Notes to the Unaudited Consolidated Financial Statements
The accompanying unaudited interim consolidated financial statements are those of Isoray, Inc., and its wholly-owned subsidiaries referred to herein as “Isoray” or the “Company”. All significant intercompany accounts and transactions have been eliminated in the consolidation. In the opinion of management, all adjustments necessary for the fair presentation of the consolidated financial statements have been included. These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes as set forth in the Company’s annual report filed on Form
10
-K for the year ended
June 30, 2018.
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
2019
will be
0%.
2.
|
New Accounting Pronouncements
|
In
May 2014,
the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No.
2014
-
09
Revenue Recognition, replacing guidance currently codified in Subtopic
605
-
10
Revenue Recognition-Overall with various SEC Staff Accounting Bulletins providing interpretive guidance. The guidance establishes a new
five
step principle-based framework in an effort to significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The standard became effective for the Company in the
first
quarter of its fiscal year
2019.
The Company adopted the new standard in the
first
quarter of fiscal year
2019
and used the modified retrospective method. The adoption of ASU
2014
-
09
did
not
have a material impact on the consolidated financial statements of the Company and did
not
significantly change the timing of revenue recognition compared to the previous methodology.
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 fiscal years beginning after
December 15, 2018,
including interim periods within those fiscal years. Early adoption is permitted. The ASU will be effective for the Company in the
first
quarter of fiscal year
2020.
We are currently evaluating the impact of the guidance on the Company’s consolidated financial statements.
In
August 2016,
the FASB issued ASU
No.
2016
-
15
Statement of Cash Flows (Topic
230
): Classification of Certain Cash Receipts and Cash Payments. The update provides guidance on classification for cash receipts and payments related to
eight
specific issues. The update is effective for fiscal years beginning after
December 15, 2017,
and interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU
2016
-
15
as of
July 1, 2018.
The adoption of ASU
2016
-
15
did
not
have a material effect on the Company’s consolidated financial statements.
In
November 2016,
the FASB issued ASU
2016
-
18,
“Statement of Cash Flows (Topic
230
): Restricted Cash”. ASU
2016
-
18
is intended to clarify how entities present restricted cash in the statement of cash flows. The guidance requires entities to show the changes in the total of cash and cash equivalents and restricted cash in the statement of cash flows. As a result, entities will
no
longer present transfers between cash and cash equivalents and restricted cash in the statement of cash flows. When cash and cash equivalents and restricted cash are presented in more than
one
line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. ASU
2016
-
18
is effective for fiscal years beginning after
December 15, 2017
and is to be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company adopted ASU
2016
-
18
in the
first
quarter of fiscal
2019.
This update resulted in an increase of
$181,000
in cash, cash equivalents, and restricted cash at the beginning of the
first
period presented on the consolidated statement of cash flows.
Other accounting standards that have been issued or proposed by FASB that do
not
require adoption until a future date are
not
expected to have a material impact on the consolidated financial statements upon adoption. The Company does
not
discuss recent pronouncements that are
not
anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
3.
|
Short-Term Investments
|
The Company had short-term investments consisting of U.S. Treasury Securities and Certificate of Deposit Account Registry Service (CDARS) as of
December 31, 2018
and
June 30, 2018
respectively.
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 FDIC.
Short-term investments held by the Company as of
December 31, 2018
and
June 30, 2018
are as follows (in thousands):
|
|
As of December 31, 2018
|
|
|
|
Under 90
|
|
|
91 days to
|
|
|
Six months to
|
|
|
Greater
|
|
|
|
Days
|
|
|
six months
|
|
|
1 year
|
|
|
than 1 year
|
|
U.S. Treasury Securities
|
|
$
|
2,333
|
|
|
$
|
2,334
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
As of June 30, 2018
|
|
|
|
Under 90
|
|
|
91 days to
|
|
|
Six months to
|
|
|
Greater
|
|
|
|
Days
|
|
|
six months
|
|
|
1 year
|
|
|
than 1 year
|
|
CDARS
|
|
$
|
825
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Basic and diluted earnings (loss) per share are calculated by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding and does
not
include the impact of any potentially dilutive common stock equivalents. At
December 31, 2018
and
2017,
the calculation of diluted weighted average shares did
not
include convertible preferred stock, common stock warrants, or options that are potentially convertible into common stock as those would be antidilutive due to the Company’s net loss position.
Securities
not
considered in the calculation of diluted weighted average shares, but that could be dilutive in the future as of
December 31, 2018
and
2017,
were as follows (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Series B preferred stock
|
|
|
59
|
|
|
|
59
|
|
Common stock warrants
|
|
|
6,080
|
|
|
|
250
|
|
Common stock options
|
|
|
3,917
|
|
|
|
3,295
|
|
Total potential dilutive securities
|
|
|
10,056
|
|
|
|
3,604
|
|
Inventory consisted of the following at
December 31, 2018
and
June 30, 2018 (
in thousands):
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
Raw materials
|
|
$
|
379
|
|
|
$
|
371
|
|
Work in process
|
|
|
97
|
|
|
|
96
|
|
Finished goods
|
|
|
18
|
|
|
|
27
|
|
Total inventory, current
|
|
$
|
494
|
|
|
$
|
494
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
Enriched barium, non-current
|
|
$
|
234
|
|
|
$
|
276
|
|
Raw materials, non-current
|
|
|
32
|
|
|
|
43
|
|
Total inventory, non-current
|
|
$
|
266
|
|
|
$
|
319
|
|
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. On
August 25, 2017,
the Company entered into a Consignment Agreement and related Services Agreement with MedikorPharma-Ural LLC to begin utilizing our enriched barium-
130
carbonate inventory. The Company anticipates obtaining enough Cesium-
131
under this arrangement to obtain over
4,000
curies of Cesium-
131.
At
December 31, 2018,
the Company estimates that the remaining enriched barium will result in at least
2,090
curies: approximately
420
of which we believe will be obtained within the next
12
months, and
1,670
of which we believe will be obtained after the next
12
months. There is
no
assurance as to whether the agreements will be terminated before this full amount is obtained and other supply sources are used, nor is there assurance that the agreements with the
third
-party Cesium-
131
suppliers will be executed.
6.
|
Property and Equipment
|
Property and equipment consisted of the following at
December 31, 2018
and
June 30, 2018 (
in thousands):
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
Land
|
|
$
|
366
|
|
|
$
|
366
|
|
Equipment
|
|
|
3,778
|
|
|
|
4,152
|
|
Leasehold improvements
|
|
|
4,138
|
|
|
|
4,136
|
|
Other
1
|
|
|
487
|
|
|
|
328
|
|
Property and equipment
|
|
|
8,769
|
|
|
|
8,982
|
|
Less accumulated depreciation
|
|
|
(7,298
|
)
|
|
|
(7,671
|
)
|
Property and equipment, net
|
|
$
|
1,471
|
|
|
$
|
1,311
|
|
|
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
December 31, 2018
and
June 30, 2018
are costs associated with advance planning and design work on the Company’s new production facility of
$207,000.
|
7.
|
Share-Based Compensation
|
The following table presents the share-based compensation expense recognized for stock-based options during the
three
months ended
December 31, 2018
and
2017
(in thousands):
|
|
Three Months
ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cost of product sales
|
|
$
|
10
|
|
|
$
|
13
|
|
Research and development expenses
|
|
|
18
|
|
|
|
19
|
|
Sales and marketing expenses
|
|
|
22
|
|
|
|
17
|
|
General and administrative expenses
|
|
|
47
|
|
|
|
29
|
|
Total share-based compensation
|
|
$
|
97
|
|
|
$
|
78
|
|
The following table presents the share-based compensation expense recognized for stock-based options during the
six
months ended
December 31, 2018
and
2017
(in thousands):
|
|
Six Months
ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cost of product sales
|
|
$
|
20
|
|
|
$
|
29
|
|
Research and development expenses
|
|
|
36
|
|
|
|
38
|
|
Sales and marketing expenses
|
|
|
44
|
|
|
|
34
|
|
General and administrative expenses
|
|
|
90
|
|
|
|
67
|
|
Total share-based compensation
|
|
$
|
190
|
|
|
$
|
168
|
|
As of
December 31, 2018,
total unrecognized compensation expense related to stock-based options was approximately
$566,000
and the related weighted-average period over which it is expected to be recognized is approximately
1.05
years.
A summary of stock options within the Company’s share-based compensation plans as of
December 31, 2018
was as follows (in thousands except for exercise prices and terms):
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
As of December 31, 2018
|
|
Options
|
|
|
Price
|
|
|
Term (Years)
|
|
|
Value
|
|
Outstanding
|
|
|
3,917
|
|
|
$
|
.68
|
|
|
|
7.40
|
|
|
$
|
10
|
|
Vested and expected to vest
|
|
|
3,909
|
|
|
$
|
.67
|
|
|
|
7.40
|
|
|
$
|
10
|
|
Vested and exercisable
|
|
|
2,170
|
|
|
$
|
.80
|
|
|
|
6.06
|
|
|
$
|
10
|
|
There were
no
and
82,810
stock options exercised, with approximately
$0
and
$0
of intrinsic value associated with these exercises during the
three
months ended
December 31, 2018
and
2017,
respectively. The Company’s current policy is to issue new shares to satisfy stock option exercises.
There were
155,000
and
no
option awards granted with a fair value of approximately
$52,000
and
$0
during the
three
months ended
December 31, 2018
and
2017,
respectively.
There were
no
stock option awards which expired during the
three
months ended
December 31, 2018
and
2017,
respectively.
There were
32,000
and
16,875
stock option awards forfeited during the
three
months ended
December 31, 2018
and
2017,
respectively.
There were
no
and
82,810
stock options exercised, with approximately
$0
and
$0
of intrinsic value associated with these exercises during the
six
months ended
December 31, 2018
and
2017,
respectively. The Company’s current policy is to issue new shares to satisfy stock option exercises.
There were
237,500
and
75,000
option awards granted with a fair value of approximately
$87,000
and
$33,000
during the
six
months ended
December 31, 2018
and
2017,
respectively.
There were
10,000
and
no
stock option awards which expired during the
six
months ended
December 31, 2018
and
2017,
respectively.
There were
70,750
and
76,541
stock option awards forfeited during the
six
months ended
December 31, 2018
and
2017,
respectively.
8.
|
Commitments and Contingencies
|
Isotope Purchase Agreement
In
December 2015,
the Company completed negotiations with The Open Joint Stock Company (located in Russia) for the purchase of Cesium-
131
manufactured by the Institute of Nuclear Materials. The purchase agreement provided the Company with
one
year’s supply of Cesium-
131.
The original agreement was due to expire on
March 31, 2017,
but in
December 2016
an addendum was signed extending it until
December 31, 2017.
On
October 23, 2017,
the Company, together with The Open Joint Stock Company, signed an addendum to the contract to include Cesium-
131
manufactured at SSC RIAR and extending it until
December 31, 2018.
On
December 24, 2018,
an addendum was signed extending the term of the supply contract through
December 31, 2019
and modifying the volume of additional shipments of Cesium-
131.
Under the Addendum, current pricing and volumes for Cesium-
131
purchases will remain in place until
May 31, 2019.
Pricing for purchases beyond that date will be subject to renegotiation.
Research and Development - Collaborative Arrangement
On
March 13, 2017,
the Company’s subsidiary, IsoRay Medical, Inc. (“Medical”) entered into a Collaborative Development Agreement (CDA) with GammaTile, LLC (predecessor to GT Medical Technologies) to further develop a brachytherapy medical device for the treatment of cancerous tumors in the brain and to seek regulatory approval for the new product. As the project manager, Medical incurred all costs in connection with the collaboration project which was shared equally by both parties (and GT Medical Technologies reimbursed the Company for its half) since
November 8, 2016,
which is when they informally began the collaboration. The arrangement is accounted for as a collaborative arrangement and related costs are incurred, shared, and separately stated in connection with a collaborative research and development project. The CDA terminated during
March 2018
and was
not
renewed. Since
March 2018,
the Company and GT Medical Technologies have worked collaboratively to obtain
510
(k) clearance and on the transfer of the design of this device to production without a formal agreement. As such, the costs are
no
longer shared equally and during the
three
and
six
months ended
December 31, 2018,
GT Medical Technologies was responsible for more than
50%
of the costs. The Company and GT Medical Technologies collectively completed the design transfer to production at the end of
December 2018.
Moving forward the costs are
not
and will
not
be shared equally. The net costs paid by Isoray related to the CDA and the informal agreement with GT Medical Technologies are reported in the financial statements. These costs are reported on the financial statements under “Research and development: Collaboration arrangements, net of reimbursement.”
During the
three
months ended
December 31, 2018
and
2017,
gross costs incurred in connection with the collaboration agreement were
$88,000
and
$58,000,
respectively.
During the
six
months ended
December 31, 2018
and
2017,
gross costs incurred in connection with the collaboration agreement were
$204,000
and
$205,000,
respectively.
As of
December 31, 2018
and
June 30, 2018,
the Company had outstanding receivables from GammaTile LLC of
$59,000
and
$22,000
respectively.
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 December 31, 2018
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash and cash equivalents
|
|
$
|
3,201
|
|
|
$
|
3,201
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Fair Value at June 30, 2018
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash and cash equivalents
|
|
$
|
2,600
|
|
|
$
|
2,600
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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.
1
0
.
|
Concentrations of Credit and Other Risks
|
One group of customers, facilities or physician practices has revenues that aggregate to greater than
10%
of total Company product sales:
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Facility
|
|
2018
|
|
|
2017
|
|
El Camino Hospital of Los Gatos, & other facilities
1
|
|
|
22.26
|
%
|
|
|
23.60
|
%
|
1
– This group of facilities individually each comprise less 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.
1
1
.
|
Shareholders’ Equity
|
On
July 11, 2018,
the Company completed the closing of a registered direct offering with several institutional and accredited investors (each an “Investor”) for the sale of a total of
11,000,000
shares of common stock of the Company (“Shares”) at a price per share of
$0.75,
for aggregate gross proceeds to the Company of
$8.25
million. Cash expenses relating to this offering were approximately
$0.75
million.
In a concurrent private placement, the Company sold to each Investor, at
no
additional consideration, unregistered warrants to purchase up to the number of shares of common stock of the Company equal to
50%
of such Investor’s Shares or a total of
5,500,000
shares, with an exercise price of
$0.75
per share, exercisable from
January 11, 2019
until
January 11, 2024 (
the “Investor Warrants”). The Company also issued warrants to purchase up to
330,000
shares of common stock of the Company, at an exercise price of
$0.9375,
to representatives of H.C. Wainwright & Co., LLC (“Wainwright”), the placement agent for the registered direct offering, as part of its compensation (the “Placement Agent Warrants” and together with the Investor Warrants, the “Warrants”).
The aggregate number of shares of our common stock issuable upon the exercise of the Warrants is
5,830,000
shares relating to this offering. We will receive gross proceeds from this offering solely to the extent any Warrants are exercised for cash.
In connection with redomiciling the Company to Delaware,
no
designations were allocated for Series A, C or D preferred stock as there were
no
shares of any of those classes outstanding at the time of redomicile. However, as Series B had outstanding shares of preferred stock, the Company allocated
5,000,000
shares to this series and had
59,065
issued and outstanding shares at
December 31, 2018.
1
2
.
|
Contracts with Customers
|
We have adopted ASC
606,
Revenue from Contracts with Customers
effective
July
1,
2018
using the modified retrospective method applied to those contracts which were
not
substantially completed as of
July
1,
2018
.
These standards provide guidance on recognizing revenue, including a
five
-step model to determine when revenue recognition is appropriate. The standard requires that an entity recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenues for fiscal year
2019
are reported under ASC
606,
while prior period amounts are
not
adjusted and continue to be reported under ASC
605,
Revenue Recognition
.
We routinely enter into agreements with customers that include general commercial terms and conditions, notification requirements for price increases, shipping terms and in most cases prices for the products that we offer. However, these agreements do
not
obligate us to provide goods to the customer and there is
no
consideration promised to us at the onset of these arrangements. For customers without separate agreements, we have a standard list price established for all products and our invoices contain standard terms and conditions that are applicable to those customers where a separate agreement is
not
controlling. Our performance obligations are established when a customer submits a purchase order or e-mail notification (in writing, electronically or verbally) for goods, and we accept the order. We identify performance obligations as the delivery of the requested product(s) in appropriate quantities and to the location specified in the customer’s e-mail/or purchase order. We generally recognize revenue upon the satisfaction of these criteria when control of the product has been transferred to the customer at which time we have an unconditional right to receive payment. Our prices are fixed and are
not
affected by contingent events that could impact the transaction price. We do
not
offer price concessions and do
not
accept payment that is less than the price stated when we accept the purchase order, except in rare credit related circumstances. We do
not
have any material performance obligations where we are acting as an agent for another entity.
Revenues for all products are typically recognized at the time the product is shipped, at which time the title passes to the customer, and there are
no
further performance obligations.
Sources of Revenue
We have identified the following revenues disaggregated by revenue source:
|
1.
|
Domestic Physicians – direct sales of products.
|
|
2.
|
International – direct sales of products.
|
For the
three
and
six
months ended
December 31, 2018
and
2017,
the Company had revenue from both sources. International revenues in all periods was immaterial.
Contract Balances
We incur agreement obligations on general customer purchase orders and e-mails that have been accepted but unfulfilled. Due to the short duration of time between order acceptance and delivery of the related product, we have determined that the balance related to these obligations is generally immaterial at any point in time. We monitor the value of orders accepted but unfulfilled at the close of each reporting period to determine if disclosure is appropriate.
Warranty
Our general product warranties do
not
extend beyond an assurance that the product delivered will be consistent with stated specifications and do
not
include separate performance obligations.
Returns
Generally, we allow returns if
not
implanted and we are notified within a few weeks after satisfying our performance obligations of a return.
Significant Judgments in the Application of the Guidance in ASC
606
There are
no
significant judgments associated with the satisfaction of our performance obligations. We generally satisfy performance obligations upon delivery of the product to the customer. This is consistent with the time in which the customer obtains control of the products. Therefore, the value of unsatisfied performance obligations at the end of any reporting period is generally immaterial. We use historical information along with an analysis of the expected value to properly calculate and to consider the need to constrain estimates of variable consideration. Such amounts are included as a reduction to revenue from the sale of products in the periods in which the related revenue is recognized and adjusted in future periods as necessary.
Commissions and Contract Costs
We pay and expense commissions on orders to our sales team upon satisfaction of our performance obligations. We generally do
not
incur incremental charges associated with securing agreements with customers which would require capitalization and recovery over the life of the agreement.
Practical Expedients
Our payment terms for sales direct to customers and distributors are substantially less than the
one
year collection period that falls within the practical expedient in determination of whether a significant financing component exists.
Shipping and Handling Charges
Fees charged to customers for shipping and handling of products are included as revenue and the costs for shipping and handling of products are included as a component of cost of products.
Taxes Collected from Customers
As our products are used in another service and are exempt, to this point we have
not
collected taxes. If we were to collect taxes, they would be on the value of transaction revenue and would be excluded from product revenues and cost of sales and would be accrued in current liabilities until remitted to governmental authorities.
Effective Date and Transition Disclosures
Adoption of the new standards related to revenue recognition did
not
have a material impact on our consolidated financial statements and is
not
expected to have a material impact in future periods.
ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS