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 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 25, 2020 are those that depend most heavily on these judgments and estimates. As of September 30, 2020 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 nominal reported revenues in these locations during the three months ended September 30, 2020.
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. 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. 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.
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 would 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 external beam radiation therapy has previously been administered.
Results of Operations
Three months ended September 30, 2020 and 2019 (in thousands):
|
|
Three months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020 - 2019
|
|
|
|
Amount
|
|
|
% (a)
|
|
|
Amount
|
|
|
% (a)
|
|
|
% Change
|
|
Sales, net
|
|
$
|
2,384
|
|
|
|
100
|
|
|
$
|
2,315
|
|
|
|
100
|
|
|
|
3
|
|
Cost of sales
|
|
|
1,138
|
|
|
|
48
|
|
|
|
1,079
|
|
|
|
47
|
|
|
|
5
|
|
Gross profit
|
|
|
1,246
|
|
|
|
52
|
|
|
|
1,236
|
|
|
|
53
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
312
|
|
|
|
13
|
|
|
|
233
|
|
|
|
10
|
|
|
|
34
|
|
Sales and marketing expenses
|
|
|
581
|
|
|
|
24
|
|
|
|
815
|
|
|
|
35
|
|
|
|
(29
|
)
|
General and administrative expenses
|
|
|
1,067
|
|
|
|
45
|
|
|
|
1,097
|
|
|
|
47
|
|
|
|
(3
|
)
|
Gain on change in estimate of asset retirement obligation (Note 10)
|
|
|
-
|
|
|
|
-
|
|
|
|
(73
|
)
|
|
|
(3
|
)
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,960
|
|
|
|
82
|
|
|
|
2,072
|
|
|
|
89
|
|
|
|
(5
|
)
|
Operating loss
|
|
$
|
(714
|
)
|
|
|
(30
|
)
|
|
$
|
(836
|
)
|
|
|
(36
|
)
|
|
|
(15
|
)
|
|
(a)
|
Expressed as a percentage of sales, net
|
Sales
Sales, net for the three months ended September 30, 2020 increased 3% compared to the three months ended September 30, 2019. 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 also helped to increase revenues during the three months ended September 30, 2020.
The sales breakdown between prostate and non-prostate applications is set forth below.
|
|
Three months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020 - 2019
|
|
|
|
Amount
|
|
|
% (a)
|
|
|
Amount
|
|
|
% (a)
|
|
|
% Change
|
|
Prostate brachytherapy
|
|
$
|
1,890
|
|
|
|
79
|
|
|
$
|
2,073
|
|
|
|
90
|
|
|
|
(9
|
)
|
Other sales
|
|
|
494
|
|
|
|
21
|
|
|
|
242
|
|
|
|
10
|
|
|
|
104
|
|
Sales, net
|
|
|
2,384
|
|
|
|
100
|
|
|
|
2,315
|
|
|
|
100
|
|
|
|
3
|
|
(a) Expressed as a percentage of sales, net
Prostate sales decreased by approximately 9% during the three months ended September 30, 2020 compared to the three months ended September 30, 2019. We believe that due to stay-at-home orders in various states and hospitals’ focus on COVID-19, patients’ brachytherapy procedures were either delayed or cancelled. This led to a decrease in sales for prostate treatments during the quarter ended September 30, 2020 compared to the quarter ended September 30, 2019. The decrease in sales volume was partially offset by a price increase that occurred in January 2020. Also during the three months ended September 30, 2020, the Blu Build™ loader was launched into full market release resulting in increased revenue compared to the three months ended September 30, 2019.
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 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 months ended September 30, 2020.
s
Other sales includes, but is not limited to, brain, lung, head/neck, gynecological treatments, and services. Other sales, net increased by 104% for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The main driver of this growth was increased treatments for brain cancer including GammaTile™. 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 and other health insurers to set payment levels for hospital in-patient services. 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 and other health insurers 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 this 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.
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 months ended September 30, 2020, total revenues from sales to GT Med Tech were less than ten percent (10%) of sales. Sales to GT Med Tech for the three months ended September 30, 2019 were nominal. GT Med Tech has indicated it intends to increase sales and marketing efforts during the Company’s fiscal year 2021, but there is no assurance that this will occur.
Cost of sales consists primarily of the costs of manufacturing and distributing the Company’s products.
Contributing to the slight increase in the quarter ended September 30, 2020 compared to the quarter ended September 30, 2019 were small increases in isotope costs as well as in labor. Higher freight costs for isotope were due to the use of cargo flights rather than passenger flights to transport the isotope from Russia to our facility. In addition, due to lower than anticipated sales volumes we had excess isotope on hand which went unused. Labor costs increased slightly mainly due to annual merit increases for production personnel.
Contributing to the three months ended September 30, 2020 and 2019 gross profit had a slight increase due to a slight increase in sales partially offset by small increases in isotope costs due to higher freight costs and payroll due to annual merit increases.
Total research and development expense increased 34% as compared to the quarter ended September 30, 2019.
Research and development consists primarily of employee and third party costs related to research and development activities.
Contributing to the quarters ended September 30, 2020 and 2019 research and development comparison was an increase in protocol expense primarily relating to new research agreements as well as during the quarter ended September 30, 2019 the Company mutually-agreed to terminate a grant agreement which resulted in a reversal of the accrual which was not repeated during the quarter ended September 30, 2020. This increase was offset by a reduction in investment in the development of the Blu Build™ delivery system for real-time prostate brachytherapy.
Management believes that research and development expenses will continue at this level as we do not anticipate accrual reversals in the future and we continue to explore for 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. As the Company increasingly focuses on improving sales, the cost associated with marketing and additional staffing continues to increase.
Contributing to the quarters ended September 30, 2020 and 2019 comparison was a decrease in travel and tradeshow costs due to COVID-19 restrictions. Incentive compensation decreased for the quarter ended September 30, 2020 in connection with less growth 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.
Contributing to the quarters ended September 30, 2020 and 2019 comparison were decreased travel costs due to COVID-19 restrictions as well as decreased employee hiring costs, partially offset by increased director and officer insurance expense.
Impact of COVID-19
From the onset of the COVID-19 global health 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 seamlessly 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 our 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 began to 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. During the first quarter of fiscal 2021, although our sales revenues increased 3% compared to the first quarter of fiscal 2020, we were still below the average monthly 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 stay-at-home orders and hospitals focused on COVID-19 due to the pandemic 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.
As more states gradually lifted restrictions on non-essential surgeries and other activities, we received customer feedback of anticipated increases in implant volumes as patients begin returning from quarantines for office visits and consultations but there is no assurance this will occur or be sustained, particularly with the recent spike in COVID-19 cases in various locations. In the meantime, we continue to tightly manage our expenses and make fluid adjustments to isotope orders 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 quarters ended September 30, 2020 and 2019, the Company used existing cash reserves to fund its operations and capital expenditures (in thousands except current ratio):
|
|
Three months
|
|
|
|
ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Net cash (used) by operating activities
|
|
$
|
(338
|
)
|
|
$
|
(653
|
)
|
Net cash (used) by investing activities
|
|
|
(113
|
)
|
|
|
(98
|
)
|
Net (decrease) in cash and cash equivalents
|
|
$
|
(451
|
)
|
|
$
|
(751
|
)
|
|
|
|
As of
|
|
|
|
|
September 30, 2020
|
|
|
|
June 30, 2020
|
|
Working capital
|
|
$
|
3,224
|
|
|
$
|
3,932
|
|
Current ratio
|
|
|
3.12
|
|
|
|
3.50
|
|
Cash flows from operating activities
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.
Net cash used by operating activities in the three months ended September 30, 2019 was primarily due to a net loss of approximately $809,000, net of approximately $37,000 in adjustments for non-cash activity such as depreciation and amortization expense, share-based compensation, and change in estimate of asset retirement obligation. Changes in operating assets and liabilities provided approximately $90,000 from operating activities; decreases to prepaid expenses and increases to accounts payable and accrued expenses and accrued payroll and related taxes were partially offset by increases in accounts receivable resulting from higher sales as well as a decrease in accrued protocol expense primarily relating to a mutually-agreed termination of a grant agreement.
Cash flows from investing activities
Investing activities for the three months ended September 30, 2020 and 2019 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, 2020 and 2019 respectively.
Projected fiscal 2021 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 about twenty-five percent increase in revenue in fiscal 2021 and this annual growth continues, the Company anticipates reaching cash flow break-even in three to four years. The Company missed that target of twenty-five percent increased revenue in the first quarter of fiscal 2021. 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.
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.
During the three months ended September 30, 2020, the Company did not invest in the automation of production processes. Beginning in fiscal 2017 and continuing through September 30, 2020, the Company has invested approximately $1,061,000 in the automation of five production processes, four of which have been placed in service as of the end of September 30, 2020. , 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 January 22, 2020, the Company filed a Form S-3 registration statement which became effective on February 4, 2020, with the potential to register up to $80 million of equity securities. On March 31, 2020, the Company entered into an Equity Distribution Agreement (the “Agreement”) with Oppenheimer & Co., Inc. (“Oppenheimer”). The common stock sold pursuant to the Agreement will be distributed at the market prices prevailing at the time of sale. The Agreement provides that Oppenheimer will be entitled to compensation for its services at a commission rate of 3.0% of the gross sales price per share of common stock sold plus reimbursement of certain expenses. As of September 30, 2020, the Company had sold an aggregate of 1,247,232 shares under the distribution agreement at an average price of approximately $0.738 per common share for gross proceeds of approximately $920,000 and net proceeds of approximately $874,000. On October 19, 2020, the Company terminated the Agreement, effective on the same date.
On October 22, 2020, the Company sold 18,269,230 shares of its common stock at a price of $0.52 per share, for aggregate gross proceeds of $9,500,000, pursuant to the registration statement on Form S-3 that became effective on February 4, 2020. The Company intends to use the net proceeds from the offering, estimated at approximately $8,660,000, to fund operations, research and development efforts, potential future acquisitions of complementary businesses or technologies, sales and marketing initiatives, and for general corporate purposes, including general and administrative expenses, capital expenditures, and for general working capital purposes. Additionally, the Company issued to the purchasers warrants to purchase up to 9,134,615 shares of common stock. The warrants have an exercise price of $0.57 per share of common stock, are exercisable immediately, and expire five years from the date of issuance. If exercised for cash, future exercises of these warrants will provide additional capital to the Company. As a result of this recent capital raise, the Company does not anticipate the need to finance its operations for the next fiscal year from additional capital raises.
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, 2020. There have been no material changes outside of the ordinary course of business in those obligations during the quarter ended September 30, 2020 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 quarter ended September 30, 2020, 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, 2020.