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Perspective Therapeutics, Inc. - Quarter Report: 2019 December (Form 10-Q)

isr20180930_10q.htm
 

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

QUARTERLY Report PURSUANT TO Section 13 or 15(d) of the Securities Exchange Act of 1934

   

For the quarterly period ended December 31, 2019

or

 

Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

    For the transition period from __________ to ____________

 

Commission File No. 001-33407

 

ISORAY, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

41-1458152

(State or other jurisdiction of incorporation or
organization)

(I.R.S. Employer
Identification No.)

 

 

350 Hills St., Suite 106, Richland, Washington

99354

(Address of principal executive offices)

(Zip Code)

 

 

Registrant's telephone number, including area code: (509) 375-1202

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

ISR

NYSE American

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

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

 

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒

 

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

 

Class

Outstanding as of February 11, 2020

Common stock, $0.001 par value

67,650,547

 

 

 

ISORAY, INC.

 

 

Table of Contents

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1

Consolidated Unaudited Financial Statements

1

 

 

 

 

Consolidated Balance Sheets (Unaudited)

1

 

 

 

 

Consolidated Statements of Operations (Unaudited)

2

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited)

3

     
  Consolidated Statement of Changes in Shareholders' Equity (Unaudited)  4

 

 

 

 

Notes to the Consolidated Unaudited Financial Statements

5

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

22

 

 

 

Item 4

Controls and Procedures

22

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

22

 

 

 

Item 1A

Risk Factors

22

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

22

 

 

 

Item 3

Defaults Upon Senior Securities

23

 

 

 

Item 4

Mine Safety Disclosures

23

 

 

 

Item 5

Other Information

23

 

 

 

Item 6

Exhibits

23

 

 

 

Signatures

 

25

 

 

PART I – FINANCIAL INFORMATION

 

 

ITEM 1 – FINANCIAL STATEMENTS 

Isoray, Inc. and Subsidiaries 

Consolidated Balance Sheets (Unaudited) 

(In thousands, except shares) 

 

   

December 31,

   

June 30,

 
   

2019

   

2019

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 3,180     $ 5,326  

Accounts receivable, net

    1,409       1,154  

Inventory

    545       530  

Prepaid expenses and other current assets

    497       305  
                 

Total current assets

    5,631       7,315  
                 

Property and equipment, net

    1,736       1,609  
Right of use asset, net (Note 9)     1,116       -  

Restricted cash

    181       181  

Inventory, non-current

    127       155  

Other assets, net of accumulated amortization

    142       162  
                 

Total assets

  $ 8,933     $ 9,422  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               
                 

Current liabilities:

               

Accounts payable and accrued expenses

  $ 632     $ 683  
Lease liability (Note 9)     229       -  

Accrued protocol expense

    24       133  

Accrued radioactive waste disposal

    89       74  

Accrued payroll and related taxes

    203       89  

Accrued vacation

    163       142  
                 

Total current liabilities

    1,340       1,121  

Long-term liabilities:

               
Lease liability, non-current (Note 9)     889       -  

Asset retirement obligation

    563       621  
                 

Total liabilities

    2,792       1,742  

Commitments and contingencies (Note 7)

               
                 

Shareholders' equity:

               

Preferred stock, $.001 par value; 7,000,000 shares authorized:

               

Series B: 5,000,000 shares allocated; 59,065 shares issued and outstanding

    -       -  

Common stock, $.001 par value; 200,000,000 shares authorized; 67,388,047 shares issued and outstanding

    67       67  

Additional paid-in capital

    92,279       92,105  

Accumulated deficit

    (86,205 )     (84,492 )
                 

Total shareholders' equity

    6,141       7,680  
                 

Total liabilities and shareholders' equity

  $ 8,933     $ 9,422  

 

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

 

 

 

 

 Isoray, Inc. and Subsidiaries 

 Consolidated Statements of Operations  (Unaudited) 

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

 

   

Three months ended

   

Six months ended

 
   

December 31,

   

December 31,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Sales, net

  $ 2,206     $ 1,904     $ 4,521     $ 3,466  

Cost of sales

    1,095       1,139       2,174       2,177  

Gross profit

    1,111       765       2,347       1,289  
                                 

Operating expenses:

                               

Research and development:

                               

Proprietary research and development

    277       395       510       789  

Collaboration arrangement, net of reimbursement

    -       19       -       45  

Total research and development

    277       414       510       834  

Sales and marketing

    666       702       1,481       1,351  

(Gain) on equipment disposal

    -       (23 )     -       (23 )

General and administrative

    1,071       1,101       2,168       2,074  
(Gain) on change in estimate of asset retirement obligation (Note 9)     -       -       (73 )     -  

Total operating expenses

    2,014       2,194       4,086       4,236  
                                 

Operating loss

    (903 )     (1,429 )     (1,739 )     (2,947 )
                                 

Non-operating income:

                               

Interest income, net

    6       15       26       25  

Non-operating income

    6       15       26       25  
                                 

Net loss

    (897 )     (1,414 )     (1,713 )     (2,922 )

Preferred stock dividends

    (2 )     (2 )     (5 )     (5 )
                                 

Net loss applicable to common shareholders

  $ (899 )   $ (1,416 )   $ (1,718 )   $ (2,927 )
                                 

Basic and diluted loss per share

  $ (0.01 )   $ (0.02 )   $ (0.03 )   $ (0.04 )
                                 

Weighted average shares used in computing net loss per share:

                               

Basic and diluted

    67,388       67,331       67,388       66,743  

 

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

 

 

 

 

 Isoray, Inc. and Subsidiaries 

 Consolidated Statements of Cash Flows  (Unaudited) 

 (In thousands) 

 

   

Six months ended December 31,

 
   

2019

   

2018

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net loss

  $ (1,713 )   $ (2,922 )

Adjustments to reconcile net loss to net cash used by operating activities:

               

Depreciation expense

    77       65  

Gain on equipment disposals

    -       (23 )

Amortization of other assets

    20       25  

Accretion of asset retirement obligation

    15       16  
Gain on change in estimate of asset retirement obligation     (73 )     -  

Share-based compensation

    185       190  

Changes in operating assets and liabilities:

               

Accounts receivable, net

    (255 )     85  

Inventory

    13       53  

Prepaid expenses and other current assets

    (190 )     (20 )

Accounts payable and accrued expenses

    (51 )     (195 )

Accrued protocol expense

    (109 )     36  

Accrued radioactive waste disposal

    15       18  

Accrued payroll and related taxes

    114       (35 )

Accrued vacation

    21       (19 )
                 

Net cash used by operating activities

    (1,931 )     (2,726 )
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Additions to property and equipment

    (204 )     (225 )

Proceeds from sale of equipment

    -       23  

Proceeds from maturity of certificates of deposit

    -       4,418  

Purchases of and interest from U.S. Treasury Securities

    -       (8,259 )
                 

Net cash used by investing activities

    (204 )     (4,043 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Preferred dividends paid

    (11 )     (11 )

Proceeds from sales of common stock, pursuant to registered direct offering, net

    -       7,381  
                 

Net cash (used) provided by financing activities

    (11 )     7,370  
                 

Net increase (decrease) in cash, cash equivalents, and restricted cash

    (2,146 )     601  

Cash, cash equivalents, and restricted cash beginning of period

    5,507       2,781  

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH END OF PERIOD

  $ 3,361     $ 3,382  
                 

Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets:

               

Cash and cash equivalents

  $ 3,180     $ 3,201  

Restricted cash

  $ 181     $ 181  

Total cash, cash equivalents, and restricted cash shown on the consolidated statements of cash flows

  $ 3,361     $ 3,382  
                 

Non-cash investing and financing activities:

               
Recognition of operating lease liability and right of use asset   $ 1,228     $ -  

Warrants issued to placement agent of registered direct offering

  $ -     $ 163  

 

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

 

 

 

 Isoray, Inc. and Subsidiaries 

 Consolidated Statement of Changes in Shareholders' Equity (Unaudited) 

 (In thousands, except shares) 

   

Series B
Preferred Stock

   

Common Stock

                         
    Shares    

Amount

   

Shares

   

Amount

   

Additional Paid-in Capital

   

Accumulated

Deficit

   

Total

 
                                                         

Balances at June 30, 2018

    59,065     $ -       56,331,147     $ 56     $ 84,322     $ (79,348 )   $ 5,030  
                                                         
Issuance of common stock pursuant to registered direct offering, net                     11,000,000       11       7,483               7,494  
Share-based compensation                                     93               93  
Net Loss                                             (1,508 )     (1,508 )
                                                         
Balances at September 30, 2018     59,065     $ -       67,331,147     $ 67     $ 91,898     $ (80,856 )   $ 11,109  
                                                         
Offering costs pursuant to registered direct offering, net                                     (116 )             (116 )
Payment of dividend to preferred shareholders                                     (11 )             (11 )
Share-based compensation                                     97               97  
Net Loss                                             (1,414 )     (1,414 )
                                                         
Balances at December 31, 2018     59,065     $ -       67,331,147     $ 67     $ 91,868     $ (82,270 )   $ 9,665  
   

 

Series B
Preferred Stock

   

Common Stock

                         
   

Shares

   

Amount

   

Shares

   

Amount

   

Additional Paid-in Capital

   

Accumulated

Deficit

   

Total

 
                                                         

Balances at June 30, 2019

    59,065     $ -       67,388,047     $ 67     $ 92,105     $ (84,492 )   $ 7,680  
                                                         

Share-based compensation

                                    91               91  

Net Loss

                                            (816 )     (816 )
                                                         

Balances at September 30, 2019

    59,065     $ -       67,388,047     $ 67     $ 92,196     $ (85,308 )   $ 6,955  
                                                         

Payment of dividend to preferred shareholders

                                    (11 )             (11 )

Share-based compensation

                                    94               94  

Net Loss

                                            (897 )     (897 )
                                                         

Balances at December 31, 2019

    59,065     $ -       67,388,047     $ 67     $ 92,279     $ (86,205 )   $ 6,141  

 

 

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

 

 

 

 

Isoray, Inc.

Notes to the Unaudited Consolidated Financial Statements

 

 

1.

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements are those of Isoray, Inc., and its wholly-owned subsidiaries, referred to herein as “Isoray” or the “Company”. All significant intercompany accounts and transactions have been eliminated in the consolidation. In the opinion of management, all adjustments necessary for the fair presentation of the consolidated financial statements have been included. These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes as set forth in the Company’s annual report filed on Form 10-K for the year ended June 30, 2019.

 

The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures are adequate for the information not to be misleading.

 

Certain prior period amounts have been reclassified to conform to the current period’s presentation. The results of operations for the periods presented may not be indicative of those which may be expected for a full year.  The Company anticipates that as the result of continuing operating losses and the significant net operating losses available from prior fiscal years, its effective income tax rate for fiscal year 2020 will be 0%.

 

 

2.

New Accounting Standards

 

Accounting Standards Updates Adopted

 

In February 2016, the FASB issued ASU 2016-02 Leases (Subtopic 842), which requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by most leases. The update was effective for annual and interim reporting periods beginning after December 15, 2018 and early adoption was permitted. The ASU became effective for, and was adopted by, the Company in the first quarter of the fiscal year ending June 30, 2020. The Company elected the transition option to apply the new guidance at the effective date without adjusting comparative periods presented.

 

Accounting Standards Updates to Become Effective in Future Periods

 

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606, which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic 606. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is in the process of evaluating the impact the standard will have on its financial statements.

 

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

 

 

 

 

 

 

3.

Loss per Share

 

Basic and diluted earnings (loss) per share are 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. At December 31, 2019 and 2018, the calculation of diluted weighted average shares did not include convertible preferred stock, common stock warrants, or options that are potentially convertible into common stock as those would be antidilutive due to the Company’s net loss position.

 

Securities not considered in the calculation of diluted weighted average shares, but that could be dilutive in the future as of December 31, 2019 and 2018, were as follows (in thousands):

 

   

December 31,

 
   

2019

   

2018

 

Series B preferred stock

    59       59  

Common stock warrants

    6,080       6,080  

Common stock options

    4,651       3,917  

Total potential dilutive securities

    10,790       10,056  

 

 

 

 

4.

Inventory

 

Inventory consisted of the following at December 31, 2019 and June 30, 2019 (in thousands):

 

   

December 31,

   

June 30,

 
   

2019

   

2019

 

Raw materials

  $ 372     $ 333  

Work in process

    166       166  

Finished goods

    7       31  

Total inventory, current

  $ 545     $ 530  

 

   

December 31,

   

June 30,

 
   

2019

   

2019

 

Enriched barium, non-current

  $ 116     $ 117  

Raw materials, non-current

    11       38  

Total inventory, non-current

  $ 127     $ 155  

 

Inventory, non-current represents raw materials that were ordered in quantities to obtain volume cost discounts which based on current and anticipated sales volumes will not be consumed within an operating cycle. On August 25, 2017, the Company entered into a Consignment Agreement and related Services Agreement with MedikorPharma-Ural LLC to begin utilizing our enriched barium-130 carbonate inventory. The Company originally anticipated obtaining enough Cesium-131 under this arrangement to obtain over 4,000 curies of Cesium-131. During the three and six months ended December 31, 2019, the Company obtained no and 31 curies, respectively, of Cesium-131 under this agreement which has been used in production. At December 31, 2019, the Company estimates that the remaining enriched barium will result in 894 curies; approximately 60 of which will be obtained in the next twelve months and 834 will be obtained after December 31, 2020. There is no assurance as to whether the agreement will be terminated before this full amount is obtained and other supply sources are used.

 

 

5.

Property and Equipment

 

Property and equipment consisted of the following at December 31, 2019 and June 30, 2019 (in thousands):

 

   

December 31,

   

June 30,

 
   

2019

   

2019

 

Land

  $ 366     $ 366  

Equipment

    3,873       3,825  

Leasehold improvements

    4,143       4,143  

Other1

    801       645  

Property and equipment

    9,183       8,979  

Less accumulated depreciation

    (7,447

)

    (7,370

)

Property and equipment, net

  $ 1,736     $ 1,609  

 

1 Includes plant and equipment not placed in service which are items that meet the capitalization threshold or which management believes will meet the threshold at the time of completion and which have yet to be placed into service as of the date of the balance sheet, and therefore, no depreciation expense has been recognized. Also included at December 31, 2019 and June 30, 2019 are costs associated with advance planning and design work on the Company’s new production facility of $207,000.

 

 

 

 

6.

Share-Based Compensation

 

The following table presents the share-based compensation expense recognized for stock-based options during the three months ended December 31, 2019 and 2018 (in thousands): 

 

   

Three Months
ended December 31,

 
   

2019

   

2018

 

Cost of sales

  $ 8     $ 10  

Research and development expenses

    19       18  

Sales and marketing expenses

    24       22  

General and administrative expenses

    43       47  

Total share-based compensation

  $ 94     $ 97  

 

 

The following table presents the share-based compensation expense recognized for stock-based options during the six months ended December 31, 2019 and 2018 (in thousands): 

 

   

Six Months
ended December 31,

 
   

2019

   

2018

 

Cost of sales

  $ 16     $ 20  

Research and development expenses

    38       36  

Sales and marketing expenses

    49       44  

General and administrative expenses

    82       90  

Total share-based compensation

  $ 185     $ 190  

 

As of December 31, 2019, total unrecognized compensation expense related to stock-based options was approximately $454,000 and the related weighted-average period over which it is expected to be recognized is approximately .91 years.

 

A summary of stock options within the Company’s share-based compensation plans as of December 31, 2019 was as follows (in thousands except for exercise prices and terms):

 

                   

Weighted

         
           

Weighted

   

Average

         
   

Number of

   

Exercise

   

Contractual

   

Intrinsic

 

As of December 31, 2019

 

Options

   

Price

   

Term (Years)

   

Value

 

Outstanding

    4,651     $ .64       7.46     $ 418  

Vested and expected to vest

    4,651     $ .64       7.46     $ 418  

Vested and exercisable

    2,956     $ .74       6.71     $ 172  

 

There were no stock options exercised during the three months ended December 31, 2019 and 2018, respectively. The Company’s current policy is to issue new shares to satisfy stock option exercises.

 

There were 30,000 and 155,000 option awards granted with a fair value of approximately $11,000 and $52,000 during the three months ended December 31, 2019 and 2018, respectively.

 

There were no stock option awards which expired during the three months ended December 31, 2019 and 2018, respectively.

 

There were no and 32,000 stock option awards forfeited during the three months ended December 31, 2019 and 2018, respectively.

 

There were no stock options exercised during the six months ended December 31, 2019 and 2018, respectively. The Company’s current policy is to issue new shares to satisfy stock option exercises.

 

There were 40,000 and 237,500 option awards granted with a fair value of approximately $14,000 and $87,000 during the six months ended December 31, 2019 and 2018, respectively.

 

There were 8,250 and 10,000 stock option awards which expired during the six months ended December 31, 2019 and 2018, respectively.

 

There were 26,250 and 70,750 stock option awards forfeited during the six months ended December 31, 2019 and 2018, respectively.

 

 

 

 

7.

Commitments and Contingencies

 

Isotope Purchase Agreement 

 

In December 2015, the Company completed negotiations with The Open Joint Stock Company (located in Russia) for the purchase of Cesium-131 manufactured by the Institute of Nuclear Materials. The purchase agreement provided the Company with one year’s supply of Cesium-131. The original agreement was due to expire on March 31, 2017, but in December 2016 an addendum was signed extending it until December 31, 2017. On October 23, 2017, the Company, together with The Open Joint Stock Company, signed an addendum to the contract to include Cesium-131 manufactured at RIAR and extending it until December 31, 2018. On December 24, 2018, an addendum was signed extending the term of the supply contract through December 31, 2019 and modifying the volume of additional shipments of Cesium-131. Under the addendum, current pricing and volumes for Cesium-131 purchases remained in place until May 31, 2019. On July 11, 2019, another addendum was signed extending the pricing terms until August 4, 2019. On July 30, 2019, a new supply contract was signed with The Open Joint Stock Company for a term of August 2019 to December 2020 as the Company had purchased the maximum amount of Cesium-131 permitted under the prior agreement.

 

 

 

 

8.

Fair Value Measurements

 

The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement (in thousands):

 

   

Fair Value at December 31, 2019

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 

Cash and cash equivalents

  $ 3,180     $ 3,180     $ -     $ -  

 

   

Fair Value at June 30, 2019

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 

Cash and cash equivalents

  $ 5,326     $ 5,326     $ -     $ -  

 

The Company’s cash and cash equivalent instruments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.

 

 

9.

Leases

 

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


Upon the adoption of Topic 842 on July 1, 2019, the Company recognized a right-of-use asset and lease liability of approximately $1.2 million. In determining the amount of the right-of-use asset and lease liability, we assumed the termination of the lease in April 2024 and incurring a termination penalty of $20,000. As of the date of adoption, the operating lease is included on the balance sheet at the present value of the future base payments discounted at a 6% discount rate using the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment as the lease does not provide an implicit discount rate. The weighted average remaining term and discount rate as of December 31, 2019 was 4.3 years and 6%, respectively.

 

For the three and six months ended December 31, 2019, our operating lease expense was approximately $73,000 and $147,000, respectively. Operating right-of-use asset amortization was approximately $56,000 and $111,000 during the three and six months ended December 31, 2019, respectively. Due to lease expense in excess of payments made, the lease liability decreased approximately $55,000 and $109,000 for the three and six months ended December 31, 2019.


The following table presents the future operating lease payments and lease liability included on the condensed balance sheet related to the Company’s operating lease as of December 31, 2019 (in thousands):

 

Year Ending June 30,        
2020 (remaining nine months of the year)   $ 145  
2021     290  
2022     290  
2023     290  
2024     237  
Total     1,252  
Less: Imputed Interest     (134 )
Total Lease Liability     1,118  
Less current portion     (229 )
Non-current Lease Liability   $ 889  

 

 

Asset Retirement Obligation

 

The Company has an asset retirement obligation (ARO) associated with the facility it currently leases. In connection with the lease modification executed in July 2019, the ARO changed as follows (in thousands):

 

    Six months ended December 31,  
    2019     2018  
Beginning balance   $ 621     $ 590  
Accretion of discount     15       16  
Gain on change in ARO estimate due to lease modification     (73 )     -  
Ending Balance   $ 563     $ 606  

 

The original facility lease was scheduled to expire in the fourth quarter of fiscal year 2016. Upon the end of the original lease term, the initial asset retirement estimate was fully accreted and the related ARO asset was fully amortized. During the six months ended December 31, 2019, the Company extended the lease term an additional five years thus extending the time before asset retirement costs would be incurred. This resulted in a decrease in the ARO balance to a fair value of $555,000 and the Company recognized a gain on change in the estimate of $73,000 during the six months ended December 31, 2019. At the time of the lease extension, the undiscounted estimated asset retirement obligation was $704,000 discounted to fair value utilizing an interest rate of 5.1%.

 

 

10.

Shareholders’ Equity

 

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

 

 

In a concurrent private placement, the Company sold to each Investor, at no additional consideration, unregistered warrants to purchase up to the number of shares of common stock of the Company equal to 50% of such Investor’s Shares or a total of 5,500,000 shares, with an exercise price of $0.75 per share, exercisable from January 11, 2019 until January 11, 2024 (the “Investor Warrants”). The Company also issued warrants to purchase up to 330,000 shares of common stock of the Company, at an exercise price of $0.9375, exercisable from January 11, 2019 until July 10, 2023, to representatives of H.C. Wainwright & Co., LLC (“Wainwright”), the placement agent for the registered direct offering, as part of its compensation (the “Placement Agent Warrants” and together with the Investor Warrants, the “Warrants”).

 

The aggregate number of shares of our common stock issuable upon the exercise of the Warrants is 5,830,000 shares relating to this offering. We will receive gross proceeds from this offering solely to the extent any Warrants are exercised for cash.

 

 

11.

Contracts with Customers

 

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

 

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

 

Sources of Revenue

 

We have identified the following revenues disaggregated by revenue source:

 

 

1. Domestic – direct sales of products and services.
     
  2. International – direct sales of products and services.

 

During the three months ended December 31, 2019, the Company did not have any international revenue and had a nominal amount during the three months ended December 31, 2018.

 

During the six months ended December 31, 2019, the Company did not have any international revenue and had a nominal amount during the six months ended December 31, 2018.

 

For the three months ended December 31, 2019 and 2018, respectively, prostate brachytherapy comprised 89% of our revenue while other revenue comprised 11%.

 

For the six months ended December 31, 2019 and 2018, respectively, prostate brachytherapy comprised 89% of our revenue while other revenue comprised 11%.

 

Contract Balances

 

We incur obligations on general customer purchase orders and e-mails that have been accepted but unfulfilled. Due to the short duration of time between order acceptance and delivery of the related product, we have determined that the balance related to these obligations is generally immaterial at any point in time. We monitor the value of orders accepted but unfulfilled at the close of each reporting period to determine if disclosure is appropriate.

 

Warranty

 

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

 

Returns

 

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

 

Significant Judgments in the Application of the Guidance in ASC 606

 

There are no significant judgments associated with the satisfaction of our performance obligations. We generally satisfy performance obligations upon shipment of the product to the customer. This is consistent with the time in which the customer obtains control of the products. Therefore, the value of unsatisfied performance obligations at the end of any reporting period is generally immaterial. We use historical information along with an analysis of the expected value to properly calculate and to consider the need to constrain estimates of variable consideration. Such amounts are included as a reduction to revenue from the sale of products in the periods in which the related revenue is recognized and adjusted in future periods as necessary.

 

 

Commissions and Contract Costs

 

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

 

Practical Expedients

 

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

 

Shipping and Handling Charges

 

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

 

Taxes Collected from Customers

 

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

 

Concentration of Customers

 

One group of customers, facilities or physician practices has revenues that aggregate to greater than 10% of total Company sales. While the aggregate members of the group aggregate to more than 10% of total Company sales, no single member of the group has revenues greater than 10% of total Company sales. These facilities are serviced by the same physician group, one of whom is our Medical Director:

 

 

   

Six Months Ended December 31,

Facility

 

2019
% of
total

revenue

   

2018
% of
total

revenue

El Camino, Los Gatos, & other facilities

   

23.60

%

   

22.26

 

 

 

 

 

ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Caution Regarding Forward-Looking Information

 

In addition to historical information, this Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA). This statement is included for the express purpose of availing Isoray, Inc. of the protections of the safe harbor provisions of the PSLRA.

 

All statements contained in this Form 10-Q, other than statements of historical facts, that address future activities, events or developments are forward-looking statements, including, but not limited to, statements containing the words “believe,” “expect,” “anticipate,” “intends,” “estimate,” “forecast,” “project,” and similar expressions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products, services, developments or industry rankings; any statements regarding future revenue, economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. These statements are based on certain assumptions and analyses made by us in light of our experience and our assessment of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. However, whether actual results will conform to the expectations and predictions of management is subject to a number of risks and uncertainties described under Item 1A - Risk Factors beginning on page 22 below that may cause actual results to differ materially.

 

Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results anticipated by management will be realized or, even if substantially realized, that they will have the expected consequences to or effects on our business operations. Readers are cautioned not to place undue reliance on such forward-looking statements as they speak only of the Company’s views as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of the Company’s financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, management evaluates past judgments and estimates, including those related to bad debts, inventories, accrued liabilities, derivative liabilities and contingencies. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies and related risks described in the Company’s annual report on Form 10-K as filed with the SEC on September 27, 2019 are those that depend most heavily on these judgments and estimates. As of December 31, 2019, there had been no material changes to any of the critical accounting policies contained therein.

 

Overview

 

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

 

The brachytherapy seed utilizes Cesium-131, with a 9.7 day half-life, as its radiation source. The Company believes that it is the unique combination of the short half-life and the energy of the Cesium-131 isotope that are yielding the beneficial treatment results that have been published in peer reviewed journal articles and presented in various forms at conferences and tradeshows.

 

The Company has distribution agreements outside of the United States. These distributors are responsible for obtaining regulatory clearance to sell the Company’s products in their territories, with the support of the Company. As of the date of this Report, the Company has distributors in the Russian Federation and Peru with no reported revenues in these locations during the six months ended December 31, 2019.

 

The Company has a supply agreement with The Open Joint Stock Company <<Isotope>>, a Russian company, for the supply of Cesium-131, which was extended by an addendum through December 31, 2019 and the volume was also modified. Under the addendum, current pricing and volumes for Cesium-131 purchases remained in place until May 31, 2019. On July 11, 2019, another addendum was signed extending the pricing terms until August 4, 2019. On July 30, 2019, a new supply contract was signed with The Open Joint Stock Company for a term of August 2019 to December 2020 as the Company had purchased the maximum amount of Cesium-131 permitted under the prior agreement. The Company also has a consignment inventory agreement with MedikorPharma-Ural LLC (“Medikor”) to process the Company’s enriched barium at another nuclear reactor in Russia. The term of this consignment agreement began in November 2017 and is for 10 years. Our source of supply of Cesium-131 from Russia is historically produced using one of two nuclear reactors which supply the irradiation needed for Cesium-131 production. One of the Russian nuclear reactors was shut down from December 2017 until August 2018, and the other Russian nuclear reactor shut down in August 2019 and continues to be shut down in 2020 for an indeterminate period. As a result of these scheduled shutdowns, only one of the Company's historic Russian suppliers of Cesium-131 is available during these periods.

 

Results of Operations

 

Three months ended December 31, 2019 and 2018 (in thousands):

 

   

Three months ended December 31,

 
   

2019

   

2018

    2019 - 2018  
   

Amount

   

% (a)

   

Amount

   

% (a)

   

% Change

 

Sales, net

  $ 2,206       100     $ 1,904       100       16  

Cost of sales

    1,095       50       1,139       60       (4 )

Gross profit / (loss)

    1,111       50       765       40       45  
                                         

Operating expenses:

                                       

Research and development expenses - proprietary

    277       12       395       21       (30 )

Research and development expenses – collaboration agreement, net of reimbursement

    -       -       19       1       (100

)

Sales and marketing expenses

    666       30       702       37       (5 )

   (Gain) on equipment disposal

    -

 

    -

 

    (23 )     (1 )     100  

General and administrative expenses

    1,071       49       1,101       58       (3 )

Total operating expenses

    2,014       91       2,194       115       (8 )

Operating loss

    (903

)

    (41

)

    (1,429

)

    (75

)

    (37

)

 

 

(a)

Expressed as a percentage of sales, net

 

 

Six months ended December 31, 2019 and 2018 (in thousands):

 

   

Six months ended December 31,

 
   

2019

   

2018

    2019 - 2018  
   

Amount

   

% (a)

   

Amount

   

% (a)

   

% Change

 

Sales, net

  $ 4,521       100     $ 3,466       100       30  

Cost of sales

    2,174       48       2,177       63       0  

Gross profit / (loss)

    2,347       52       1,289       37       82  
                                         

Operating expenses:

                                       

Research and development expenses - proprietary

    510       11       789       23       (35 )

Research and development expenses – collaboration agreement, net of reimbursement

    -       -       45       1       (100

)

Sales and marketing expenses

    1,481       33       1,351       39       10  

   (Gain) on equipment Disposal

    -

 

    -

 

    (23 )     (1 )     100  

General and administrative expenses

    2,168       48       2,074       60       5  
(Gain) on change in estimate of asset retirement obligation     (73 )     (2 )     -       -       (100 )

Total operating expenses

    4,086       90       4,236       122       (4 )

Operating loss

    (1,739

)

    (38

)

    (2,947

)

    (85

)

    (41

)

 

 

(a)

Expressed as a percentage of sales, net

 

Sales

 

Sales, net for the three months ended December 31, 2019 increased 16% compared to the three months ended December 31, 2018. Sales, net for the six months ended December 31, 2019 increased 30% compared to the six months ended December 31, 2018. The Company’s sales personnel continued to bring on new accounts while also working with existing customers to increase their order volumes. The Blu Build™ loader, while in a limited market release, also contributed nominally to revenues during the three and six months ended December 31, 2019. 

 

The sales breakdown between prostate and non-prostate applications is set forth below.

 

Three months ended December 31, 2019 and 2018 (in thousands):

 

   

Three months ended December 31,

 
   

2019

   

2018

   

2019 - 2018

 
   

Amount

   

% (a)

   

Amount

   

% (a)

   

% Change

 

Prostate brachytherapy

  $ 1,964       89     $ 1,695       89       16  

Other sales

    242       11       209       11       16

 

Sales, net

    2,206       100       1,904       100       16  

 

(a) Expressed as a percentage of sales, net

 

Six months ended December 31, 2019 and 2018 (in thousands):

 

   

Six months ended December 31,

 
   

2019

   

2018

   

2019 - 2018

 
   

Amount

   

% (a)

   

Amount

   

% (a)

   

% Change

 

Prostate brachytherapy

  $ 4,037       89     $ 3,071       89       31  

Other sales

    484       11       395       11       23  

Sales, net

    4,521       100       3,466       100       30  

 

(a) Expressed as a percentage of sales, net

 

 

Prostate Brachytherapy

 

Prostate sales growth of approximately 16% during the three months ended December 31, 2019 compared to the three months ended December 31, 2018 and approximately 31% during the six months ended December 31, 2019 compared to the six months ended December 31, 2018 was achieved due to a sustained focus on acquiring new accounts through physician training programs and marketing campaigns along with continued support of existing customers to help them grow their business. While in a limited market release, the Blu Build™ loader also contributed to prostate revenue growth as it was sold to new customers that desired the intraoperative loader system. Management believes that the product's design is now complete and ready for broader market release but there is no assurance as to the exact timing of release. This broader market release should contribute to revenue in a more meaningful way in the second half of fiscal 2020 but there is no assurance that this will occur. Management believes the timing of the holidays in November and particularly in December resulted in fewer sales as many customers failed to order our product for use during the last two weeks of December. The Company continues to update its website and other marketing collateral as well as attending tradeshows to acquire new leads for our sales personnel. Also, the website along with some social media campaigns have been used to educate patients about the availability of Cesium-131 as a treatment option.

 

Management believes continued growth in prostate brachytherapy revenues will be the result of physicians, payors, and patients increasingly considering overall treatment advantages including costs compared with non-brachytherapy treatments, better treatment outcomes and improvement in the quality of life for patients. We believe the trend to use brachytherapy in lieu of other options is starting to improve our performance as for the twelve month period ended December 31, 2019 the net new physician customer count increased 39% over the same period ended December 31, 2018 but there is no assurance as to how long this trend will continue.

 

Management believes increased pressure to deliver effective healthcare in both terms of outcome and cost drove treatment options, and accordingly drove the Company’s prostate revenues, during the three and six months ended December 31, 2019.

 

Other Sales

 

Other sales includes, but is not limited to, brain, lung, head/neck, gynecological treatments, and services. Other sales, net increased by approximately 16% for the three months ended December 31, 2019 compared to the three months ended December 31, 2018, and approximately 23% for the six months ended December 31, 2019 compared to the six months ended December 31, 2018. Initial applications for these other brachytherapy treatments are primarily used in recurrent cancer treatments or salvage cases that are generally difficult to treat aggressive cancers where other treatment options are either ineffective or unavailable.

 

Other brachytherapy treatments are subject to the influence of a small pool of innovative physicians who are the early adopters of the technology who also tend to be faculty at teaching hospitals training the next generation of physicians. This causes the revenue created by these types of treatment applications to be more volatile and vary significantly from year to year. Additionally, with other brachytherapy surgical procedures there remains inconsistency and uncertainty regarding reimbursement for the procedures. This uncertain reimbursement for these new procedures will remain until specific coding and coverage policies are established, which could take years. Individual centers weigh the value of the procedure with their other treatment priorities on a patient by patient basis. Isoray believes that additional clinical data will begin to build a compelling argument to support reimbursement and increased adoption of its procedures; however, any growth will be inconsistent in the near term.

 

GammaTile™

 

For several years the Company has focused on many different applications of its Cesium-131 brachytherapy seeds in the cranial cavity to target many forms of brain cancer. Most recently, the Company has focused on using braided strand configurations and on being a contract manufacturer of GammaTile™ Therapy which is owned by GT Medical Technologies, Inc. (GT Med Tech). GammaTile™ Therapy uses biodegradable “tiles” to deliver Cesium-131 brachytherapy seeds into contact with cancerous tumors in the brain.

 

GammaTile™ Therapy was originally cleared for treating recurrent brain cancers. GT Med Tech filed a 510k with the FDA on an expanded indication of GammaTile™ Therapy to include treatment of newly diagnosed brain tumors with an application of Cesium-131. On January 27, 2020, GT Med Tech announced that it had received clearance from the FDA for an expanded indication that will allow patients of newly diagnosed malignant brain tumors to be treated by GammaTile™ Therapy. For the three and six months ended December 31, 2019, total revenues from sales to GT Med Tech were nominal. There were no sales to GT Med Tech for the three and six months ended December 31, 2018 as GT Med Tech began the limited market release of GammaTile™ Therapy in January 2019. While GT Med Tech continues to assure Isoray that its sales and marketing efforts will show steady improvements in sales there is no assurance this will occur.

 

Cost of sales

 

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

 

Contributing to the three and six months ended December 31, 2019 and 2018 comparison were increased other direct materials purchases as well as increased labor to meet production demand due to improved sales. Although sales improved dramatically, the increase in cost of sales was only nominal primarily as a result of cost savings in isotope due to the termination of our domestic isotope supplier that occurred in fiscal year 2019 which resulted in lower isotope unit costs compared to the three and six months ended December 31, 2018 and more efficient isotope usage driven by the increased revenue that led to lower losses of isotope due to decay.

 

Gross Profit

 

Gross profit increased 45% for the three month period ended December 31, 2019 when compared to the three month period ended December 31, 2018. Contributing to the three and six months ended December 31, 2019 and 2018 gross profit comparison were increased sales and significantly lower isotope unit costs compared to the prior year comparable period, continued leverage of the fixed cost components within costs of sales, and more efficient isotope usage. The lower isotope unit costs are related to the previously discussed change in our supply chain made at the end of calendar year 2018.

 

Research and development

 

Research and development – proprietary

 

Proprietary research and development consists primarily of employee and third-party costs related to research and development activities.

 

Contributing to the three and six months ended December 31, 2019 and 2018 proprietary research and development comparison were a decrease in protocol expense primarily relating to a mutually-agreed termination of a grant agreement which resulted in a reversal of the accrual and a reduction in investment in the development of the Blu Build™ delivery system for real-time prostate brachytherapy.

 

Research and development – collaborative arrangement

 

Collaboration arrangement related costs are incurred, shared, and separately stated in connection with a collaborative research and development project with

GT Medical Technologies, Inc. (formerly known as GammaTile, LLC).

 

 

Contributing to the three and six months ended December 31, 2019 and 2018 comparison were decreased costs due to the fact that payments being made pursuant to the collaborative arrangement with GT Med Tech were no longer necessary at the same level, as the collaborative arrangement primarily related to work involved in obtaining 510(k) clearance, which has now been obtained.

 

Sales and marketing expenses

 

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

 

Contributing to the three months ended December 31, 2019 and 2018 comparison was a decrease in travel costs as a tradeshow that occurred in October 2018 occurred in September 2019. Incentive compensation increased for the quarter ended December 31, 2019 in connection with the increase in revenue.

 

Contributing to the six months ended December 31, 2019 and 2018 comparison were increased incentive compensation in connection with the increase in revenue.

 

General and administrative expenses

 

General and administrative expenses consist primarily of the costs related to the executive, human resources/training, quality assurance/regulatory affairs, finance, and information technology functions of the Company.

 

General and administrative expenses decreased 3% to $1.07 million in the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019. Contributing to the three months ended December 31, 2019 and 2018 comparison were decreases in legal fees and proxy solicitation fees associated with redomiciling the Company to Delaware in December 2018 and renewal fees of our CE Mark. These cost decreases were partially offset in the three months ended December 31, 2019 by increases associated with payroll due to increased headcount and insurance premiums.

 

Contributing to the six months ended December 31, 2019 and 2018 comparison were cost increases associated with payroll due to increased headcount, insurance premiums, and employee hiring expense. These costs were partially offset in the six months ended December 31, 2019 by decreases in legal fees and proxy solicitation fees associated with redomiciling the Company to Delaware in December 2018.

 

Liquidity and capital resources

 

The Company assesses its liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. The Company has historically financed its operations through selling equity to investors. During the six months ended December 31, 2019 and 2018, the Company used existing cash reserves to fund its operations and capital expenditures (in thousands except current ratio):

 

   

Six months

 
   

ended December 31,

 
   

2019

   

2018

 

Net cash used by operating activities

  $ (1,931

)

  $ (2,726

)

Net cash used by investing activities

    (204

)

    (4,043 )

Net cash (used) provided by financing activities

    (11 )     7,370  

Net (decrease) increase in cash and cash equivalents

  $ (2,146 )   $ 601

 

 

 

   

As of

 
   

December 31, 2019

   

June 30, 2019

 

Working capital

  $ 4,291     $ 6,194  

Current ratio

    4.20       6.53  

 

Cash flows from operating activities

 

Net cash used by operating activities in the six months ended December 31, 2019 was primarily due to a net loss of approximately $1.71 million, net of approximately $224,000 in adjustments for non-cash activity such as depreciation and amortization expense, asset retirement obligation accretion, change in estimate of asset retirement obligation, and share-based compensation. Changes in operating assets and liabilities used approximately $442,000 to fund operating activities; increases in accounts receivable and prepaid expenses and other current assets and decreases in accounts payable and other accrued expenses and accrued protocol expense were partially offset by increases in accrued payroll and related taxes, accrued vacation, accrued radioactive waste disposal, and inventory.

 

Net cash used by operating activities in the six months ended December 31, 2018 was primarily due to a net loss of approximately $2.92 million, net of approximately $273,000 in adjustments for non-cash activity such as depreciation and amortization expense, gain on equipment disposal, asset retirement obligation accretion, and share-based compensation. Changes in operating assets and liabilities used approximately $77,000 to fund operating activities; decreases in accounts payable and accrued expenses, accrued payroll and related taxes, accrued vacation and an increase in prepaid expenses and other current assets were partially offset by decreases in accounts receivable and inventory and increases in accrued protocol expense and accrued radioactive waste disposal.

 

Cash flows from investing activities

 

Investing activities for the six months ended December 31, 2019 consisted of transactions related to the purchase of fixed assets, including automation of production processes.

 

Investing activities for the six months ended December 31, 2018 consisted of transactions related to the purchase and sale of fixed assets, including automation of production processes, as well as the purchase and subsequent maturity of U.S. Treasury Bills. 

 

Management will continue to invest in technology and machinery that improves and streamlines production processes and to invest maturing U.S. Treasury Bills in low-risk investment opportunities that safeguard assets and provide greater assurance those resources will be liquid and available for business needs as they arise. 

 

Cash flows from financing activities

 

Financing activities in the six months ended December 31, 2019 included payment of preferred dividends.

 

Financing activities in the six months ended December 31, 2018 included payment of preferred dividends and proceeds from sale of common stock, pursuant to registered direct offering, net (see note 10 to the financial statements).

 

Projected 2020 Liquidity and Capital Resources

 

Operating activities

 

Assuming no extraordinary expenses occur (whether operating or capital), if management is successful at implementing its strategy of renewed emphasis on driving the consumer to the prostate market, meets or exceeds its annual growth targets of twenty-five percent increase in revenue in fiscal 2020 and this annual growth continues, the Company anticipates reaching cash flow break-even in three to four years. The Company exceeded that target of twenty-five percent increased revenue in the six months ended December 31, 2019. There is no assurance that targeted sales growth will continue over the next three to four years. However, management is encouraged by the results for the six months ended December 31, 2019.  

 

Capital expenditures

 

Management has completed the design of a future production and administration facility but has not determined when or if it will move ahead with construction. If financing is obtained and the facility constructed, it is believed that the new facility will have non-cash depreciation cost equal to or greater than the monthly rental cost of the current facility.

 

Management is reviewing and implementing changes in all aspects of production operations (including process automation), research and development, sales and marketing, and general and administrative functions to evaluate the most efficient deployment of capital to ensure that the appropriate materials, systems, and personnel are available to support and drive sales.

 

During the six months ended December 31, 2019, the Company invested approximately $187,000 in the automation production processes. Beginning in fiscal 2017 and continuing through December 31, 2019, the Company has invested approximately $1,027,000 in the automation of five production processes, four of which have been placed in service as of the end of December 31, 2019. Management expects to invest approximately $30,000 more over the next three months on the remaining automation projects, but there is no assurance that this amount will not be revised. This investment is designed to allow the Company to significantly increase the output of Cesium-131 brachytherapy seeds, while allowing the Company to decrease the labor costs related to seed production and also improving the overall safety of our operations.

 

 

Financing activities

 

On July 11, 2018, the Company sold 11,000,000 shares of its common stock at a price of $0.75 per share, for aggregate gross proceeds of $8.25 million, pursuant to the registration statement on Form S-3 that became effective on November 23, 2015. There was no material change in the use of proceeds from our public offering as described in our prospectus supplement filed with the SEC pursuant to Rule 424(b) on July 11, 2018. Through December 31, 2019, the Company had used the net proceeds raised through the July 11, 2018 offering as described in the prospectus supplement. No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of our equity securities or to any other affiliates.

 

Additionally, the Company issued to the purchasers unregistered warrants to purchase up to 5,500,000 shares of common stock. The warrants have an exercise price of $0.75 per share common stock, are exercisable commencing six months following the issuance date, and expire five and one-half years from the issuance date. If exercised for cash, future exercises of these warrants will provide additional capital to the Company. 

 

On October 19, 2018, the Company filed a Form S-1 registration statement for the registration of 5,830,000 shares of common stock to be received by the investors and representatives of Wainwright on exercise of warrants issued in connection with the registered direct offering completed on July 11, 2018. The Company may receive up to $4,434,375 in gross proceeds solely to the extent the warrants are exercised for cash. The registration statement became effective on December 14, 2018, and the SEC file number assigned to the registration statement is 333-207909.

 

On January 22, 2020, the Company filed a Form S-3 registration which became effective on February 4, 2020, with the potential to register up to $80 million of equity securities.


As of December 31, 2019, the Company had cash and cash equivalents that totaled $3.18 million compared to $5.33 million at the end of fiscal 2019 ended June 30, 2019. The Company has zero long-term debt. The relatively larger decrease in cash, cash equivalents, and certificates of deposit this quarter compared to recent quarters was attributed to an increase in prepaid expenses in the quarter primarily related to premium payments for Director & Officer insurance as well as a large decrease in accounts payable compared to the prior quarter due to the timing of payments made. Management remains comfortable that our cash reserves are sufficient to fund operating activities through the remainder of calendar year 2020. Shareholders’ equity at the end of fiscal second quarter 2020 totaled $6.14 million versus $7.68 million at the end of fiscal 2019 ended June 30, 2019.

 

The Company expects to finance its future cash needs through sales of equity, possible strategic collaborations, debt financing or through other sources that may be dilutive to existing shareholders. Management anticipates that if it raises additional financing that it will be at a discount to the market price and it will be dilutive to shareholders.

 

Other Commitments and Contingencies

 

The Company presented its other commitments and contingencies in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019. There have been no material changes outside of the ordinary course of business in those obligations during the quarter ended December 31, 2019 other than those previously disclosed in Note 7 of the interim financial statements contained in this Form 10-Q.

 

Off-Balance Sheet Arrangements

 

The Company has no off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as revenue and expenses during the reporting periods. The Company evaluates its estimates and judgments on an ongoing basis. The Company bases its estimates on historical experience and on various other factors the Company believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. Actual results could therefore differ materially from those estimates if actual conditions differ from our assumptions.

 

 

During the quarter ended December 31, 2019, there have been no changes to the critical accounting policies and estimates, as discussed in Part II, Item 7 of our Form 10-K for the year ended June 30, 2019.

  

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable

 

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 co-principal financial officers, 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 December 31, 2019. Based on that evaluation, our principal executive officer and our co-principal financial officers concluded that the design and operation of our disclosure controls and procedures were effective. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, management believes that our system of disclosure controls and procedures are designed to provide a reasonable level of assurance that the objectives of the system will be met.

 

Changes in Internal Control over Financial Reporting

 

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1 – LEGAL PROCEEDINGS

 

Nothing to disclose.

 

ITEM 1A – RISK FACTORS

 

A description of the risk factors associated with our business is included under “Risk Factors” contained in Part I, Item 1A of our Form 10-K for the year ended June 30, 2019, and is incorporated herein by reference. There have been no material changes in our risk factors since such filing, except for the following:

 

We Rely Heavily On Three Customers

 

For the six months ended December 31, 2019 approximately 40% of the Company’s revenues were dependent on three customers with approximately 24% being generated by one customer. The loss of any of these customers would have a material adverse effect on the Company’s revenues which may not be replaced by other customers particularly as these customers are in the prostate sector which is facing substantial competition from other treatments. 

 

We May Need Additional Capital In The Future To Maintain Our NYSE American Listing.

Our Common Stock is currently listed on the NYSE American stock exchange which will consider delisting a company’s securities if, among other things, the company fails to maintain minimum stockholder’s equity. With our stockholder's equity anticipated to fall below $6 million for the quarter ended March 31, 2020, we may not be able to maintain our listing on the NYSE American unless we raise capital in the next three to six months. In the event that our common stock is delisted from the NYSE American, trading, if any, in the common stock would be conducted in the over-the-counter market. As a result, our shareholders would likely find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our common stock.

 

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

 

None.

 

 

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4 - MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5 – OTHER INFORMATION

 

None

 

ITEM 6. EXHIBITS

 

(Except as otherwise indicated (a) all exhibits were previously filed, (b) all omitted exhibits are intentionally omitted, and (c) all documents referenced below were filed under SEC file number 001-33407.)

 

Exhibits:

 

 

 

 

 

3(i)

 

Certificate of Incorporation, incorporated by reference to Exhibit A of the Form Def 14A filed on November 9, 2018.

     

3(ii)

 

Bylaws, incorporated by reference to Exhibit C of the Form Def 14A filed on November 9, 2018.

     

10.1

 

Form of Amendment to Employment Agreement, incorporated by reference to Exhibit 10.1 of the Form 8-K filed on December 17, 2019.

     

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 Co-Principal Financial Officer

     
31.3*   Rule 13a-14(a)/15d-14(a) Certification of Co-Principal Financial Officer

 

 

 

32.1**

 

Section 1350 Certifications

     

 

 

101.INS*

 

XBRL Instance Document

 

 

 

101.SCH*

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.

** Furnished herewith

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: February 12, 2020

 

 

 

 

ISORAY, INC., a Delaware corporation 

 

 

 

 

 

 /s/ Lori A. Woods

 

 

Lori A. Woods

 

 

Chief Executive Officer
(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

 

 


/s/ Jonathan Hunt

 

 

Jonathan Hunt

 

 

Chief Financial Officer

(Co-Principal Financial Officer)

     
     
     
    /s/ Mark J. Austin
   

Mark J. Austin

Controller
(Co-Principal Financial Officer and Principal Accounting Officer)

     

 

25