The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
Notes
to the Unaudited Consolidated Financial Statements
For the
three months ended September 30, 2016 and 2015
The
accompanying unaudited interim consolidated financial statements are those of IsoRay, Inc., and its wholly-owned subsidiaries (“IsoRay”
or the “Company”). All significant intercompany accounts and transactions have been eliminated in 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, 2016.
The
unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. 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 2017 will be 0%.
|
2.
|
New Accounting Pronouncements
|
In May 2014, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) 2014-09, "Revenue from Contracts with Customers" (ASU 2014-09),
which supersedes the revenue recognition requirements in FASB Accounting Standards Codification (ASC) Topic 605, "Revenue
Recognition". The guidance requires that an entity recognize revenue in a way that depicts the transfer of promised goods
or services to customers in the amount that reflects the consideration to which the entity expects to be entitled to in exchange
for those goods and services. The guidance will be effective for annual reporting periods beginning after December 15, 2017, including
interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. The Company
continues to evaluate the new standard and its impact on the Company's consolidated financial statements. This update will be effective
as of the beginning of fiscal 2019. This update is not expected to have a material impact on the Company’s consolidated financial
statements.
In July 2015, the FASB issued ASU No. 2015-11:
Inventory. The guidance requires an entity’s management to measure inventory within the scope of this ASU at the lower of
cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal, and transportation. The guidance is effective for public business entities for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2016. Early application is permitted.
The Company continues to evaluate the new standard and its impact on the Company's consolidated financial statements. This update
will be effective as of the beginning of fiscal 2018.
In November 2015, the FASB issued an ASU
2015-17 to simplify the balance sheet classification of deferred taxes. This update requires all deferred tax assets and liabilities
to be reported as non-current in the consolidated balance sheets. This update will be effective as of the beginning of fiscal 2018.
This update is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02
Leases (Subtopic 842), which will require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations
created by most leases. The update is effective for annual and interim reporting periods beginning after December 15, 2018. The
Company continues to evaluate the new standard and its impact on the Company's consolidated financial statements. This update will
be effective as of the beginning of fiscal 2019.
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. Except to indicate an evaluation of a recent pronouncement
is in process, the Company does not discuss recent pronouncements that are not anticipated to have potential impact on or
are unrelated to its financial condition, results of operations, cash flows or disclosures.
|
3.
|
Certificates of deposit
|
Certificate of Deposit Account Registry
Service (CDARS) is a system that allows the Company to invest in certificates of deposit through a single financial institution
that exceed the $250,000 limit to be fully insured by the Federal Deposit Insurance Corporation (FDIC). That institution utilizes
the CDARS system to purchase certificates of deposit at other financial Institutions while keeping the investment at each institution
fully insured by the Federal Deposit Insurance Corporation (FDIC). CDARS held by the Company as of September 30, 2016 and June
30, 2016 are as follows (in thousands):
|
|
As of September 30, 2016
|
|
|
|
Under 90
|
|
|
91 days to
|
|
|
Six months to
|
|
|
Greater
|
|
|
|
Days
|
|
|
six months
|
|
|
1 year
|
|
|
than 1 year
|
|
CDARS
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,249
|
|
|
$
|
-
|
|
|
|
As of June 30, 2016
|
|
|
|
Under 90
|
|
|
91 days to
|
|
|
Six months to
|
|
|
Greater
|
|
|
|
Days
|
|
|
six months
|
|
|
1 year
|
|
|
than 1 year
|
|
CDARS
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,247
|
|
|
$
|
2,973
|
|
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 September 30, 2016 and 2015, 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, 2016 and 2015, were as follows (in thousands):
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Series B preferred stock
|
|
|
59
|
|
|
|
59
|
|
Common stock warrants
|
|
|
230
|
|
|
|
361
|
|
Common stock options
|
|
|
2,609
|
|
|
|
2,364
|
|
Total potential dilutive securities
|
|
|
2,898
|
|
|
|
2,784
|
|
Inventory consisted of the following at
September 30, 2016 and June 30, 2016
(in thousands):
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
Raw materials
|
|
$
|
194
|
|
|
$
|
155
|
|
Work in process
|
|
|
164
|
|
|
|
161
|
|
Finished goods
|
|
|
22
|
|
|
|
18
|
|
Total inventory, current
|
|
$
|
380
|
|
|
$
|
334
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
Enriched barium, non-current
|
|
$
|
470
|
|
|
$
|
470
|
|
Raw materials, non-current
|
|
|
114
|
|
|
|
121
|
|
Total inventory, non-current
|
|
$
|
584
|
|
|
$
|
591
|
|
Inventory, non-current is 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 and the enriched barium which will only be utilized if required to obtain volumes of isotope
not able to be purchased from an existing source in the short or long-term. Management does not anticipate the need to utilize
the enriched barium within the current operating cycle.
|
6.
|
Property and Equipment
|
Property and equipment consisted of the following at September
30, 2016 and June 30, 2016
(in thousands):
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
Land
|
|
$
|
168
|
|
|
$
|
168
|
|
Equipment
|
|
|
3,614
|
|
|
|
3,606
|
|
Leasehold improvements
|
|
|
4,130
|
|
|
|
4,130
|
|
Other
1
|
|
|
331
|
|
|
|
214
|
|
Property and equipment
|
|
|
8,243
|
|
|
|
8,118
|
|
Less accumulated depreciation
|
|
|
(7,540
|
)
|
|
|
(7,541
|
)
|
Property and equipment , net
|
|
$
|
703
|
|
|
$
|
577
|
|
1
– Plant & 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. Also included at September
30, 2016 and June 30, 2016 are costs associated with automation of production processes and advance planning and design work on
the Company’s new production facility.
|
7.
|
Share-Based Compensation
|
The following table presents the share-based
compensation expense recognized during the quarter ended September 30, 2016 and 2015
(in
thousands):
|
|
Quarter
ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cost of product sales
|
|
$
|
27
|
|
|
$
|
18
|
|
Research and development expenses
|
|
|
8
|
|
|
|
3
|
|
Sales and marketing expenses
|
|
|
15
|
|
|
|
3
|
|
General and administrative expenses
|
|
|
20
|
|
|
|
8
|
|
Total share-based compensation
|
|
$
|
70
|
|
|
$
|
32
|
|
As of September 30, 2016, total unrecognized
compensation expense related to stock-based options was approximately $732,000 and the related weighted-average period over which
it is expected to be recognized is approximately 1.84 years.
A summary of stock options within the Company’s
share-based compensation plans as of September 30, 2016 was as follows
:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
As of September 30, 2016
|
|
Options
|
|
|
Price
|
|
|
Term (Years)
|
|
|
Value
|
|
Outstanding
|
|
|
2,609,189
|
|
|
$
|
1.07
|
|
|
|
7.12
|
|
|
$
|
141,677
|
|
Vested and expected to vest
|
|
|
2,530,789
|
|
|
$
|
1.06
|
|
|
|
7.06
|
|
|
$
|
141,677
|
|
Vested and exercisable
|
|
|
1,629,996
|
|
|
$
|
1.09
|
|
|
|
5.74
|
|
|
$
|
139,802
|
|
There were no and 45,994 stock options
exercised and no and $21,654 of intrinsic value associated with these exercises during the quarters ended September 30, 2016 and
2015, respectively. The Company’s current policy is to issue new shares to satisfy stock option exercises.
There were no stock option awards granted
during the quarters ended September 30, 2016 and 2015, respectively
.
There were 280,534 and 1,608 stock option
awards which expired during quarters ended September 30, 2016 and 2015, respectively.
There were 35,336 and 6,334 stock option awards forfeited during
quarters ended September 30, 2016 and 2015, respectively.
|
8.
|
Commitments and Contingencies
|
Class Action Lawsuit Related to Press
Release
On May 22, 2015, the first of three lawsuits
was filed against IsoRay, Inc. and two of its officers – Dwight Babcock (the Company’s retired CEO) and Brien Ragle,
CFO – related to a press release on May 20, 2015 regarding a May 19 online publication of the peer-reviewed article in the
journal Brachytherapy titled “Analysis of Stereotactic Radiation vs. Wedge Resection vs. Wedge Resection Plus Cesium-131
Brachytherapy in Early-Stage Lung Cancer” by Dr. Bhupesh Parashar, et al. The lawsuits are class actions alleging violations
of the federal securities laws. By Order dated August 17, 2015, all of the pending lawsuits were consolidated into one case –
In re IsoRay, Inc. Securities Litigation; Case No. 4:15-cv-05046-LRS, in the US District Court for the Eastern District of Washington.
On October 16, 2015, an amended complaint was filed with more detailed allegations relating to alleged violations of federal securities
laws. On December 15, 2015, IsoRay filed a motion to dismiss the complaint altogether. On June 1, 2016, the court entered an order
denying IsoRay's motion to dismiss, holding that the complaint's allegations, if accepted as true, state a plausible claim to relief.
The order did not adjudicate the merits of the lawsuit. No other issues were decided in the ruling.
On June 15, 2016, IsoRay filed their answer
to the amended complaint. As IsoRay previously disclosed, on September 23, 2016, the parties entered into a stipulation of settlement
which, if it becomes final, will provide for a payment to the plaintiff class of $3,537,500, which will be paid by our insurers.
On October 4, 2016, the stipulation of settlement was filed with the court, along with plaintiffs’ unopposed motion for preliminary
approval of the settlement. On October 20, 2016, the court granted preliminary approval of the settlement. Following notice to
class members, the class action is subject to final approval by the court. A final approval hearing is scheduled for March 7, 2017.
If the proposed settlement is not approved by the court or if IsoRay is otherwise unable to obtain a favorable resolution of the
claims set forth in the complaint, the lawsuit could have a material adverse effect on our business, results of operations and
financial condition.
Derivative Complaint related to
shareholder value
On September 29, 2016, a purported shareholder
derivative complaint captioned Kitley v. Babcock, et al., No. 0:16-cv-03297, was filed on behalf of the Company in the United
States District Court for the District of Minnesota against certain of the Company’s current and former officers and directors.
The complaint alleges that the defendants breached their fiduciary duties by causing the Company to issue allegedly false and
misleading statements in a May 20, 2015 press release – the same press release at issue in the pending securities class
action – concerning the results from a peer reviewed study of its Cesium-131 isotope seeds and mesh product for the treatment
of non-small cell lung cancers. The complaint brings claims of breach of fiduciary duty, gross mismanagement, and unjust
enrichment, and seeks unspecified compensatory damages, changes in corporate governance, and attorney’s fees and costs.
Because the complaint is derivative in nature, it does not seek monetary damages from the Company. The Company may be obligated
pursuant to indemnification obligations to advance fees and costs incurred by the individuals defending against the action.
The Company has applicable directors and officers insurance policies. Defendants’ response to the complaint is due
November 17, 2016.
|
9.
|
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 September 30, 2016
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash and cash equivalents
|
|
$
|
8,459
|
|
|
$
|
8,459
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Warrant derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Fair value at June 30, 2016
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash and cash equivalents
|
|
$
|
10,139
|
|
|
$
|
10,139
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Warrant derivative liability
|
|
|
27
|
|
|
|
-
|
|
|
|
27
|
|
|
|
-
|
|
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.
The Company’s warrant derivative
liability is valued using the Black-Scholes option pricing model which requires a variety of inputs. Such instruments are typically
included in Level 2.
As of September 30, 2016, there were accrued
but undeclared dividends on Series B Preferred Stock outstanding in the amount of approximately $8,000.
Warrants
The following table summarizes all warrants
outstanding as of the beginning of the fiscal year, all activity related to warrants issued, cancelled, exercised or expired during
the period and weighted average prices by category.
|
|
|
|
|
Weighted average
|
|
|
|
Warrants
|
|
|
exercise price
|
|
Outstanding as of June 30, 2016
|
|
|
230,087
|
|
|
$
|
0.94
|
|
Warrants expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of September 30, 2016
|
|
|
230,087
|
|
|
$
|
0.94
|
|
The following table summarizes additional
information about the Company’s common warrants outstanding as of September 30, 2016:
|
|
|
Range of
|
|
|
|
Number of Warrants
|
|
|
Exercise Prices
1
|
|
|
Expiration Date
|
|
199,437
|
|
|
$
|
0.94
|
|
|
October 2016
|
|
25,650
|
|
|
$
|
0.94
|
|
|
December 2016
|
|
5,000
|
|
|
$
|
0.98
|
|
|
June 2017
|
|
230,087
|
|
|
|
|
|
|
|
1
– Exercise
prices have been rounded to the nearest whole cent.
|
12.
|
Related Party Transaction
|
In previous fiscal years the Company engaged
the services of APEX Data Systems, Inc. (APEX), owned by Dwight Babcock, former Chairman and Chief Executive Officer, to build
and maintain a web interfaced data collection application to aggregate patient data in a controlled environment. An alternative
vendor began providing these services beginning January 2016.
The cost recorded during the quarter ended
September 30, 2015 from APEX Data Systems, Inc. for the maintenance of the web interfaced data collection applications in combination
with the updating of the Company website was approximately $3,000. An additional approximately $3,000 was spent on the maintenance
of Customer Relationship Management (CRM) software in the quarter ended September 30, 2015.
During the quarter ended June 30, 2016,
the Company engaged GO Intellectual Capital, LLC (GO) for marketing services in support of the Company’s rebranding effort.
Michael McCormick, a member of the Company Board of Directors, is a 1/3 owner of GO. A statement of work was developed defining
the scope of the effort and the deliverables to the Company including a new logo with brand messaging and communication tools including
a website, sales presentation tools and a public relations strategy. For the quarter ended September 30, 2016, the Company paid
approximately $15,000 to GO for its performance of work related to the agreed upon statement of work. No such services were provided
in the quarter ended September 30, 2015.
|
13.
|
Concentrations of Credit and Other Risks
|
One group of customers, facilities or physician
practices have revenues that aggregate to greater than 10% of total Company product sales:
|
|
Quarter ended
|
|
|
|
September 30,
|
|
|
June 30,
|
|
Facility
|
|
2016
|
|
|
2016
|
|
El Camino Hospital of Los Gatos, Fremont Surgery Center & other facilities
1
|
|
|
22.33
|
%
|
|
|
23.39
|
%
|
1
– This group
of facilities individually do not aggregate to more than 10% of total Company product sales. They are serviced by the same physician
group, one of whom is our Medical Director.
The Company routinely assesses the financial
strength of its customers and provides an allowance for doubtful accounts as necessary.