ISORAY, INC.

 

Table of Contents

 

PART I	FINANCIAL INFORMATION
Item 1	Consolidated Unaudited Financial Statements	1
	Consolidated Balance Sheets (Unaudited)	1
	Consolidated Statements of Operations (Unaudited)	2
	Consolidated Statements of Cash Flows (Unaudited)	3
	Consolidated Statements of Changes in Stockholders' Equity (Unaudited)	4
	Notes to the Consolidated Unaudited Financial Statements	5
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4	Controls and Procedures	20
PART II	OTHER INFORMATION
Item 1	Legal Proceedings	21
Item 1A	Risk Factors	21
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3	Defaults Upon Senior Securities	22
Item 4	Mine Safety Disclosures	22
Item 5	Other Information	22
Item 6	Exhibits	23
Signatures		24

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1 - FINANCIAL STATEMENTS

 

Isoray, Inc. and Subsidiaries

Consolidated Balance Sheets  (Unaudited)

(In thousands, except shares)

 

 

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

 

 

 

Isoray, Inc. and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(Dollars and shares in thousands, except for per-share amounts)

   

  

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

 

 

Isoray, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

  

 

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

 

 

Isoray, Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders' Equity  (Unaudited)

(In thousands, except shares)

 

 

 

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

 

 

Isoray, Inc.

Notes to the Unaudited Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Caution Regarding Forward-Looking Information

 

In addition to historical information, this Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA). This statement is included for the express purpose of availing Isoray, Inc. of the protections of the safe harbor provisions of the PSLRA.

 

All statements contained in this Form 10-Q, other than statements of historical facts, that address future activities, events or developments are forward-looking statements, including, but not limited to, statements containing the words “believe,” “expect,” “anticipate,” “intends,” “estimate,” “forecast,” “project,” and similar expressions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products, services, developments or industry rankings; any statements regarding future revenue, economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. These statements are based on certain assumptions and analyses made by us in light of our experience and our assessment of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. However, whether actual results will conform to the expectations and predictions of management is subject to a number of risks and uncertainties described under Item 1A - Risk Factors beginning on page 21 below that may cause actual results to differ materially.

 

Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results anticipated by management will be realized or, even if substantially realized, that they will have the expected consequences to or effects on our business operations. Readers are cautioned not to place undue reliance on such forward-looking statements as they speak only of the Company’s views as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of the Company’s financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, management evaluates past judgments and estimates, including those related to bad debts, inventories, accrued liabilities, derivative liabilities and contingencies. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies and related risks described in the Company’s annual report on Form 10-K as filed with the SEC on September 25, 2020 are those that depend most heavily on these judgments and estimates. As of March 31, 2021 there had been no material changes to any of the critical accounting policies contained therein.

 

Overview

 

Isoray is a brachytherapy device manufacturer with FDA clearance for a single medical device that can be delivered to the physician in multiple configurations as prescribed for the treatment of cancers in multiple body sites. The Company manufactures and sells this product as the Cesium-131 brachytherapy seed or Cesium Blu.

 

 

The brachytherapy seed utilizes Cesium-131, with a 9.7 day half-life, as its radiation source. The Company believes that it is the unique combination of the short half-life and the energy of the Cesium-131 isotope that are yielding the beneficial treatment results that have been published in peer reviewed journal articles and presented in various forms at conferences and tradeshows.

 

The Company has distribution agreements outside of the United States. These distributors are responsible for obtaining regulatory clearance to sell the Company’s products in their territories, with the support of the Company. As of the date of this Report, the Company has distributors in the Russian Federation, Peru and India with nominal reported revenues in these locations during the nine months ended March 31, 2021.

 

The Company has a supply agreement with The Open Joint Stock Company <<Isotope>>, a Russian company, for the supply of Cesium-131 for a term of August 2020 to December 2021. On March 18, 2021, the Company entered into a new supply contract (the “New Agreement”) with JSC Isotope pursuant to which the Company will purchase Cesium-131 for a term from March 18, 2021 through March 31, 2023. Our source of supply of Cesium-131 from Russia is historically produced using one of two nuclear reactors which supply the irradiation needed for Cesium-131 production. One of the Russian nuclear reactors was shut down from December 2017 until August 2018, and the other Russian nuclear reactor shut down in August 2019 and continues to be shut down in 2021 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 will be aimed at cancers of the abdomen that invade the abdominal wall and pelvic floor, such as advanced cancers of the colon and rectum and advanced GYN cancers such as ovarian and uterine cancers. The directional dosing device will likely be used initially with the recurrent cancers mentioned above where our competitors’ external beam radiation therapy has previously been administered.

 

The Company recently received FDA 510k clearance for use of C4 Imaging's Sirius® positive-signal MRI (Magnetic Resonance Imaging) markers with the Company's Cesium-131 brachytherapy seeds. Sirius® is implanted during the treatment of prostate cancer with the Cesium-131 seeds and is used to facilitate seed localization within the prostate utilizing a single post-implant MRI procedure. 

 

Results of Operations

 

Three months ended March 31, 2021 and 2020 (in thousands):

 

		Three months ended March 31,
		2021								2020								2021 - 2020
		Amount				% (a)				Amount				% (a)				% Change
Sales, net		$	2,600				100			$	2,880				100				(10	)
Cost of sales			1,238				48				1,174				41				5
Gross profit			1,362				52				1,706				59				(20	)
Operating expenses:
Research and development expenses			362				14				294				10				23
Sales and marketing expenses			581				22				805				28				(28	)
General and administrative expenses			1,183				46				1,155				40				2
Loss on equipment disposal			2				-				-				-				100
Total operating expenses			2,128				82				2,254				78				(6	)
Operating loss		$	(766	)			(29	)		$	(548	)			(19	)			40

 

(a)

Expressed as a percentage of sales, net

  

Nine months ended March, 2021 and 2020 (in thousands):

 

		Nine months ended March 31,
		2021								2020								2021 - 2020
		Amount				% (a)				Amount				% (a)				% Change
Sales, net		$	7,343				100			$	7,401				100				(1	)
Cost of sales			3,568				49				3,348				45				7
Gross profit			3,775				51				4,053				55				(7	)
Operating expenses:
Research and development expenses			959				13				804				11				19
Sales and marketing expenses			1,781				24				2,286				31				(22	)
General and administrative expenses			3,379				46				3,323				45				2
Loss on equipment disposal			9				-				-				-				(100	)
Gain on change in estimate of asset retirement obligation (Note 10)			-				-				(73	)			(1	)
Total operating expenses			6,128				83				6,340				86				(3	)
Operating loss		$	(2,353	)			(32	)		$	(2,287	)			(31	)			3

 

(a)

Expressed as a percentage of sales, net

  

 

Sales

 

Sales, net for the three months ended March 31, 2021 decreased 10% compared to the three months ended March 31, 2020. Sales, net for the nine months ended March 31, 2021 decreased 1% compared to the nine months ended March 31, 2020. We believe that due to stay-at-home orders at times during the nine months ended March 31, 2021 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 both the three and nine months ended March 31, 2021 compared to the three and nine months ended March 31, 2020. The decrease in sales would have been even greater if the prostate market were the Company’s sole focus but the substantial increase in sales for other applications helped offset the prostate market decline.

 

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

 

Three months ended March 31, 2021 and 2020 (in thousands):

 

		Three months ended March 31,
		2021								2020								2021 - 2020
		Amount				% (a)				Amount				% (a)				% Change
Prostate brachytherapy		$	2,033				78			$	2,406				84				(16	)
Other sales			567				22				474				16				20
Sales, net			2,600				100				2,880				100				(11	)

 

(a)

Expressed as a percentage of sales, net

 

 

Nine months ended March 31, 2021 and 2020 (in thousands):

 

		Nine months ended March 31,
		2021								2020								2021 - 2020
		Amount				% (a)				Amount				% (a)				% Change
Prostate brachytherapy		$	5,818				79			$	6,443				87				(10	)
Other sales			1,525				21				958				13				59
Sales, net			7,343				100				7,401				100				(1	)

 

(a)

Expressed as a percentage of sales, net

 

 

Prostate Brachytherapy

 

Prostate sales decreased by approximately 16% and 10% during the three and nine months ended March 31, 2021 respectively compared to the three and nine months ended March 31, 2020. 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 three and nine months ended March 31, 2021 compared to the three and nine months ended March 31, 2020. The decrease in sales volume was partially offset by a price increase that occurred in January 2020. Also during the nine months ended March 31, 2021, the Blu Build™ loader was launched into full market release resulting in increased revenue compared to the nine months ended March 31, 2020.

 

Management believes continued growth in prostate brachytherapy revenues will be the result of physicians, payors, and patients increasingly considering overall treatment advantages including costs compared with non-brachytherapy treatments, better treatment outcomes and improvement in the quality of life for patients. The American Cancer Society estimates that nearly 250,000 new prostate cancer cases will be diagnosed in calendar year 2021, which represents an increase of approximately 30% over the calendar year 2020 estimate (American Cancer Society, 2021). This increase is due to patients being unable to access treatment or putting treatment off due to the COVID pandemic, but there is no assurance that this will occur and if it occurs that it will have a positive impact on the Company's performance. We believe the trend to use brachytherapy in lieu of other options is starting to improve our performance but there is no assurance as to how long this trend will continue.

 

Other Sales

 

Other sales includes, but is not limited to, brain, lung, head/neck, gynecological treatments, and services. Other sales, net increased by 20% for the three months ended March 31, 2021 and 59% for the nine months ended March 31, 2021 compared to the three and nine months ended March 31, 2020, respectively. The main driver of this growth was increased treatments for brain cancer including GammaTile™, and lung cancer. Initial applications for these other brachytherapy treatments are primarily used in recurrent cancer treatments or salvage cases that are generally difficult to treat aggressive cancers where other treatment options are either ineffective or unavailable.

 

Other brachytherapy treatments are subject to the influence of a small pool of innovative physicians who are the early adopters of the technology who also tend to be faculty at teaching hospitals training the next generation of physicians. This causes the revenue created by these types of treatment applications to be more volatile and varies significantly from year to year. Individual centers weigh the value of the procedure with their other treatment priorities on a patient by patient basis. 

 

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

 

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

 

The 64 ICD-10-PCS codes are important for the growing surgical applications of Cesium-131 in treating a significant range of hard to treat cancers including brain, lung, head and neck, abdominal, gynecological, pelvic, and colorectal cancers. The new codes took effect on October 1, 2020 and management believes they will provide greater impetus for usage as now CMS will be able to track the additional cost of the Cesium-131 seed itself and be able to reimburse the hospital through the DRG payment system for these additional costs when an in-patient brachytherapy procedure is performed. Isoray believes that additional clinical data and these new billing codes will begin to build a compelling argument to support reimbursement and increased adoption of the procedures; however, any growth will be inconsistent in the near term.

 

GammaTile™

 

For several years the Company has focused on many different applications of its Cesium-131 brachytherapy seeds in the cranial cavity to target many forms of brain cancer. Most recently, the Company has focused on using braided strand configurations and on being a contract manufacturer of GammaTile™ Therapy which is owned by GT Medical Technologies, Inc. (GT Med Tech). GammaTile™ Therapy uses biodegradable “tiles” to deliver Cesium-131 brachytherapy seeds into contact with cancerous tumors in the brain.

 

GammaTile™ Therapy was originally cleared for treating recurrent brain cancers. GT Med Tech filed a 510k with the FDA on an expanded indication of GammaTile™ Therapy to include treatment of newly diagnosed brain tumors with an application of Cesium-131. On January 27, 2020, GT Med Tech announced that it had received clearance from the FDA for an expanded indication allowing patients of newly diagnosed malignant brain tumors to be treated by GammaTile™ Therapy. For the three and nine months ended March 31, 2021, total revenues from sales to GT Med Tech were less than ten percent (10%) of sales. 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 and in fact sales of GammaTile™Therapy were flat in the first three quarters of fiscal year 2021 which Management believes was primarily due to the effects of the COVID pandemic and hospital access.

 

Cost of sales

 

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

 

Contributing to the increase in the three and nine months ended March 31, 2021 and 2020 comparison were 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.

 

Gross Profit

 

Contributing to the three and nine months ended March 31, 2021 and 2020 gross profit decline was a decrease in sales due to orders being cancelled or postponed due to COVID-19 impacts as well as increases in isotope costs due to higher freight costs and payroll due to annual merit increases.

 

Research and development

 

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

 

Contributing to the three months ended March 31, 2021 and 2020 research and development comparison was an increase in payroll due to annual merit increase as well as additional headcount and an increase in protocol expense primarily relating to new research agreements. This increase was offset by a reduction in investment in the development of the Blu Build™ delivery system for real-time prostate brachytherapy.

 

Contributing to the nine months ended March 31, 2021 and 2020 research and development comparison was an increase in protocol expense primarily relating to new research agreements as well as during the nine months ended March 31, 2020 the Company mutually-agreed to terminate a grant agreement which resulted in a reversal of the accrual which was not repeated during the nine months ended March 31, 2021. Also contributing to the nine months ended March 31, 2021 and 2020 comparison were increased payroll costs due to annual merit increases and expansion of the research and development team through additional headcount. These increases were offset by a reduction in investment in the development of the Blu Build™ delivery system for real-time prostate brachytherapy.

 

 

The Company recently received FDA 510k clearance for use of C4 Imaging's Sirius® positive-signal MRI (Magnetic Resonance Imaging) markers with the Company's Cesium-131 brachytherapy seeds. Sirius® is implanted during the treatment of prostate cancer with the Cesium-131 seeds and is used to facilitate seed localization within the prostate utilizing a single post-implant MRI procedure. We are beginning a limited market release on this technology in our fourth quarter of fiscal 2021 and expect it to be available for full market release later this calendar year but there is no assurance this timing will occur.

 

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. 

 

Contributing to the quarters ended March 31, 2021 and 2020 comparison was a decrease in travel and tradeshow costs due to COVID-19 restrictions. Incentive compensation decreased for the quarter ended March 31, 2021 in connection with the decrease in revenue. 

 

Contributing to the nine months ended March 31, 2021 and 2020 comparison was a decrease in travel and tradeshow costs due to COVID-19 restrictions. Incentive compensation decreased for the nine months ended March 31, 2021 in connection with the decrease 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 three and nine months ended March 31, 2021 and 2020 comparison were increased director and officer insurance expense, increased payroll due to annual merit increases, IT consulting expenses, and bad debt expense, partially offset by decreased travel costs due to COVID-19 restrictions as well as decreased employee hiring costs and legal fees .

 

Impact of COVID-19

 

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

 

As COVID-19 spread, many states implemented new guidelines in an attempt to mitigate the spread of the virus and to conserve certain medical supplies. Those guidelines led to the cancellation or postponement of elective and non-emergency surgical procedures, including prostate brachytherapy procedures.  During the first nine months of fiscal 2021, our sales revenues decreased 1% compared to the first nine months of fiscal 2020, and we were still below the average monthly prostate revenues attained in our third quarter of fiscal 2020 prior to the outset of COVID-19's impact on our operations. We believe this is due to stay-at-home orders and hospitals’ focus on COVID-19, 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 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. We continue to tightly manage our expenses and make 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 nine months ended March 31, 2021 and 2020, the Company used existing cash reserves to fund its operations and capital expenditures (in thousands except current ratio):

 

		Nine months
		ended March 31,
		2021				2020
Net cash (used) by operating activities		$	(1,719	)		$	(2,793	)
Net cash (used) by investing activities			(272	)			(248	)
Net cash provided (used) by financing activities			64,441				120
Net (decrease) in cash and cash equivalents		$	62,450			$	(2,921	)

 

			As of
			March 31, 2021				June 30, 2020
Working capital		$	66,158			$	3,932
Current ratio			35.53				3.50

 

Cash flows from operating activities

 

Net cash used by operating activities in the nine months ended March 31, 2021 was primarily due to a net loss of approximately $2.33 million net of approximately $428,000 in adjustments for non-cash activity such as share-based compensation, depreciation and amortization expense, accretion of asset retirement obligation, and loss on equipment disposal. Changes in operating assets and liabilities provided approximately $179,000 from operating activities; increases in accounts payable, accrued protocol expense, accrued vacation, and accrued radioactive waste disposal, and decreases in accounts receivable due to increased collection efforts and decreased sales,  were partially offset by increases in inventory and prepaid expenses and other current assets, and a decrease in accrued payroll and related taxes.

 

Net cash used by operating activities in the nine months ended March 31, 2020 was primarily due to a net loss of approximately $2.26 million, net of approximately $367,000 in adjustments for non-cash activity such as depreciation and amortization expense, asset retirement obligation accretion, change in estimate of asset retirement obligation, and share-based compensation. Changes in operating assets and liabilities used approximately $904,000 to fund operating activities; increases in accounts receivable, prepaid expenses and other current assets, and inventory and decreases in accrued protocol expense were partially offset by increases in accounts payable and accrued expenses, accrued payroll and related taxes, accrued vacation, and accrued radioactive waste disposal.

 

 

Cash flows from investing activities

 

Investing activities for the nine months ended March 31, 2021, consisted of transactions related to the purchase of fixed assets and other assets, including automation of production processes, enterprise resource planning software implementation, as well as proceeds from sale of equipment. 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.

 

Investing activities for the nine months ended March 31, 2020, consisted of transactions related to the purchase of fixed assets, including automation of production processes.

 

Cash flows from Financing activities

 

Financing activities in the nine months ended March 31, 2021, included payment of preferred dividends and net proceeds of approximately $56,375,000 from the sale of 59,669,230 shares of common stock pursuant to two underwritten offerings (see note 9 to the financial statements). Also included are net proceeds of approximately $7,784,000 pursuant to exercise of the 12,318,877 warrants to purchase common stock as well as net proceeds of approximately $291,000 pursuant to the exercise of 520,315 options to purchase common stock.

 

Financing activities in the nine months ended March 31, 2020 included payment of preferred dividends and proceeds of common stock, pursuant to exercise of options to purchase common stock.

  

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 nine months 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 nine months ended March 31, 2021, the Company invested nominally in the automation of production processes. Beginning in fiscal 2017 and continuing through March 31, 2021, the Company has invested approximately $1,064,000 in the automation of five production processes, four of which have been placed in service as of the end of March 31, 2021. Management expects to invest approximately $10,000 more over the next three months on the remaining automation projects, 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 23, 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 was distributed at the market prices prevailing at the time of sale. The Agreement provided 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 Agreement at an average price of approximately $0.738 per common share for gross proceeds of approximately $920,000 and net proceeds of approximately $850,000. 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 net proceeds from the offering were approximately $8,595,000. The Company has not yet used any proceeds from this offering. 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. 

 

Between January 1, 2021, and March 31, 2021, the Company received approximately $8.1 million as a result of the exercise of warrants and options.

 

On February 8, 2021, the Company sold shares of its common stock at a price of $1.25 per shares for aggregate gross proceeds of approximately $45,000,000, pursuant to the registration statement on Form S-3 that became effective on February 4, 2020. Additionally, the Company granted the underwriters an option to purchase an additional 5,400,000 shares of common stock at a purchase price of $1.25 per share for the purpose of covering overallotments, which was exercised on February 8, 2021 and generated gross proceeds of approximately $6,750,000. The Company has not yet used any proceeds from this offering. 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 stockholders, Management anticipates that if it raises additional financing that it will be at a discount to the market price and it will be dilutive to stockholders.

 

Other commitments and contingencies

 

The Company presented its other commitments and contingencies in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. There have been no material changes outside of the ordinary course of business in those obligations during the nine months ended March 31, 2021 other than those previously disclosed in note 7 of the financial statements contained in this filing.

 

Off-balance sheet arrangements

 

The Company has no off-balance sheet arrangements.

 

Critical accounting policies and estimates

 

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

 

During the nine months ended March 31, 2021, there have been no changes to the critical accounting policies and estimates discussed in Part II, Item 7 of our Form 10-K for the year ended June 30, 2020.

  

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable.

 

ITEM 4 – CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and co-principal financial officers, we conducted an evaluation of the design and operation of our disclosure controls and procedures, as such term is defined under Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of March 31, 2021. Based on that evaluation, our principal executive officer and our co-principal financial officers concluded that the design and operation of our disclosure controls and procedures were effective. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, management believes that our system of disclosure controls and procedures are designed to provide a reasonable level of assurance that the objectives of the system will be met.

 

Changes in Internal Control over Financial Reporting

 

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

ITEM 1 – LEGAL PROCEEDINGS

 

Nothing to disclose.

 

ITEM 1A – RISK FACTORS

 

A description of the risk factors associated with our business is included under “Risk Factors” contained in Part I, Item 1A of our annual report on Form 10-K for the year ended June 30, 2020. There have been no material changes in our risk factors since such filing, except for the following:

 

We Rely Heavily on Three Customers

 

For the nine months ended March 31, 2021 approximately 41% of the Company’s revenues were dependent on three customers, with approximately 26% being generated by one group of customers. The loss of any of these customers would have a material adverse effect on the Company’s revenues that may not be replaced by other customers, particularly as these customers are in the prostate sector which is facing substantial competition from other treatments.

 

The Novel Coronavirus (COVID-19) Outbreak Could Materially Adversely Affect Our Financial Condition and Results of Operations.

 

COVID-19 may impact supply chain and product sales. Our Cesium supply comes from Russia, and while at this time we are not aware of any shutdowns of nuclear facilities in Russia or limited staffing due to ongoing risk of virus transmission, shutdowns may occur in the future. We also depend on overseas flights, which have been curtailed.  Further flight cancellations may impact our supply chain. While our surgeries are not considered elective, in areas where hospitals are devoted to COVID-19 or other chronic conditions, surgeries required to implant our seeds may be postponed or cancelled, as occurred in late March 2020 and continued through much of April 2020 at numerous locations, and impacted us again from September 2020 to March 2021. If conditions worsen with the COVID-19 pandemic this may have a material adverse effect on our business.

 

The spread of COVID-19 has caused us to modify our business practices (including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, and suppliers. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be harmed.

 

These and similar, and perhaps more severe, disruptions in our operations could negatively impact our business, operating results and financial condition. In addition, quarantines, stay-at-home, executive and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, could impact personnel at third-party manufacturing facilities in the United States and other countries, or the availability or cost of materials, which would disrupt our supply chain.

 

The spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, it has significantly disrupted global financial markets, and may limit our ability to access capital, which could in the future negatively affect our liquidity. A recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock.

 

The ultimate impact of the COVID-19 outbreak or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, healthcare systems or the global economy as a whole. However, the effects could have a material impact on our operations, and we will continue to monitor the COVID-19 situation closely.

 

We Are Subject To Uncertainties Regarding Reimbursement For Use Of Our Product. 

 

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

 

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

 

The final rule was published on September 18, 2020 with an initial effective date of January 1, 2021; however, CMS subsequently delayed the effective date to July 1, 2021. The Consolidated Appropriations Act, 2021 enacted December 27, 2020 included a provision that delayed the effective date to January 1, 2022. As published, the rule is effective for randomly selected Core-Based Statistical Areas (CBSAs) and the participating zip codes are included in the final rule. The selected zip codes include approximately thirty percent of all eligible Medicare fee-for-service (FFS) radiotherapy episodes nationally. The RO APM could prove beneficial to the Company if clinics and physicians transition to brachytherapy options and away from more expensive IMRT and other non-brachytherapy options. However, if clinics and physicians determine to use less costly iodine brachytherapy this would have a negative impact on the Company as the costs of our Cesium-131 seeds are higher than iodine seeds. Management is currently evaluating the impact the final rule may have on our business, financial condition, or results of operations, but it is uncertain whether this rule will have a favorable or unfavorable impact on our business.

 

Brachytherapy seeds have two CMS codes in the out-patient setting – one code for loose seeds and a second code for stranded seeds. Reimbursement amounts are reviewed and revised annually based upon information submitted to CMS on claims by providers. Changes in reimbursement can positively or negatively affect market demand for our product. We monitor these changes and provide comments, as permitted, when changes are proposed, prior to implementation.

 

 

In-patient procedures are covered by CMS and hospitals are paid based on the type and complexity of the surgery. These procedures are done as part of a Diagnostic Related Group or DRG system under which the hospital pays for all items involved in the care of the patient exclusive of the physician fees. Hospitals are less receptive to treatments which require out of pocket costs such as procedures we use for certain non-prostate applications. Certain of our DRG reimbursement amounts coupled with out-of-pocket costs imposed on hospitals make some of our surgical, in-patient procedures not financially viable. We rely on our reimbursement consultant to assist us to improve the rate of reimbursement so that our product reimbursement will create greater incentives to be used. Effective October 1, 2020, new codes took effect and now CMS will be able to track the additional cost of the Cesium-131 seed itself and be able to reimburse the hospital through the DRG payment system for these additional costs when an in-patient brachytherapy procedure is performed. There is no assurance we will obtain the increase necessary to keep certain procedures viable and improve the margins of others.

 

Historically, private insurers have followed Medicare guidelines in establishing reimbursement rates. However, third-party payers are increasingly challenging the pricing of certain medical services or devices, and we cannot be sure that they will reimburse our customers at levels sufficient for us to maintain favorable sales and price levels for our product. There is no uniform policy on reimbursement among third-party payers, and we can provide no assurance that our product will continue to qualify for reimbursement from all third-party payers or that reimbursement rates will not be reduced. A reduction in or elimination of third-party reimbursement for treatments using our products would have a material adverse effect on our revenues.

 

Our success in international markets also depends upon the eligibility of our product for coverage and reimbursement through government-sponsored health care payment systems and third-party payors. Reimbursement practices vary significantly by country. Many international markets have government-managed insurance systems that control reimbursement for our new product and procedures. Other foreign markets have both private insurance systems and government-managed systems that control reimbursement for our new product and procedures. Market acceptance of our product may depend on the availability and level of coverage and reimbursement in any country within a particular time. In addition, health care cost containment efforts similar to those we face in the United States are prevalent in many of the other countries in which we intend to sell our product and these efforts are expected to continue.

 

Furthermore, any federal and state efforts to reform government and private healthcare insurance programs, such as those passed by the federal government in 2010, could significantly affect the purchase of healthcare services and our product in general and demand for our product in particular. Approximately 60% of men diagnosed with prostate cancer are of Medicare age (65+), providing Medicare with a significant influence in the marketplace. We are unable to predict the ultimate impact of current healthcare reform rates, those reforms that may be enacted in the future both in the United States and in other countries, whether other healthcare legislation or regulations affecting the business may be proposed or enacted in the future or what effect any such legislation or regulations would have on our business, financial condition or results of operations.

 

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

 

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4 - MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5 – OTHER INFORMATION

 

None.

 

 

ITEM 6. EXHIBITS

 

(Except as otherwise indicated (a) all exhibits were previously filed, (b) all omitted exhibits are intentionally omitted, and (c) all documents referenced below were filed under SEC file number 001-33407.)

 

Exhibits:
1.1		Underwriting Agreement between Isoray, Inc. and Oppenheimer & Co. Inc., dated February 4, 2021, incorporated by reference to Exhibit 10.1 of the Form 8-K filed on February 4, 2021 (SEC file number 333-236025).
3(i)		Certificate of Incorporation, incorporated by reference to Exhibit A of the Form Def 14A filed on November 9, 2018.
3(ii)		Bylaws, incorporated by reference to Exhibit C of the Form Def 14A filed on November 9, 2018.
10.1		Addendum No. 1 to Supply Contract, dated February 10, 2021, by and between Isoray Medical, Inc. and Joint Stock Company «Isotope», incorporated by reference to Exhibit 10.1 of the Form 8-K filed on February 12, 2021.

10.2		Supply Contract, dated March 18, 2021, between Isoray Medical, Inc., and Joint Stock Company «Isotope» (confidential portions of the exhibit have been omitted), incorporated by reference to Exhibit 10.1 of the Form 8-K filed on March 23, 2021.
31.1*		Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
31.2*		Rule 13a-14(a)/15d-14(a) Certification of Co-Principal Financial Officer
31.3*		Rule 13a-14(a)/15d-14(a) Certification of Co-Principal Financial Officer
32.1**		Section 1350 Certifications
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith

** Furnished herewith

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: May 13, 2021
		ISORAY, INC., a Delaware corporation
		/s/ Lori A. Woods
		Lori A. Woods
		Chief Executive Officer (Principal Executive Officer)
		/s/ Jonathan Hunt
		Jonathan Hunt
		Chief Financial Officer (Co-Principal Financial Officer)
		/s/ Mark J. Austin
		Mark J. Austin
		Controller (Co-Principal Financial, Principal Accounting Officer, Corporate Secretary)