Notes to the Unaudited Consolidated Financial Statements
For the
three
months ended
September
3
0
, 2017
and
2016
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, 2017
.
The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC)
. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures are adequate for the information not to be misleading.
Certain prior period amounts have been reclassified to conform to the current period
’s presentation. The results of operations for the periods presented may not be indicative of those which may be expected for a full year. The Company anticipates that as the result of continuing operating losses and the significant net operating losses available from prior fiscal years, its effective income tax rate for fiscal year 2018 will be 0%.
2.
|
New Accounting
Standards
|
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 will be effective for the Company in the first quarter of its fiscal year 2019, but early adoption is permitted starting in the first quarter of fiscal year 2018. The Company intends to adopt the new standard in the first quarter of fiscal year 2019 and expects to use the modified retrospective method. The Company has evaluated the impact of the future adoption of ASU 2014-09 on its consolidated financial statements and does not currently expect significant changes in the timing of revenue recognition compared to the existing methodology.
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 ASU became effective for the Company on July 1, 2017. This update did not have a material impact on the Company’s consolidated financial statements upon adoption.
In N
ovember 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. The ASU became effective for the Company on July 1, 2017. This update did not to have a material impact on the Company’s consolidated financial statements upon adoption.
In February 2016, the FASB issued ASU 2016-02 Leases (Subtopic 842), which will require lessees to recog
nize 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. 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): C
lassification 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 is currently evaluating the impact of implementing this update on the consolidated financial statements.
Other accounting standards that have been issued or proposed by FASB
that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
3.
|
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 Cor
poration (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. CDARS held by the Company as of September 3
0, 2017 and June 30, 2017 mature as follows (in thousands):
|
|
As of
September 30, 2017
|
|
|
|
Under 90
|
|
|
91 days to
|
|
|
Six months to
|
|
|
Greater
|
|
|
|
Days
|
|
|
six months
|
|
|
1 year
|
|
|
than 1 year
|
|
CDARS
|
|
$
|
825
|
|
|
$
|
825
|
|
|
$
|
1,650
|
|
|
$
|
-
|
|
|
|
As of June 30, 201
7
|
|
|
|
Under 90
|
|
|
91 days to
|
|
|
Six months to
|
|
|
Greater
|
|
|
|
Days
|
|
|
six months
|
|
|
1 year
|
|
|
than 1 year
|
|
CDARS
|
|
$
|
3,039
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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, 2017 and 2016, 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, 2017 and 2016, were as follows (in thousands):
|
|
September 30
,
|
|
|
|
2017
|
|
|
2016
|
|
Series B preferred stock
|
|
|
59
|
|
|
|
59
|
|
Common stock warrants
|
|
|
-
|
|
|
|
230
|
|
Common stock options
|
|
|
3,395
|
|
|
|
2,609
|
|
Total potential dilutive securities
|
|
|
3,454
|
|
|
|
2,898
|
|
Inventory consisted of the following at
September 30, 2017 and June 30, 2017 (in thousands):
|
|
September 30
,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
Raw materials
|
|
$
|
339
|
|
|
$
|
191
|
|
Work in process
|
|
|
94
|
|
|
|
121
|
|
Finished goods
|
|
|
20
|
|
|
|
11
|
|
Total inventory, current
|
|
$
|
453
|
|
|
$
|
323
|
|
|
|
September 30
,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
Enriched barium, non-current
|
|
$
|
347
|
|
|
$
|
470
|
|
Raw materials, non-current
|
|
|
80
|
|
|
|
43
|
|
Total inventory, non-current
|
|
$
|
427
|
|
|
$
|
513
|
|
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, IsoRay Medical, Inc. (“
Medical”) entered into a Consignment Agreement and related Services Agreement with MedikorPharma-Ural LLC (“Medikor”). Pursuant to the Consignment Agreement, Medical has consigned its inventory of enriched barium carbonate to Medikor. It is expected that beginning in November, 2017, Medikor will use the barium carbonate consigned by Medical and contract with a third-party manufacturer to produce Cesium-131. Pursuant to the Service Agreement, Medical will perform certain qualitative and quantitative chemical analyses on the resulting Cesium-131. It is further expected that a separate third-party contractor will receive the Cesium-131 produced by the third-party manufacturer and will sell the Cesium-131 exclusively to Medical.
Medical anticipates obtaining enough Cesium-131 under this arrangement to obtain over 4,000 curies of Cesium-131 over a ten-year period but 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 periodically executed over this time period.
6.
|
Property and Equipment
|
Property and equipment consisted of the following at
September 30, 2017 and June 30, 2017 (in thousands):
|
|
September 30
,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
Land
|
|
$
|
366
|
|
|
$
|
366
|
|
Equipment
|
|
|
3,776
|
|
|
|
3,776
|
|
Leasehold improvements
|
|
|
4,134
|
|
|
|
4,130
|
|
Other
1
|
|
|
422
|
|
|
|
373
|
|
Property and equipment
|
|
|
8,698
|
|
|
|
8,645
|
|
Less accumulated depreciation
|
|
|
(7,608
|
)
|
|
|
(7,591
|
)
|
Property and equipment, net
|
|
$
|
1,090
|
|
|
$
|
1,054
|
|
1
– Represents 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, 2017 and June 30, 2017 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
three months ended September 30, 2017 and 2016 (in thousands):
|
|
Three Months
ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cost of product sales
|
|
$
|
16
|
|
|
$
|
27
|
|
Research and development expenses
|
|
|
19
|
|
|
|
8
|
|
Sales and marketing expenses
|
|
|
17
|
|
|
|
15
|
|
General and administrative expenses
|
|
|
38
|
|
|
|
20
|
|
Total share-based compensation
|
|
$
|
90
|
|
|
$
|
70
|
|
As of
September 30, 2017, total unrecognized compensation expense related to stock-based options was approximately $807
,000 and the related weighted-average period over which it is expected to be recognized is approximately 1.39 years.
A summary of stock options within the Company
’s share-based compensation plans as of September 30, 2017 was as follows (in thousands except for exercise prices and terms):
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
As of
September 30, 2017
|
|
Options
|
|
|
Price
|
|
|
Term (Years)
|
|
|
Value
|
|
Outstanding
|
|
|
3,395
|
|
|
$
|
0.76
|
|
|
|
7.71
|
|
|
$
|
67
|
|
Vested and expected to vest
|
|
|
3,290
|
|
|
$
|
0.76
|
|
|
|
7.66
|
|
|
$
|
67
|
|
Vested and exercisable
|
|
|
1,760
|
|
|
$
|
0.90
|
|
|
|
5.82
|
|
|
$
|
67
|
|
There were
no stock options exercised during the three months ended September 30, 2017 and 2016, respectively. The Company’s current policy is to issue new shares to satisfy stock option exercises.
There were
75,000 and no option awards granted with a fair value of approximately $33,000 and $
0 during the three months ended September 30, 2017 and 2016, respectively.
There were no
and 280,534 stock option awards which expired during three months ended September 30, 2017 and 2016, respectively.
There were
59,666 and 35,336 stock option awards forfeited during three months ended September 30, 2017 and 2016, 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 Cs-131 manufactured by the Institute of Nuclear Materials. The purchase agreement provided the Company with one year
’s supply of Cs-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 Cs-131 manufactured at SSC RIAR and extending it until December 31, 2018
.
Research and Development - Collaborative Arrangement
On March 13, 2017, Medical entered into a Collaborative Development Agreement (CDA) with GammaTile, LLC to fu
rther 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 will incur all costs in connection with the collaboration project which has been shared equally by both parties as of November 8, 2016 when they informally began the collaboration. The start of the formal collaboration has been extended from December 2017 until March 2018. In accordance with ASC 808 “Collaborative Arrangements”, this activity 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. These costs are reported on the financial statements under “Research and development: Collaboration arrangements, net of reimbursement.” The Company collaborated with GammaTile LLC in filing applications to the U.S. Food and Drug Administration (FDA) to clear GammaTile™ for clinical use, and a New Technology Add-on Payment (NTAP) to the Center for Medicare and Medicaid Services (CMS) seeking re-imbursement for the GammaTile™ treatment in the in-patient setting. The application with the FDA is ongoing, however, the NTAP was filed in October 2017.
During the quarte
r ended September 30, 2017 and June 30, 2017, costs incurred in connection with the collaboration agreement were $147,000 and $65,000, respectively.
As of September 30, 2017 and June 30, 2017, the Company had outstanding receivables from GammaTile LLC of
$68,000 and $66,000 respectively.
Derivative Complaint related to Shareholder Value
On September 29, 2016, David M. Kitley, purportedly on behalf of IsoRay, filed a derivative lawsuit in the United States District Court for the District of Minnesota under the case caption Kitley v. IsoRay, Inc., Case No. 0:16-cv-03297-DTS. The complaint
named as defendants current and former IsoRay directors Dwight Babcock, Thomas LaVoy, Philip J. Vitale and Michael W. McCormick, alleging that they violated their fiduciary duties to IsoRay in connection with a press release allegedly containing false and misleading statements concerning the results from a peer reviewed study of its Cesium-131 isotope seeds for the treatment of non-small cell lung cancers, thereby artificially inflating the price of IsoRay stock. The complaint sought unspecified damages, in an amount not presently determinable, among other forms of relief.
On November 17, 2016, IsoRay moved to dismiss the complaint, arguing that plaintiff was not entitled to pursue his derivative claims due to his failure to serve a pre-suit demand on IsoRay
’s board. Rather than respond to the motion to dismiss, plaintiff filed an amended complaint on January 23, 2017. The amended complaint alleged the same derivative claims as the original, and added IsoRay director Alan Hoffmann as a defendant. Plaintiff sought an award of damages and an order directing IsoRay to undertake reforms of its corporate governance and internal procedures. IsoRay moved to dismiss the amended complaint on March 9, 2017. Plaintiff responded on April 20, 2017, and IsoRay replied on May 17, 2017. The court heard oral argument on the motion on August 22, 2017, and took the matter under advisement at that time. On October 19, 2017, the court granted IsoRay’s motion to dismiss. The matter is now resolved.
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, 2017
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash and cash equivalents
|
|
$
|
3,956
|
|
|
$
|
3,956
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Fair
Value at June 30, 2017
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash and cash equivalents
|
|
$
|
5,932
|
|
|
$
|
5,932
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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.
10
.
|
Related Party Transaction
s
|
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, 2017
.
11
.
|
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:
|
|
Three
months ended
|
|
|
|
September 30
,
|
|
|
September 30
,
|
|
Facility
|
|
201
7
|
|
|
201
6
|
|
El Camino Hospital of Los Gatos, Fremont Surgery Center & other facilities
1
|
|
|
25.98
|
%
|
|
|
22.33
|
%
|
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 necess
ary.
Media Advertising Agreement
On October 3, 2017, IsoRay, Inc. (“IsoRay”) entered into a Media Advertising Agreement (the “Agreement”) with Al & J Media Inc., a corporation incorporated in the State of New York (the “Consultant”).
Pursuant to the Agreement, the Consultant will introduce IsoRay to potential sources of media, marketing agreements, and/or strategic alliances, including but not limited to radio and television media advertising, various media publications, and Internet podcasts. The Consultant does not promote IsoRay as part of the Agreement; it is only a media agent for advertising. The services are expected to be complete in 180 days. IsoRay may cancel the Agreement after the first 90 days.
As compensation for the services, IsoRay will pay the Consultant $120,000 of which $20,000 is payable upon execution of the Agreement, and $20,000 is payable 30, 60, 90, 120, and 150 days after execution of the Agreement. Additionally, the Consultant will receive 250,000 warrants upon execution of the Agreement, which vest immediately, entitling the Consultant to purchase shares of IsoRay common stock, exercisable on or before October 3, 2020, at an exercise price of $0.54 per share, and 250,000 at the market warrants 90 days after execution of the Agreement, at a price based on the issuance date.