Perspective Therapeutics, Inc. - Quarter Report: 2021 September (Form 10-Q)

ISORAY, INC.

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Isoray, Inc.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

For the quarter ended September 30, 2021 and 2020

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 notes as set forth in the Company’s annual report filed on Form 10-K for the year ended June 30, 2021.

The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and note 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.

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 2022 will be 0%.

Accounting Standards Updates to Become Effective in Future Periods

Accounting standards that have been issued or proposed by the Financial Accounting Standards Board or “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.

Basic and diluted earnings (loss) per share are calculated by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding and does not include the impact of any potentially dilutive common stock equivalents. At September 30, 2021 and 2020, 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 September 30, 2021 and 2020, were as follows (in thousands):

Inventory consisted of the following at September 30, 2021 and June 30, 2021 (in thousands):

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. At June 30, 2021, the Company estimated that this remaining enriched barium would result in 894 curies.

On September 9, 2021, the Company entered into another Consignment Agreement with MedikorPharma-Ural LLC. Pursuant to the September 2021 Consignment Agreement, the Company purchased 6000 mg of enriched barium carbonate for $720,000 during September 2021, which is needed for the manufacture of Cesium-131, and consigned this inventory to Medikor. During the three months ended September 30, 2021, the Company did not obtain any curies of Cesium-131 under these agreements. At September 30, 2021, the Company estimates that the remaining enriched barium will result in 5,894 curies; approximately 894 of which will be obtained in the next twelve months and 5,000 will be obtained after September 30, 2022. There is no assurance as to whether the agreement will be terminated before this full amount is obtained and other supply sources are used, nor is there assurance that the third-party reactor which relies on these Consignment Agreements will be used by the Cesium-131 supplier under contract with the Company.

Property and equipment consisted of the following at September 30, 2021 and June 30, 2021 (in thousands):

¹ Plant and equipment, not placed in service 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 September 30, 2021 and June 30, 2021 are costs associated with advance planning and design work on the Company’s new production facility of approximately $207,000. The advance planning and design work was primarily incurred in fiscal year 2017. The new production facility is currently on hold as the Company has sufficient production capacity to meet future demands and while the Company focuses its resources on revenue growth. It is anticipated that the Company will continue work on the new production facility in the next three to five years.

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:

The following table presents the share-based compensation expense recognized for stock-based options during the three months ended September 30, 2021 and 2020 (in thousands): 

As of September 30, 2021, total unrecognized compensation expense related to stock-based options was approximately $1,572,000 and the related weighted-average period over which it is expected to be recognized is approximately 1.31 years.

A summary of stock options within the Company’s share-based compensation plans as of September 30, 2021 was as follows (in thousands except for exercise prices and terms):

There were no stock options exercised during the three months ended September 30, 2021 and 2020, respectively. The Company’s current policy is to issue new shares to satisfy stock option exercises.

There were 2,951,600 and 40,000 option awards granted with a fair value of approximately $1,712,000 and $18,000, during the three months ended September 30, 2021 and 2020, respectively.

There were 7,500 and 2,000 stock option awards which expired during the three months ended September 30, 2021 and 2020, respectively.

There were 132,500 and 2,500 stock option awards forfeited during the three months ended September 30, 2021 and 2020, respectively.

Isotope Purchase Agreement 

On August 26, 2020, a new supply contract was signed with The Open Joint Stock Company for a term of August 2020 to December 2021 as the Company had purchased the maximum amount of Cesium-131 permitted under the prior agreement. On February 10, 2021, an addendum was signed updating delivery locations. On March 18, 2021, the Company entered into a new supply contract with JSC Isotope pursuant to which the Company will purchase Cesium-131 for a term from March 18, 2021 through March 31, 2023. On July 29, 2021, an addendum was signed that adds a manufacturer, adds a shipper of goods, and increases the amount of Cesium-131 the Company can purchase. On August 19, 2021, an addendum was signed that adds MedikorPharma-Ural LLC, a company incorporated in accordance with the laws of Russia (“Medikor”), as a supplier to supply enriched barium carbonate for the manufacture of Cesium-131 to JSC Isotope on behalf of the Company. 

For the three months ended September 30, 2021 and 2020 our operating lease expense was approximately $77,000 and $73,000 respectively. For the three months ended September 30, 2021 and 2020 our operating lease expense recognized in cost of sales was approximately $49,000 and $46,000 respectively and our lease expense recognized in general and administrative expense was approximately $28,000 and $27,000 respectively. The weighted average remaining term and discount rate as of September 30, 2021 was 2.6 years and 6%, respectively.

The following table presents the future operating lease payments and lease liability included on the consolidated balance sheet related to the Company’s operating lease as of September 30, 2021 (in thousands):

Sources of Revenue

We have identified the following revenues disaggregated by revenue source:

During the three months ended September 30, 2021 and 2020 the Company had no, and nominal international revenue, respectively. For the three months ended September 30, 2021, prostate brachytherapy comprised 77% of our revenue, while other revenue, which includes but is not limited to brain, lung, head/neck, gynecological, and pelvic treatments, and services, comprised 23% compared to 79% and 21%, respectively, in the three months ended September 30, 2020.

Concentration of Customers

The following are the Company's top customers, facilities, or physician practices that utilize multiple surgical facilities shown as a percentage of total sales:

As of September 30, 2021 and 2020 respectively, no individual customers, or facilities, or physician practices made up greater than 10% of our accounts receivable.

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 21 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, 2021 are those that depend most heavily on these judgments and estimates. As of September 30, 2021 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 or Cesium Blu.

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, Peru and India with no reported revenues in these locations during the three months ended September 30, 2021.

The Company has a supply agreement with The Open Joint Stock Company <<Isotope>>, a Russian company, for the supply of Cesium-131 for a term of August 2020 to December 2021. On March 18, 2021, the Company entered into a new supply contract (the “New Agreement”) with JSC Isotope pursuant to which the Company will purchase Cesium-131 for a term from March 18, 2021 through March 31, 2023. 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 for much of 2019, 2020 and 2021. As a result of these scheduled shutdowns only one of the Company's historic Russian suppliers of Cesium-131 was available during these periods. 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.

On September 9, 2021, the Company entered into another Consignment Agreement with MedikorPharma-Ural LLC. Pursuant to this Consignment Agreement, the Company purchased 6,000 mg of enriched barium carbonate for $720,000, which is needed for the manufacture of Cesium-131, and consigned this inventory to Medikor. Beginning in October 2021, Medikor started to use the barium carbonate consigned by the Company and contract with a third-party manufacturer to produce Cesium-131. Pursuant to this Consignment Agreement, Medikor pays the Company varying US dollar amounts per curie of Cesium-131 the Company purchases. The amount varies based on how many curies of Cesium-131 the Company purchases. This arrangement is expected to minimize the impact on the Company of the temporary shutdown of one of the nuclear reactors that serves as its source of Cesium-131 from Russia.

The Company continues to explore how our proprietary isotope may be effective in the treatment of additional cancers. We recently entered into a research grant agreement with a leading cancer center to study the treatment of metastatic melanoma. In this immuno-oncology study, Cesium-131 will be used in combination with an immune checkpoint inhibitor. Metastatic melanoma is the most virulent form of skin cancer, often spreading to lymph nodes, the lungs, liver, brain, and tissue under the skin. This study follows our recently announced agreement with the University of Cincinnati to study the combination of Cesium-131 with the immunotherapy drug Keytruda® in recurrent head and neck cancers.

The Company recently filed a provisional patent application for a device designed to achieve directional dosing using our Cesium-131 seeds. This device is a bed that holds the Cesium-131 seeds to focus the radiation to a specific treatment area. The device is fixed to a directional mesh that can be used to treat pancreatic cancers as well as retroperitoneal sarcomas. We see unidirectional brachytherapy utilizing Cesium-131 as a highly attractive potential therapy for advanced abdominal cancers as well. In this practical application, the device will be aimed at cancers of the abdomen that invade the abdominal wall and pelvic floor, such as advanced cancers of the colon and rectum and advanced GYN cancers such as ovarian and uterine cancers. The directional dosing device will likely be used initially with the recurrent cancers mentioned above where our competitors’ external beam radiation therapy has previously been administered.

The Company recently attended the annual meeting of the American Society for Therapeutic Radiation Oncology (“ASTRO”) held in Chicago in October 2021. There were several presentations on Cesium-131 that continue to support the use of Cesium-131 for recurrent brain metastases and high grade meningiomas both with the GammaTile™ and the Company's legacy product with braided strands.

Results of Operations

Three months ended September 30, 2021 and 2020 (in thousands):

Sales

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

Three months ended September 30, 2021 and 2020 (in thousands):

Prostate Brachytherapy

Prostate sales increased by approximately 4% during the three months ended September 30, 2021 compared to the three months ended September 30, 2020. We believe that due to hospitals’ focus on COVID-19 including the Delta variant during the three months ended September 30, 2021 in various states, patients’ brachytherapy procedures continued to be delayed or cancelled. This led to a smaller increase in sales for prostate treatments during the three months ended September 30, 2021 compared to the three months ended September 30, 2020. 

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. The American Cancer Society estimates that nearly 250,000 new prostate cancer cases will be diagnosed in calendar year 2021, which represents an increase of approximately 30% over the calendar year 2020 estimate (American Cancer Society, 2021). This increase is due to patients being unable to access treatment or putting treatment off due to the COVID pandemic, but there is no assurance that this will occur and if it occurs that it will have a positive impact on the Company's performance. We believe the trend to use brachytherapy in lieu of other options is starting to improve our performance but there is no assurance as to how long this trend will continue.

Beginning in October, we recently treated a few patients with C4 Imaging's Sirius® positive-signal MRI (Magnetic Resonance Imaging) markers with Cesium-131 seeds after “pre-market” activities with this technology were completed in September.

Other Sales

Other sales includes, but is not limited to, brain, lung, head/neck, gynecological, and pelvis treatments, as well as services. Other sales, net increased by 20% for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The main driver of this growth was increased services as well as treatments for pelvic and lung cancers. The increase in services was mainly due to an increase in the minimum order fee due from GT Medical Technologies as their forecast was greater than their actual orders during the three months ended September 30, 2021. 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 varies significantly from year to year. Individual centers weigh the value of the procedure with their other treatment priorities on a patient by patient basis. 

Other brachytherapy treatments, such as brain, lung, and head/neck are typically performed in the in-patient setting using the DRG or diagnostic related groups. DRGs are designed for Medicare to set payment levels for hospital in-patient services. Other health insurers may follow Medicare reimbursement when setting their payment rates. When these other types of brachytherapy are performed in the out-patient setting, existing codes for Cesium-131 that are also used for prostate brachytherapy are used to bill for these procedures.

In May 2020, the Centers for Medicare and Medicaid Services (CMS) approved 64 ICD-10-PCS billing codes used for reimbursement of Cesium-131 for the hospital in-patient DRG setting. The codes allow hospitals to bill Medicare for specific surgical procedures that would benefit from the addition of Cesium-131.

The 64 ICD-10-PCS codes are important for the growing surgical applications of Cesium-131 in treating a significant range of hard to treat cancers including brain, lung, head and neck, abdominal, gynecological, pelvic, and colorectal cancers. The new codes took effect on October 1, 2020 and management believes they will provide greater impetus for usage as now CMS will be able to track the additional cost of the Cesium-131 seed itself and be able to reimburse the hospital through the DRG payment system for these additional costs when an in-patient brachytherapy procedure is performed. Isoray believes that additional clinical data and these new billing codes will begin to build a compelling argument to support reimbursement and increased adoption of the 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 allowing patients of newly diagnosed malignant brain tumors to be treated by GammaTile™ Therapy. For the three months ended September 30, 2021, total revenues from sales including minimum order fees to GT Med Tech were approximately 15% of sales. 

Cost of sales

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

Contributing to the increase in the three months ended September 30, 2021 and 2020 comparison were increases in isotope and other materials costs as well as increases in labor and depreciation. Due to lower than forecasted levels of sales volumes, we had excess isotope on hand which went unused. Other materials costs increased due to supplier price increases. Labor costs increased due to annual merit increases for production personnel as well as additional headcount and depreciation increased due to completion of production automation projects.

Gross Profit

Contributing to the three months ended September 30, 2021 and 2020 gross profit decline was lower than anticipated sales due to orders being cancelled or postponed due to COVID-19, increases in isotope costs due to lower than forecasted sales volumes which led to excess isotope on hand which went unused, and increases in payroll due to annual merit increases and additional headcount. Additionally, material costs increased compared to the three months ended September 30, 2020. 

Research and development

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

Contributing to the three months ended September 30, 2021 and 2020 research and development comparison was an increase in payroll due to annual merit increase as well as additional headcount and an increase in consulting expenses relating to market research. This increase was partially offset by a reduction in investment in the development of the Blu Build™ delivery system for real-time prostate brachytherapy.

On December 31, 2020, the Company received FDA 510k clearance for use of C4 Imaging's Sirius® positive-signal MRI (Magnetic Resonance Imaging) markers with the Company's Cesium-131 brachytherapy seeds. Sirius® is implanted during the treatment of prostate cancer with the Cesium-131 seeds and is used to facilitate seed localization within the prostate utilizing a single post-implant MRI procedure. We finished our premarket activities related to the Sirius® marker during the first quarter of fiscal 2022 and we are starting a product performance evaluation (formerly referred to as a limited market release) on this technology in the second quarter of fiscal 2022 and expect it to be available for full market release later in fiscal year 2022 but there is no assurance this timing will occur.

Management believes that research and development expenses will continue at this level as we continue to explore new projects and collaborations.

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. 

Contributing to the quarters ended September 30, 2021 and 2020 comparison was an increase in travel and tradeshow costs due to some COVID-19 restrictions being eased as well as increased payroll expenses resulting from annual merit increases and new hires. These increases were partially offset by a reduction in consulting expenses due to reclassification of reimbursement consulting to general and administrative expenses.

General and administrative expenses

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

Contributing to the three months ended September 30, 2021 and 2020 comparison were increased payroll due to annual merit increases and new hires, employment hiring expenses, IT consulting expenses, director and officer insurance expense, public company related expenses, increased audit and legal fees, and increased travel due to the easing of some COVID-19 restrictions. In addition, the majority of annual employee and director stock grants have historically been granted in the fiscal fourth quarter, however awards for performance in fiscal 2021 were granted in July 2021 thereby increasing share-based stock compensation expense in the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Impact of COVID-19

From the onset of the COVID-19 global pandemic we have been proactive in implementing plans to ensure the health and well-being of our employees, while remaining focused on providing uninterrupted product flow to the physicians and patients who count on us. We transitioned many employees to work from home and made other adjustments to ensure the continuity of our business through this time. At the beginning of the pandemic, we moved quickly to ensure that our inventory of non-isotope supplies were appropriate in case our supply chain was disrupted. In addition, we set in motion a strategy to maintain a continuous and uninterrupted supply of isotope from our suppliers in Russia including the review and use of alternative freight services due to the cancellation of many international flights.

As COVID-19 spread, many states implemented new guidelines in an attempt to mitigate the spread of the virus and to conserve certain medical supplies. Those guidelines led to the cancellation or postponement of elective and non-emergency surgical procedures, including prostate brachytherapy procedures.  Although during the first three months of fiscal 2022, our sales revenues increased 8% compared to the first three months of fiscal 2021, we were still below the average monthly prostate revenues attained in our third quarter of fiscal 2020 prior to the outset of COVID-19's impact on our operations. We believe this is due to hospitals’ focus on COVID-19 including variants, resulting in a delay or cancellation of patients scheduled to be seen by physicians. This resulted in fewer or delayed urology referrals for prostate brachytherapy treatment.

In the first three months of fiscal 2022, we forecasted an increase in cases, particularly prostate cases, which did not occur due to an increase in the Delta variant of COVID-19 as well as increased physician vacations. We plan to continue to manage our expenses and make adjustments to isotope orders, as permitted by our suppliers, to meet potential increased treatment demands.

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 three months ended September 30, 2021 and 2020, the Company used existing cash reserves to fund its operations and capital expenditures (in thousands except current ratio):

Cash flows from operating activities

Net cash used by operating activities in the three months ended September 30, 2021 was primarily due to a net loss of approximately $2.24 million net of approximately $673,000 in adjustments for non-cash activity such as share-based compensation, depreciation and amortization expense, and accretion of asset retirement obligation. Changes in operating assets and liabilities contributed approximately $514,000 to the cash used by operating activities; increases in inventory, mainly due to the purchase of enriched barium carbonate, and decreases in accrued payroll and related taxes and accrued vacation, were partially offset by decreases in prepaid expenses and other current assets and accounts receivable due to increased collection efforts, and increases in accounts payable and accrued expenses, accrued protocol expenses, and accrued radioactive waste disposal.

Net cash used by operating activities in the three months ended September 30, 2020 was primarily due to a net loss of approximately $713,000, net of approximately $137,000 in adjustments for non-cash activity such as depreciation and amortization expense, share-based compensation, and accretion of asset retirement obligation. Changes in operating assets and liabilities provided approximately $238,000 from operating activities; decreases to accounts receivable due to increased collection efforts and prepaid expenses, and increases in accounts payable, accrued protocol expense, accrued vacation, and accrued radioactive waste disposal were partially offset by a decrease in accrued payroll and related taxes and increased inventory purchases.

Cash flows from investing activities

Investing activities for the three months ended September 30, 2021 and 2020 respectively, consisted of transactions related to the purchase of fixed assets. Management will continue to invest in technology and machinery that improves and streamlines production processes and to invest 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

There were no financing activities in the quarter ended September 30, 2021 and 2020 respectively.

Projected fiscal 2022 liquidity and capital resources

Operating activities

Management forecasts that fiscal 2022 cash requirements will increase compared to previous years and that current cash and cash equivalents will be sufficient to meet projected operating cash needs for the next twelve months. Monthly operating expenses are budgeted to increase for sales and marketing, research and development and general and administrative expenses in fiscal 2022 as management works to implement its strategy. Assuming no extraordinary expenses occur (whether operating or capital), if management is successful at implementing its strategy to focus on renewed emphasis to drive the consumer to the prostate market and meets or exceeds its growth targets of twenty-five percent increase in revenue in fiscal 2022 and this annual growth continues, the Company anticipates reaching cashflow break-even in three to four years. These assumptions do assume that GammaTile™ will contribute to total revenue but do not incorporate any significant growth in the other non-prostate applications as they generate nominal revenues today but if they show significant improvement, cashflow break-even could occur sooner. There is no assurance that the targeted sales growth will materialize but management is encouraged by the depth and experience of its sales team and its track record of growth during the last three fiscal years. The Company missed its target of twenty-five percent increased revenue in the first three months of fiscal 2022 and there is no assurance that targeted sales growth will continue over the next three to four years.

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. The Company has limited additional space at this time and may need more office space in the future.

Management is reviewing 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.

Financing activities

When it does require capital in the future, 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 stockholders, 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 stockholders.

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, 2021. There have been no material changes outside of the ordinary course of business in those obligations during the three months ended September 30, 2021 other than those previously disclosed in note 7 of the financial statements contained in this filing.

Off-balance sheet arrangements

The Company has no off-balance sheet arrangements.

Critical accounting policies and estimates

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

During the three months ended September 30, 2021, there have been no changes to the critical accounting policies and estimates discussed in Part II, Item 7 of our Form 10-K for the year ended June 30, 2021.

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) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of September 30, 2021. 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 annual report on Form 10-K for the year ended June 30, 2021. 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 three months ended September 30, 2021 approximately 50% of the Company’s revenues were dependent on three customers, with approximately 29% being generated by one group of customers. The loss of any of these customers would have a material adverse effect on the Company’s revenues that may not be replaced by other customers, particularly as these customers are in the prostate sector which is facing substantial competition from other treatments.

The Uncertainty Regarding Reimbursement for Use of Our Product Has Been Resolved.

Hospitals and freestanding clinics may be less likely to purchase our product if they cannot be assured of receiving favorable reimbursement for treatments using our product from third-party payers, such as Medicare and private health insurance plans. Currently, Medicare reimburses hospitals under the fee-for-service (FFS) model that cover the cost of stranded and loose seeds. Clinics and physicians performing procedures in a free-standing center are reimbursed at the actual cost of the seeds. 

In July 2019, CMS proposed a significant change to the way Medicare pays for radiation services in an out-patient setting. The Radiation Oncology Alternative Payment Model (RO APM) proposed a single, bundled payment for a 90-day episode of radiation therapy including LDR brachytherapy, IMRT, SBRT, proton therapy, and HDR brachytherapy. The RO APM proposal applied the same payment levels to services provided in physician offices, free-standing centers, and hospital outpatients. In addition, certain surgical codes were proposed to be included in the bundled payment such as those for gynecological treatments. This CMS proposal for a revised payment included brachytherapy sources.

The final rule was published on September 18, 2020 with an initial effective date of January 1, 2021; however, CMS subsequently delayed the effective date to July 1, 2021.

In July 2021, CMS proposed changes to the RO APM which included removing brachytherapy from the list of included modalities under the RO Model so that brachytherapy would still be paid under the current fee-for-service (FFS) model. In the proposed rule, CMS explained the exclusion of brachytherapy from the RO APM was to ensure that providers would not be incentivized to forego brachytherapy in situations where a combination of brachytherapy and EBRT is clinically indicated. Additionally, the proposed rule included a five year performance period for select zip codes of January 1, 2022 through December 31, 2026.

Effective November 2, 2021, CMS finalized the proposed rule from July 2021 and determined to keep all brachytherapy and sources on a fee-for-service model and removed it from the list of included modalities in the RO APM. While management believes that permitting billing for the Company's Cesium-131 product on a fee-for-service model remains favorable to the Company there is no assurance as to when a new proposal will be proposed for an alternative billing method such as the bundled payment going into effect for many other treatment modalities on January 1, 2022. Brachytherapy and sources or seeds will continue to be paid separately. 

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.)

* 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.