit and Other Risks
Financial
Instruments
The
Company’s financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents, short-term investments,
and
accounts receivable.
The
Company’s cash and cash equivalents are maintained with high-quality financial
institutions. The accounts are guaranteed by the Federal Deposit Insurance
Corporation (FDIC) up to $100,000. At June 30, 2008, uninsured cash balances
totaled approximately $4.6 million.
Short-term
investments are held by a major, high-quality financial institution. Generally,
these securities are traded in a highly liquid market and may be redeemed upon
demand and bear minimal risk. As discussed in Note 3, the Company has been
unable to liquidate its municipal debt securities due to uncertainties in the
credit markets. The Company is uncertain as to when the liquidity issues related
to these investments will improve.
The
Company’s accounts receivable result from credit sales to customers. The Company
had two customers whose sales were greater than 10% for each of the years ended
June 30, 2008 and 2007, respectively. These customers represented a combined
34.3% and 37.7% of the Company’s total revenues for the years ended June 30,
2008 and 2007, respectively. These same customers accounted for a combined
38.4%
and 25.6% of the Company’s net accounts receivable balance at June 30, 2008
and 2007, respectively.
The
loss
of any of these significant customers would have a temporary adverse effect
on
the Company’s revenues, which would continue until the Company located new
customers to replace them.
The
Company routinely assesses the financial strength of its customers and provides
an allowance for doubtful accounts as necessary.
Inventories
Most
components used in the Company’s product are purchased from outside sources.
Certain components are purchased from single suppliers. The failure of any
such
supplier to meet its commitment on schedule could have a material adverse effect
on the Company’s business, operating results and financial condition. If a
sole-source supplier or a supplier of Cs-131 or irradiated barium were to go
out
of business or otherwise become unable to meet its supply commitments, the
process of locating and qualifying alternate sources could require up to several
months, during which time the Company’s production could be delayed. Such delays
could have a material adverse effect on the Company’s business, operating
results and financial condition.
20. Subsequent
Events
The
following events and transactions have occurred subsequent to June 30,
2008:
FDA
Inspection
The
Company underwent its first inspection by the Food and Drug Administration
(FDA)
in July 2008. The inspection covered the manufacturing and quality systems
at
its Richland facility. At the end of the inspection, no report of deviations
from Good Manufacturing Practices or list of observations (form FDA 483) was
issued to IsoRay.
Extension
of Warrants
On
August
20, 2008, the Board of Directors extended the expiration dates of warrants
issued pursuant to the Company’s private placement memorandums dated October 17,
2005 and February 1, 2006 for an additional one-year period. These warrants
originally began expiring in October 2007 but were retroactively extended for
a
one-year term on January 8, 2008 (Note 12). Based on this additional extension,
the warrants will now expire between October 2009 and February 2010. No other
terms or conditions of the warrants were changed. The change in expiration
dates
affected outstanding warrants to purchase 2,102,142 shares of common stock.
Of
these outstanding warrants there were warrants to purchase 12,500 shares held
by
the Chairman and Interim CEO of the Company.
In
accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated:
September 29, 2008
|
ISORAY,
INC., a Minnesota corporation
|
|
|
By
|
/s/
Dwight Babcock
|
|
Dwight
Babcock, Interim Chief Executive Officer
|
|
|
By
|
/s/
Jonathan R. Hunt
|
|
Jonathan
R. Hunt, Chief Financial Officer
|
|
58