Perspective Therapeutics, Inc. - Quarter Report: 2009 September (Form 10-Q)
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
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þ
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the
quarterly period ended September 30, 2009
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
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For the
transition period from __________ to ____________
Commission
File No. 001-33407
ISORAY,
INC.
(Exact
name of registrant as specified in its charter)
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Minnesota
(State
or other jurisdiction of incorporation or
organization)
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41-1458152
(I.R.S.
Employer
Identification
No.)
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350
Hills St., Suite 106, Richland,
Washington
(Address
of principal executive offices)
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99354
(Zip
Code)
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Registrant's
telephone number, including area code: (509)
375-1202
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Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or such shorter period that the
registrant was required to submit and post such files).
Yes x No
¨
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
Number of
shares outstanding of each of the issuer's classes of common equity as of the
latest practicable date:
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Class
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Outstanding as of November 13,
2009
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Common
stock, $0.001 par value
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22,942,088
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ISORAY,
INC.
Table
of Contents
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PART
I
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FINANCIAL
INFORMATION
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|||
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Item
1
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Consolidated
Unaudited Financial Statements
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1 | ||
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Consolidated
Balance Sheets
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1 | |||
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Consolidated
Statements of Operations (Unaudited)
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2 | |||
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Consolidated
Statements of Cash Flows (Unaudited)
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3 | |||
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Notes
to Consolidated Unaudited Financial Statements
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4 | |||
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Item
2
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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9 | ||
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Item
3
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Quantitative
and Qualitative Disclosures About Market Risk
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15 | ||
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Item
4
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Controls
and Procedures
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15 | ||
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PART
II
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OTHER
INFORMATION
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|||
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Item
1A
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Risk
Factors
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15 | ||
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Item
5
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Other
Information
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16 | ||
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Item
6
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Exhibits
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16 | ||
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Signatures
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17 | |||
PART
I – FINANCIAL INFORMATION
Consolidated
Balance Sheets
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(Unaudited)
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||||||||
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September
30,
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June
30,
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|||||||
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2009
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2009
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|||||||
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ASSETS
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||||||||
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Current
assets:
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||||||||
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Cash
and cash equivalents
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$ | 3,169,376 | $ | 2,990,744 | ||||
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Short-term
investments
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959,811 | 1,679,820 | ||||||
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Accounts
receivable, net of allowance for doubtful accounts
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||||||||
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of
$115,594 and $86,931, respectively
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799,436 | 746,568 | ||||||
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Inventory
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720,986 | 789,246 | ||||||
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Prepaid
expenses and other current assets
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175,245 | 151,077 | ||||||
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Total
current assets
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5,824,854 | 6,357,455 | ||||||
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Fixed
assets, net of accumulated depreciation and amortization
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4,656,580 | 4,891,484 | ||||||
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Deferred
financing costs, net of accumulated amortization
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18,111 | 28,186 | ||||||
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Licenses,
net of accumulated amortization
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8,827 | 11,867 | ||||||
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Restricted
cash
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179,151 | 178,615 | ||||||
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Other
assets, net of accumulated amortization
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269,898 | 273,959 | ||||||
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Total
assets
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$ | 10,957,421 | $ | 11,741,566 | ||||
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LIABILITIES
AND SHAREHOLDERS' EQUITY
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||||||||
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Current
liabilities:
|
||||||||
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Accounts
payable and accrued liabilities
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$ | 709,757 | $ | 698,882 | ||||
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Accrued
payroll and related taxes
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247,152 | 188,703 | ||||||
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Notes
payable, due within one year
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155,867 | 161,437 | ||||||
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Total
current liabilities
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1,112,776 | 1,049,022 | ||||||
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Notes
payable, due after one year
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164,358 | 176,023 | ||||||
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Asset
retirement obligation
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566,018 | 553,471 | ||||||
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Total
liabilities
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1,843,152 | 1,778,516 | ||||||
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Shareholders'
equity:
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||||||||
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Preferred
stock, $.001 par value; 6,000,000 shares authorized:
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||||||||
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Series
A: 1,000,000 shares allocated; no shares issued and
outstanding
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- | - | ||||||
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Series
B: 5,000,000 shares allocated; 59,065 shares issued and
outstanding
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59 | 59 | ||||||
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Common
stock, $.001 par value; 194,000,000 shares authorized;
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||||||||
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22,942,088
shares issued and outstanding
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22,942 | 22,942 | ||||||
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Treasury
stock, at cost, 13,200 shares
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(8,390 | ) | (8,390 | ) | ||||
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Additional
paid-in capital
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47,876,130 | 47,818,203 | ||||||
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Accumulated
deficit
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(38,776,472 | ) | (37,869,764 | ) | ||||
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Total
shareholders' equity
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9,114,269 | 9,963,050 | ||||||
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Total
liabilities and shareholders' equity
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$ | 10,957,421 | $ | 11,741,566 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
1
IsoRay,
Inc. and Subsidiaries
Consolidated
Statements of Operations
(Unaudited)
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Three months ended September
30,
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||||||||
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2009
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2008
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|||||||
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Product
sales
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$ | 1,379,087 | $ | 1,519,582 | ||||
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Cost
of product sales
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1,160,089 | 1,448,436 | ||||||
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Gross
margin
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218,998 | 71,146 | ||||||
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Operating
expenses:
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||||||||
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Research
and development expenses
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68,882 | 218,550 | ||||||
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Sales
and marketing expenses
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442,899 | 730,774 | ||||||
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General
and administrative expenses
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602,431 | 780,157 | ||||||
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Total
operating expenses
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1,114,212 | 1,729,481 | ||||||
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Operating
loss
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(895,214 | ) | (1,658,335 | ) | ||||
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Non-operating
income (expense):
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||||||||
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Interest
income
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5,867 | 44,786 | ||||||
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Loss
on impairment of short-term investments
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- | (159,200 | ) | |||||
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Financing
and interest expense
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(17,361 | ) | (20,847 | ) | ||||
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Non-operating
(expense) income, net
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(11,494 | ) | (135,261 | ) | ||||
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Net
loss
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$ | (906,708 | ) | $ | (1,793,596 | ) | ||
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Basic
and diluted loss per share
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$ | (0.04 | ) | $ | (0.08 | ) | ||
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Weighted
average shares used in computing net loss per share:
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||||||||
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Basic
and diluted
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22,942,088 | 22,942,088 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
2
IsoRay,
Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(Unaudited)
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Three months ended September
30,
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||||||||
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2009
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2008
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|||||||
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CASH
FLOWS FROM OPERATING ACTIVITIES:
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||||||||
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Net
loss
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$ | (906,708 | ) | $ | (1,793,596 | ) | ||
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Adjustments
to reconcile net loss to net cash used by operating
activities:
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||||||||
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Depreciation
and amortization of fixed assets
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242,904 | 303,489 | ||||||
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Amortization
of deferred financing costs and other assets
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18,191 | 21,493 | ||||||
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Amortization
of discount on short-term investments
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9 | - | ||||||
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Loss
on impairment of short-term investments
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- | 159,200 | ||||||
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Accretion
of asset retirement obligation
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12,547 | 11,470 | ||||||
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Share-based
compensation
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57,927 | 108,714 | ||||||
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Changes
in operating assets and liabilities:
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||||||||
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Accounts
receivable, net
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(52,868 | ) | 105,220 | |||||
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Inventory
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68,260 | 48,913 | ||||||
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Prepaid
expenses and other current assets
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(25,183 | ) | 10,218 | |||||
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Accounts
payable and accrued liabilities
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10,875 | 40,344 | ||||||
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Accrued
payroll and related taxes
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58,449 | (4,480 | ) | |||||
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Net
cash used by operating activities
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(515,597 | ) | (989,015 | ) | ||||
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CASH
FLOWS FROM INVESTING ACTIVITIES:
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||||||||
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Purchases
of fixed assets
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(8,000 | ) | (17,107 | ) | ||||
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Additions
to licenses and other assets
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- | (7,458 | ) | |||||
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Change
in restricted cash
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(536 | ) | (687 | ) | ||||
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Proceeds
from the sale or maturity of short-term investments
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720,000 | - | ||||||
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Net
cash provided / (used) by investing activities
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711,464 | (25,252 | ) | |||||
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CASH
FLOWS FROM FINANCING ACTIVITIES:
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||||||||
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Principal
payments on notes payable
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(17,235 | ) | (14,731 | ) | ||||
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Principal
payments on capital lease obligations
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- | (10,609 | ) | |||||
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Repurchase
of Company common stock
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- | (4,735 | ) | |||||
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Net
cash used by financing activities
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(17,235 | ) | (30,075 | ) | ||||
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Net
increase / (decrease) in cash and cash equivalents
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178,632 | (1,044,342 | ) | |||||
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Cash
and cash equivalents, beginning of period
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2,990,744 | 4,820,033 | ||||||
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CASH
AND CASH EQUIVALENTS, END OF PERIOD
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$ | 3,169,376 | $ | 3,775,691 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
3
IsoRay,
Inc.
Notes
to the Unaudited Consolidated Financial Statements
For
the three-month periods ended September 30, 2009 and 2008
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1.
|
Basis
of Presentation
|
The
accompanying consolidated financial statements are those of IsoRay, Inc., and
its wholly-owned subsidiaries (IsoRay or the Company). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The
accompanying interim consolidated financial statements have been prepared in
conformity with U.S. generally accepted accounting principles, consistent in all
material respects with those applied in the Company’s Annual Report on Form 10-K
for the fiscal year ended June 30, 2009. The financial information is
unaudited but reflects all adjustments, consisting only of normal recurring
accruals, which are, in the opinion of the Company’s management, necessary for a
fair statement of the results for the interim periods
presented. Interim results are not necessarily indicative of results
for a full year. The information included in this Form 10-Q should be
read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal
year ended June 30, 2009.
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2.
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New
Accounting Pronouncements
|
On July
1, 2009, the Company adopted new accounting provisions which establishes the
FASB Accounting Standards Codification™ (the Codification) as the single
official source of authoritative accounting principles recognized by the FASB to
be applied by nongovernmental entities in the preparation of financial
statements in conformity with generally accepted accounting principles (GAAP)
other than rules and interpretive releases issued by the Securities and Exchange
Commission. The Codification reorganized the literature and changed the naming
mechanism by which topics are referenced. The Codification became
effective for interim and annual periods ending after September 15,
2009. The Company’s accounting policies and amounts presented in the
financial statements were not impacted by this change.
On July
1, 2009, the Company adopted new accounting provisions which were delayed from
the effective date of fair value accounting for one year for certain
nonfinancial assets and nonfinancial liabilities, excluding those that are
recognized or disclosed in financial statements at fair value on a recurring
basis (that is, at least annually). For purposes of applying the new provisions,
nonfinancial assets and nonfinancial liabilities include all assets and
liabilities other than those meeting the definition of a financial asset or a
financial liability. The Company had previously adopted new standards for fair
value accounting on July 1, 2008. The adoption of these new
provisions did not have a material effect on the Company but will affect future
calculations of asset retirement obligations and long-lived asset
impairment.
On July
1, 2009, the Company adopted new accounting provisions for business combinations
and for non-controlling interests. The new business combination
provisions require an acquirer to measure the identifiable assets acquired,
the liabilities assumed and any noncontrolling interest in the acquiree at their
fair values on the acquisition date, with goodwill being the excess value over
the net identifiable assets acquired. In addition, the new provisions require
that a noncontrolling interest in a subsidiary be reported as equity in the
consolidated financial statements. The calculation of earnings per share will
continue to be based on income amounts attributable to the
parent. The adoption of these statements did not have a material
effect on the Company’s financial statements.
4
3. Loss
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 September 30, 2009 and 2008, the
calculation of diluted weighted average shares did 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
not considered in the calculation of diluted weighted average shares, but that
could be dilutive in the future as of September 30, 2009 and 2008 were as
follows:
|
September
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Preferred
stock
|
59,065 | 59,065 | ||||||
|
Common
stock warrants
|
3,216,644 | 3,245,082 | ||||||
|
Common
stock options
|
2,606,769 | 2,469,376 | ||||||
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Total
potential dilutive securities
|
5,882,478 | 5,773,523 | ||||||
4. Short-Term
Investments
The
Company’s short-term investments are classified as available-for-sale and
recorded at fair market value. The Company’s short-term investments
consisted entirely of certificates of deposit at various banks as of September
30, 2009 and June 30, 2009. The Company’s short-term investments are
accounted for and reported at fair value using level 1 inputs.
5. Inventory
Inventory
consisted of the following at September 30, 2009 and June 30, 2009:
|
September
30,
|
June
30,
|
|||||||
|
2009
|
2009
|
|||||||
|
Raw
materials
|
$ | 590,134 | $ | 609,932 | ||||
|
Work
in process
|
123,898 | 155,827 | ||||||
|
Finished
goods
|
6,954 | 23,487 | ||||||
| $ | 720,986 | $ | 789,246 | |||||
5
6. Share-Based
Compensation
The
following table presents the share-based compensation expense recognized during
the three months ended September 30, 2009 and 2008:
|
Three
months ended September 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cost
of product sales
|
$ | 5,897 | $ | 9,130 | ||||
|
Research
and development
|
162 | 9,921 | ||||||
|
Sales
and marketing expenses
|
23,625 | 58,692 | ||||||
|
General
and administrative expenses
|
28,243 | 30,971 | ||||||
|
Total
share-based compensation
|
$ | 57,927 | $ | 108,714 | ||||
As of
September 30, 2009, total unrecognized compensation expense related to
stock-based options was $230,202 and the related weighted-average period over
which it is expected to be recognized is approximately 0.87 years.
The
Company currently provides stock-based compensation under three equity incentive
plans approved by the Board of Directors. Options granted under each
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.
A summary
of stock options within the Company’s share-based compensation plans as of
September 30, 2009 were as follows:
|
Weighted
|
||||||||||||||||
|
Weighted
|
Average
|
|||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||
|
Number
of
|
Exercise
|
Contractual
|
Intrinsic
|
|||||||||||||
|
Options
|
Price
|
Term
|
Value
|
|||||||||||||
|
Outstanding
at September 30, 2009
|
2,606,769 | $ | 2.01 | 7.7 | $ | 821,076 | ||||||||||
|
Vested
and expected to vest at September
30, 2009
|
2,526,559 | $ | 2.07 | 7.7 | $ | 754,390 | ||||||||||
|
Vested
and exercisable at September
30, 2009
|
2,155,823 | $ | 2.37 | 7.3 | $ | 476,749 | ||||||||||
There
were no options exercised during the three months ended September 30, 2009 and
2008, respectively. The Company’s current policy is to issue new
shares to satisfy option exercises.
6
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:
|
Three
months ended September 30,
|
||||||||
|
2009(a)
|
2008 (b)
|
|||||||
|
Weighted
average fair value of options granted
|
$ | 0.51 | $ | 0.51 | ||||
|
Key
assumptions used in determining fair value:
|
||||||||
|
Weighted
average risk-free interest rate
|
2.50 | % | 3.34 | % | ||||
|
Weighted
average life of the option (in years)
|
4.00 | 5.33 | ||||||
|
Weighted
average historical stock price volatility
|
132.21 | % | 122.28 | % | ||||
|
Expected
dividend yield
|
– | % | – | % | ||||
(a) During the quarter
ended September 30, 2009, the Company granted 10,000 stock options.
(b) During the quarter
ended September 30, 2008, the Company granted 45,000 stock options.
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. Although the Company is using the Black-Scholes option
valuation model, management believes that because changes in the subjective
input assumptions can materially affect the fair value estimate, this valuation
model does not necessarily provide a reliable single measure of the fair value
of its 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.
7. Commitments
and Contingencies
Patent and Know-How Royalty
License Agreement
The
Company is the holder of an exclusive license to use certain “know-how”
developed by one of the founders of a predecessor to the Company and licensed to
the Company by the Lawrence Family Trust, a Company shareholder. The
terms of this 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 in the agreement, remains applicable. To date, management
believes that there have been no product sales incorporating the “know-how” and
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 “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.
7
8. Fair
Value Measurements
Effective
July 1, 2008, for the financial assets and liabilities of the Company, and
effective July 1, 2009, for the non-financial assets and liabilities of the
Company, disclosure requirements have been expanded to include the following
information for each major category of assets and liabilities that are measured
at fair value on a recurring basis: financial assets of the Company include cash
and cash equivalents, short-term investments, accounts receivable, net of
allowance and restricted cash - these are measured using level 1
inputs. Financial liabilities of the Company include accounts payable
and accrued liabilities, accrued payroll and related taxes, notes payable, due
within one year and notes payable, due after one year - these are measured using
level 1 inputs. Non-financial assets of the Company include
inventory, prepaid and other current assets, fixed assets, net, deferred
financing costs, net, licenses, net and other assets, net - these are measured
using level 2 inputs. Non-financial liabilities of the Company
include the asset retirement obligation and this is measured using level 3
inputs. The only change in the valuation of the asset retirement
obligation was the accretion in the three months ended September 30,
2009.
8
ITEM
2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Caution
Regarding Forward-Looking Information
In
addition to historical information, this Form 10-Q contains certain
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 (“PSLRA”). This statement is included
for the express purpose of availing IsoRay, Inc. of the protections of the safe
harbor provisions of the PSLRA.
All
statements contained in this Form 10-Q, other than statements of historical
facts, that address future activities, events or developments are
forward-looking statements, including, but not limited to, statements containing
the words "believe," "expect," "anticipate," "intends," "estimate," "forecast,"
"project," and similar expressions . All statements other than statements of
historical fact are statements that could be deemed forward-looking statements,
including any statements of the plans, strategies and objectives of management
for future operations; any statements concerning proposed new products,
services, developments or industry rankings; any statements regarding future
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 “Risk Factors” beginning on page 15 below and in the “Risk
Factors” section of our Form 10-K for the fiscal year ended June 30, 2009 that
may cause actual results to differ materially.
Consequently,
all of the forward-looking statements made in this Form 10-Q are qualified by
these cautionary statements and there can be no assurance that the actual
results anticipated by management will be realized or, even if substantially
realized, that they will have the expected consequences to or effects on our
business operations. Readers are cautioned not to place undue
reliance on such forward-looking statements as they speak only of the Company's
views as of the date the statement was made. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
Critical Accounting Policies
and Estimates
The
discussion and analysis of the Company’s financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with 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
disclosure 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
accounting policies and related risks described in the Company’s annual report
on Form 10-K as filed with the Securities and Exchange Commission on September
23, 2009 are those that depend most heavily on these judgments and
estimates. As of September 30, 2009, there have been no material
changes to any of the critical accounting policies contained
therein.
9
Results of
Operations
Three
months ended September 30, 2009 compared to three months ended September 30,
2008
Revenues. The
Company generated revenue of $1,379,087 during the three months ended September
30, 2009 compared to sales of $1,519,582 during the three months ended September
30, 2008. The decrease of $140,495 or 9% was mainly due to decreased
overall sales volume of the Company’s Proxcelan Cs-131 brachytherapy seeds along
with a 36 % decrease in the number of more expensive strand loaded seeds some of
which was partially offset by an 12% increase in the number of loose / MICK™ loaded
seeds over the prior year.
Approximately
51% of the decrease is due to physicians ordering less seeds per implant as they
have become more efficient with use of the isotope and its
characteristics. The Company will need to increase the number of
total implants to increase sales. Management believes that other
treatment options with higher reimbursement rates, such as IMRT, put pressure on
Proxcelan Cs-131 seed sales as well as other brachytherapy seed
sales. During the three months ended September 30, 2009, the Company
sold its Proxcelan seeds to 50 different medical centers as compared to 47
medical centers during the corresponding period of 2008.
Cost of product
sales. Cost of product sales was $1,160,089 for the three
months ended September 30, 2009 compared to cost of product sales of $1,448,436
during the three months ended September 30, 2008. The decrease of
$288,347 or 20% was mainly due to more efficient production operations as the
Company continues work to streamline its manufacturing processes. The
major components of the decrease were wages, benefits and related taxes, preload
expenses and depreciation. Wages, benefits, and related taxes
decreased approximately $79,000 and continue to be directly attributable to a
reduced headcount as the Company continues to actively manage its manufacturing
staff headcount to effectively respond to sales changes. Preload
expenses decreased approximately $ 91,000 due to decreased sales volumes,
improvements in in-house loading capabilities and the increased utilization of
in-house loading by customers. Depreciation contributed additional
savings of approximately $55,000 as the result of a significant piece of
production equipment reaching the end of its depreciable life.
Gross margin. Gross
margin was $218,998 for the three month period ended September 30, 2009 compared
to a gross margin of $71,146 for the three month period ended September 30,
2008. The increase of $147,852 or 208% was due to continued
reductions in production costs and efficient use of manufacturing resources
despite the decrease in revenues.
Research and
development. Research and development expenses for the three
month period ended September 30, 2009 were $68,882 which represents a decrease
of $149,668 or 68% over the research and development expenses of $218,550 for
the three months ended September 30, 2008. The total decrease is a
combination of reductions in consulting, isotope research, legal expense,
protocol expense, share-based compensation and payroll, benefits and related
taxes. Consulting decreased approximately $10,000 as the Company’s
spending on its projects to improve efficiency in production processes has been
completed with the savings partially offset by the cost of the consulting
relationship with the Company’s former research and development
director. Payroll, benefits and related taxes decreased approximately
$35,000 due to a lower headcount. There were additional savings in
protocol expenses of approximately $60,000 due to the stage the Company's
protocols are in at present, share-based compensation of approximately $10,000,
legal expenses of $17,000 and approximately $16,000 from isotope research as the
Company has discontinued most funding until the final prototype testing
trial.
10
Sales and marketing
expenses. Sales and marketing expenses were $442,899 for the
three months ended September 30, 2009. This represents a decrease of
$287,875 or 39% compared to expenditures in the three months ended September 30,
2008 of $730,774 for sales and marketing. The decrease is mainly due
to a decrease in expenses related to conventions and tradeshows, marketing and
advertising, share-based compensation, physician training, travel and wages,
benefits and related taxes. Wages, benefits and related taxes
decreased approximately $63,000 due to a lower headcount and continued lower
base salaries for sales people due to a new compensation plan that was
originally introduced in April 2008 and subsequently changed in October
2008. Conventions and tradeshows decreased by approximately $58,000
due to the sales group attending fewer small conferences and the shift in
scheduling of a major conference that occurred in the three months ended
September 30, 2008 in FY2009 and will occur instead in the three months ended
December 31, 2009 in FY2010. Marketing and advertising expenses
decreased approximately $19,000 as a result of a reduction in the number of
trade journals used for advertising. Share-based compensation
decreased by approximately $35,000 as a result of reduced headcounts that
resulted in the forfeiture of some options and vesting was completed on other
options that were a component of the prior year expense. Physician
training expense was reduced by approximately $16,000 as there was a significant
training event in the prior year. Travel expense decreased by
approximately $79,000 due in part to having reduced headcount in the active
sales team and associated travel for the major conference discussed above which
took place during the three months ended September 30, 2008 in FY2009 but will
instead take place during the three months ended December 31, 2009 in
FY2010.
General and administrative
expenses. General and administrative expenses for the three
months ended September 30, 2009 were $602,431 compared to general and
administrative expenses of $780,157 for the three months ended September 30,
2008. The decrease of $177,726 or 23% is primarily due to decreases
in wages, benefits and related taxes, public company expenses, consulting
expense, legal expense and office supply expense partially offset by an increase
in audit, SOX and tax expense. Wages, benefits and related taxes
decreased approximately $24,000 mainly due to the reduction in headcount
partially offset with the Chief Executive Officer becoming an employee (he was a
consultant while serving as interim CEO). Public company expenses
decreased approximately $36,000 due a decrease in board compensation as a result
of the interim CEO becoming an employee and reduced investor relations
activities. Consulting expenses decreased approximately $33,000 mainly due to
the fact that the interim CEO became an employee. Legal fees
decreased by $78,000 primarily due to the fact that no legal fees were incurred
in the three months ended September 30, 2009 for ongoing litigation whereas in
the prior year legal fees were incurred in a lawsuit with a former
employee. Office supplies expense has decreased by approximately
$16,000 due to the Company's focused effort to minimize purchases of computer
software, computer hardware and office supplies.
Operating loss. The
Company continues to focus its resources on sales and retaining the
administrative infrastructure to increase the level of demand for the Company’s
product. These objectives and related costs have resulted in the
Company not being profitable and generating operating losses since its
inception. In the three months ended September 30, 2009, the Company
had an operating loss of $895,214 which is a decrease of $763,121 or 46% over
the operating loss of $1,658,335 for the three months ended September 30,
2008.
Interest
income. Interest income was $5,867 for the three months ended
September 30, 2009. This represents a decrease of $38,919 or 87%
compared to interest income of $44,786 for the three months ended September 30,
2008. The decrease is due to the Company’s lower short-term
investment balances and lower interest rates during the quarter ended September
30, 2009 as compared to the quarter ended September 30,
2008. Interest income is mainly derived from excess funds held in
money market accounts and invested in short-term investments.
11
Loss on short-term
investments. The loss of $159,200 for the three months ended
September 30, 2008 was due to uncertainties in the credit markets that affected
the liquidity of the Company’s auction rate securities. The loss
represented the amount to write-down these securities to their estimated fair
market value.
Financing and interest
expense. Financing and interest expense for the three months
ended September 30, 2009 was $17,361 or a decrease of $3,486 or 17% from
financing and interest expense of $20,847 for the corresponding period in
2008. Interest expense was approximately $7,000 and $13,000 for the
three months ended September 30, 2009 and 2008, respectively. The
remaining balance of financing and interest expense represents the amortization
of deferred financing costs.
Liquidity and capital
resources. The Company has historically financed its
operations through cash investments from shareholders. During the
three months ended September 30, 2009, the Company primarily used existing cash
reserves to fund its operations and capital expenditures.
Cash
flows from operating activities
Cash used
in operating activities was approximately $500,000 for the three months ended
September 30, 2009 compared to approximately $1.0 million for the three months
ended September 30, 2008. 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
Cash
provided by investing activities was approximately $711,000 for the three months
ended September 30, 2009 and cash used by investing activities was approximately
$25,000 for the three months ended September 30, 2008. The increase
in cash provided by investing activities was a function of short-term
investments of $720,000 maturing in the three months ended September 30,
2009. Cash expenditures for fixed assets were approximately $8,000
and $17,000 during the three months ended September 30, 2009 and 2008,
respectively.
Cash
flows from financing activities
Cash used
in financing activities was approximately $17,000 and $30,000 for the quarters
ended September 30, 2009 and 2008, respectively, and was used mainly for
payments of debt and capital leases.
Projected
Fiscal Year 2010 Liquidity and Capital Resources
At
September 30, 2009, cash and cash equivalents amounted to $3,169,376 and
short-term investments amounted to $959,811 compared to $2,990,744 of cash and
cash equivalents and $1,679,820 of short-term investments at June 30,
2009.
The
Company had approximately $2.8 million of cash and cash equivalents and $960,000
of short-term investments as of November 10, 2009. As of that date
management believed that the Company’s monthly required cash operating
expenditures were approximately $200,000 which represents a significant decrease
of approximately $150,000 from average monthly expenses in fiscal year
2009. Management believes that less than $100,000 will be spent on
capital expenditures for the entire fiscal year 2010, but there is no assurance
that unanticipated needs for capital equipment may not arise.
12
The
Company’s loan with BFEDD matures in fiscal year 2010 and will be paid in full
on or about November 13, 2009. The balance of the loan at September
30, 2009 was $109,629 and is included in current liabilities.
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
2010. The Company will owe an additional $56,610 to the contractor
upon completion of a successful demonstration of the enrichment
process. Once a successful demonstration of the enrichment process
has occurred, the Company will have to decide if the smaller test model will
produce sufficient quantities of enriched barium or if an additional investment
of $100,000 to $150,000 will be required to build a larger production
model.
During
fiscal year 2010, the Company intends to continue its existing protocol studies
and begin new protocol studies on lung cancer treatment using
Cs-131. Currently, the Company has budgeted approximately $220,000 in
fiscal year 2010 for protocol expenses relating to lung cancer as well as
continued work on the dual therapy and mono therapy prostate
protocols.
Based on
the foregoing assumptions, management believes cash, cash equivalents, and
short-term investments on hand at September 30, 2009 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 now include increasing revenues from both new and existing
customers (through our direct sales channels and through our distributors),
expanding into other market applications which initially will include head and
neck implants and lung implants in addition to maintaining the Company's focus
on cost control. However, there can be no assurance that the Company
will attain profitability or that the Company will be able to attain its revenue
targets. Sales in the prostate market have not shown the increases
necessary to breakeven during the past two fiscal years and did not improve this
quarter. As management is now focused on expanding into head and neck
applications and lung applications, management believes the Company will need to
raise additional capital for protocols and marketing as it attempts to gain
market share. Initially, management plans to seek to sell common
stock pursuant to a direct registered offering at a discount to the market price
of not more than 15% and has an effective Form S-3 shelf offering registration
statement available for this purpose.
If the
direct offering of common stock is unsuccessful, the Company expects to finance
its future cash needs through solicitation of warrant holders to exercise their
warrants, possibly strategic collaborations or debt financing or through other
sources that may be dilutive to existing shareholders. Management
anticipates that if it raises financing that it will be at a discount to the
market price of common stock of not more than 15% and dilutive to
shareholders. Of course, funding may not be available to it on
acceptable terms, or at all. If the Company is unable to raise additional funds,
it may not be able to market its products as planned or continue development and
regulatory approval of its future products.
13
Long-Term
Debt
IsoRay
has two loan facilities in place as of September 30, 2009. 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 sixty month term
with a final balloon payment that will be paid on or about November 13,
2009. As of September 30, 2009, the principal balance owed was
$109,629. This loan is secured by certain equipment, materials and
inventory of the Company, 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
loan bears interest at nine percent and the principal balance owed as of
September 30, 2009 was $210,596. This loan is secured by receivables,
equipment, materials and inventory, and certain life insurance policies and also
required personal guarantees.
Other
Commitments and Contingencies
In
November 2008, a subsidiary of the Company entered into a written contract with
a contractor based in the Ukraine to formalize a research and development
project originally begun over two years ago to develop a proprietary separation
process to manufacture enriched barium. There is no assurance that
this process can be developed. The contract calls for a payment of
$56,610 upon completion of a successful demonstration scheduled for the Fall of
2009 but there is no assurance this testing will occur by then or whether it
will be successful. After a successful demonstration, the Company
will decide if the prototype model will produce sufficient quantities of
enriched barium or if a larger production model will need to be built for an
additional $100,000 to $150,000.
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 current
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.
14
ITEM
3 – QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a
smaller reporting company, the Company is not required to provide Part I, Item 3
disclosure in this Quarterly Report.
ITEM
4 – CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the design and operation of our disclosure controls and
procedures, as such term is defined under Rules 13a-14(c) and 15d-14(c)
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as of September 30, 2009. 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.
Changes
in Internal Control over Financial Reporting
There
have not been any changes in our internal control over financial reporting (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
during the most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
ITEM
1A – RISK FACTORS
There
have been no material changes for the risk factors disclosed in the “Risk
Factors” section of our Annual Report on Form 10-K for the year ended June 30,
2009.
15
ITEM
5. OTHER INFORMATION
In lieu
of filing a Current Report on Form 8-K under Item 5.02 – Departure of Directors
or Certain Officers; Election of Directors; Appointment of Certain Officers;
Compensatory Arrangements of Certain Officers, the Company is providing the
required disclosure under this Item 5.
On
November 12, 2009, the Company's Compensation Committee approved a change in the
compensation for Dwight Babcock, the Company's Chief Executive
Officer. Effective December 1, 2009, Mr. Babcock's salary will
increase to $275,000 annually, and Mr. Babcock will be eligible to receive a
$25,000 bonus should the Company meet goals for fiscal year 2010 that will be
established by the Compensation Committee.
ITEM
6. EXHIBITS
Exhibits:
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Principal Executive
Officer
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Principal Financial
Officer
|
|
32
|
Section
1350 Certifications
|
16
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Dated:
November 13, 2009
|
||
|
ISORAY,
INC., a Minnesota corporation
|
||
|
By
|
/s/ Dwight Babcock
|
|
|
Dwight
Babcock, Chief Executive Officer
|
||
|
(Principal
Executive Officer)
|
||
|
By
|
/s/ Brien Ragle
|
|
|
Brien
Ragle, Controller
|
||
|
(Principal
Financial and Accounting Officer)
|
||
17