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ISR > SEC Filings for ISR > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for ISORAY, INC.

Form 10-Q for ISORAY, INC.


14-Nov-2012

Quarterly Report


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 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 "Risk Factors" under Part II, Item 1A below and in the "Risk Factors" section of our Form 10-K for the fiscal year ended June 30, 2012 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 accounting principles generally accepted in the United States of America. 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 Securities and Exchange Commission on September 28, 2012 are those that depend most heavily on these judgments and estimates. As of September 30, 2012, there had been no material changes to any of the critical accounting policies contained therein.

Results of Operations

Three months ended September 30, 2012 compared to three months ended September 30, 2011.

Revenues.The overall decrease in revenue generated by prostate brachytherapy is consistent with revenue decreases experienced by this segment of the industry as a whole, however, the strategy implemented by management in the prior year in diversifying the number of body sites being actively treated with the Proxcelan Cs-131 brachytherapy seed has continued to mitigate some of the decreased revenue from the prostate segment of the business. These newer brachytherapy product sales (including brain, lung and those reported as other) remain in the early stages of adoption and application in the clinical setting and their purchasing patterns are subject to the influence of a few key physicians who can significantly influence revenue from quarter to quarter. During the three months ended September 30, 2012, the Company had one of the physicians that utilized brachytherapy seeds in the treatment of lung cancer take an extended amount of leave, decreasing that physician's purchases compared to the three months ended September 30, 2011. There was increased utilization of brachytherapy seeds in the treatment of brain cancer by physicians that were not using the treatment during the three months ended September 30, 2011. The newer brachytherapy product sales reported as "other" represent more developmental applications of our product which may not lead to either a long term revenue source or a significant product line and therefore revenue fluctuation in this segment is expected to be subject to more significant variation from quarter to quarter. Company management intends to actively pursue alternative uses for the Company's brachytherapy seeds in treatments consistent with the FDA clearance granted permitting the Company to utilize other FDA cleared application methods as a means of administering the treatments.

Management believes that the overall market for prostate brachytherapy has continued to receive increased pressure from other treatment options with higher reimbursement rates such as Intensity -Modulated Radiation Therapy (IMRT) and Robotics but management believes that combining treatments incorporating brachytherapy with other modalities in the prostate and treatment of other body sites with brachytherapy have the potential to continue to increase.

The Company made the first U.S. sales of its recently FDA cleared GliaSite Radiation Therapy System (GliaSite RTS) for use in clinical treatment during the three months ended December 31, 2011. During the three months ended September 30, 2012, all product sales were generated by the brachytherapy seeds and the related methods of application except for the revenue generated by the sales of GliaSite RTS which include the sale of the Iotrex solution, catheter trays and access trays. In April 2012, the Company received its CE mark clearing its and its distributor's ability to sell and distribute the GliaSite RTS in the European Union. The initial sale of GliaSite RTS related components into the European Union was made in July 2012 to the Company's distributor Karlheinz Goehl-Medizintechnik Goehl based in Germany.

Key operating factors

                                      Three months           Three months
Description                         ended 09-30-2012       ended 09-30-2011       Variance ($)      Variance (%)
Product Sales (Prostate)           $          881,856     $        1,096,728     $     (214,872 )             (20 )%
Product Sales (Brain)                          24,574                      -             24,574               100 %
Product Sales (Lung)                           64,100                 94,826            (30,726 )             (32 )%
Product Sales (GliaSite)                       60,804                      -             60,804               100 %
Product Sales (Other)                          24,898                 21,863              3,035                14 %
Total product sales                $        1,056,232     $        1,213,417     $     (157,185 )             (13 )%

Cost of product sales.

The cost of product sales for the production of brachytherapy seeds decreased in the three months ended September 30, 2012 when compared to the three months ended September 30, 2011. The decrease in brachytherapy seed cost of products was influenced by five key operating factors, which were depreciation and amortization, material cost, payroll and benefits cost, pre-loading expense and other costs.

Depreciation and amortization expense decreased as assets utilized in production reached the end of their useful lives without requiring replacement, materials cost decreased primarily as the result of using the traditional blend of isotope sources during the current quarter as well as a reduced consumption of production supplies, inventory and other costs as well as a reduced cost of pre-loading seeds as production was decreased in response to the reduction in revenue. A partial offset of the reduction in cost of product sold was an increase in payroll and benefits expense primarily as there was not an allocation of labor related to research and development expense to that department.

The cost of product sales for the GliaSite RTS related products was segregated from cost of product sales related to brachytherapy seed production during the three months ended September 30, 2012. Sales of the GliaSite RTS products and related production did not begin until the three months ended December 31, 2011.

Key operating factors

                                         Three months           Three months
Description                            ended 09-30-2012       ended 09-30-2011       Variance ($)      Variance (%)
Material                              $          418,773     $          499,017     $      (80,244 )             (16 )%
Payroll and benefits                             228,357                176,600             51,757                29 %
Pre-load                                          75,395                100,653            (25,258 )             (25 )%
Depreciation                                     200,783                218,017            (17,234 )              (8 )%
Other cost of product sales (Seeds)              138,109                152,788            (14,679 )             (10 )%
GliaSite RTS                                      15,240                      -             15,240               100 %
Total cost of product sales           $        1,076,657     $        1,147,075     $      (70,418 )              (6 )%

Gross profit / (loss). Gross profit for the three month period ended September 30, 2012 decreased compared to the three month period ended September 30, 2011 primarily as a result of the decreased brachytherapy seed revenue from prostate cancer treatment and the addition of the production costs of the GliaSite RTS.

Key operating factor

                                      Three months            Three months
Description                         ended 09-30-2012        ended 09-30-2011       Variance ($)       Variance (%)

Gross profit / (loss)              $          (20,425 )    $           66,342     $      (86,767 )             (131 )%

Gross profit percentage                            (2 )%                    5 %

Research and development. Research and development costs were decreased by three key operating factors for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Key operating factors consisting of other organ research expense, protocol expense and payroll and benefits expense decreased in the three months ended September 30, 2012.

Research and development expense decreased primarily as the result of a decrease in protocol activity as some efforts have reached their conclusion, payroll and benefits expense decreased as fewer production staff were being used on research and development projects resulting in decreased cost being transferred from other departments and other organ research expense was reduced as the result of projects reaching their conclusion.

Key operating factors

                                          Three months           Three months
Description                             ended 09-30-2012       ended 09-30-2011       Variance ($)      Variance (%)
Other organ research expense                       11,636                 25,143            (13,507 )             (54 )%
Protocol expense                                   16,858                 37,789            (20,931 )             (55 )%
Payroll and benefits expense                       69,246                142,820            (73,574 )             (52 )%
Other research - development expense               43,732                 45,562             (1,830 )              (4 )%
Total research and development         $          141,472     $          251,314     $     (109,842 )             (44 )%

Research and development reimbursement. The research and development reimbursement was influenced by a single key operating factor for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. This key operating factor was the existence of a reimbursement from the European GliaSite RTS distributor for the reimbursement of some research and development expenses related to returning the GliaSite RTS to market which was completed in the fiscal year ended June 30, 2012.

Key operating factors

                                      Three months           Three months
Description                         ended 09-30-2012       ended 09-30-2011       Variance ($)       Variance (%)
Research and development
reimbursement                      $                -     $          (50,000 )   $       50,000               (100 )%
Total research and development
reimbursement                      $                -     $          (50,000 )   $       50,000               (100 )%

Sales and marketing expenses. Sales and marketing expenses increased overall by an immaterial amount in the three months ended September 30, 2012 compared to the three months ended September 30, 2011 primarily as the result of changes in three operating factors.

The three operating factors that influenced the increase in sales and marketing expenses were conventions and tradeshows, as the sales force expanded the number of events that were attended in order to increase the number of new market segments to which the expanded product offerings were exposed, hiring expense increased as the Company replaced a salesperson, while payroll and benefits expense decreased as the result of the commission expense being reduced as a function of the decreased revenue.

Key operating factors

                                      Three months           Three months
Description                         ended 09-30-2012       ended 09-30-2011       Variance ($)      Variance (%)
Conventions and tradeshows         $           16,892     $            9,197     $        7,695                84 %
Hiring expense                                  8,218                      -              8,218               100 %
Payroll and benefits expense                  197,591                213,031            (15,440 )              (7 )%
Other sales - marketing expense                93,355                 92,190              1,165                 1 %
Total sales and marketing          $          316,056     $          314,418     $        1,638                 1 %

General and administrative expenses. General and administrative expenses decreased by an immaterial amount in the three months ended September 30, 2012 compared to the three months ended September 30, 2011 primarily as a result of changes in two key operating factors that net to an immaterial decrease in cost.

The primary changes in general and administrative expense are a decrease in legal expense that is partially offset by an increase in payroll and benefits expense and other general and administrative expense.

Legal expense during the three months ended September 30, 2012 compared to the three months ended September 30, 2011 decreased as the result of a non-recurring cost of legal services related to a financing that was not completed during the three months ended September 30, 2011. Payroll and benefits expense increased as the result of annual payroll changes, related payroll taxes and medical benefits.

Key operating factors

                                        Three months           Three months
Description                           ended 09-30-2012       ended 09-30-2011       Variance ($)      Variance (%)
Legal expense                        $           32,331     $           69,143     $      (36,812 )             (53 )%
Payroll and benefits expense                    279,012                265,254             15,344                 6 %
General and administrative (Other)              333,510                318,530             14,980                 5 %
Total general and administrative     $          644,853     $          652,927     $       (6,488 )              (1 )%

Operating loss. Operating loss for the three months ended September 30, 2012 increased compared to the three months ended September 30, 2011 as a result of decreased revenue generated from the sales of brachytherapy seeds for the treatment of prostate cancer with the addition of revenue from the GliaSite RTS partially mitigating that revenue decrease. The decrease in both cost of product sales and an overall reduction in research and development spending net of reimbursements led to an overall reduction in operating expenses.

Key operating factor

                                      Three months           Three months
Description                         ended 09-30-2012       ended 09-30-2011       Variance ($)        Variance (%)
Operating loss                     $       (1,122,806 )   $       (1,102,317 )   $      (22,075 )                  2 %

Change in fair value of warrant derivative liability. During the three months ended September 30, 2012, there was a warrant derivative liability established upon issuance of warrants during October 2011 to December 2011 to the purchasers in the Company's registered offering. The warrant liability requires periodic evaluation for changes in fair value. As required at September 30, 2012, the Company evaluated the fair value of the warrant derivative liability using the Black-Scholes option pricing model and applied updated inputs as of those dates. The resulting change in fair value was recorded as of September 30, 2012.

Key operating factor

                                      Three months           Three months
Description                         ended 09-30-2012       ended 09-30-2011       Variance ($)      Variance (%)
Change in fair value of warrant
derivative liability               $          129,000     $                -     $      129,000               100 %

Liquidity and capital resources. The Company has historically financed its operations through cash investments from shareholders. During the three months ended September 30, 2012 and September 30, 2011, the Company primarily used existing cash reserves to fund its operations and capital expenditures.

Cash flows from operating activities

Cash used by operating activities is the net loss adjusted for non-cash items and changes in operating assets and liabilities. Management continued to maintain or reduce the cash consumed in operating activities through maintaining a combination of cost reductions and operational efficiencies that have been previously identified in the results of operations that together resulted in a decrease in the net loss, which when increased by the non-cash items and non-cash changes in operating assets and liabilities, resulted in an overall increase in net cash used by operating activities for the three months ended September 30, 2012 when compared to the three months ended September 30, 2011. The three months ended September 30, 2011 included the collection of the grant receivable from the Internal Revenue Service in the non-cash changes in operating assets and liabilities which represents the difference in net cash used by operating activities between the three months ended September 30, 2012 and September 30, 2011. The net cash used in operating activities in three months ended September 30, 2012 and the three months ended September 30, 2011 would have been materially the same when the impact of the cash received from the IRS grant was removed from the three months ended September 30, 2011.

Key operating factor

                                           Three months           Three months
Description                              ended 09-30-2012       ended 09-30-2011       Variance ($)       Variance (%)
Net loss                                $         (993,668 )   $       (1,102,224 )   $      106,970                 10 %
Non-cash items                                     181,326                317,885           (134,973 )              (42 )%
Non-cash changes in operating
assets and liabilities                            (126,287 )              242,253           (368,540 )             (152 )%
Net cash used by operating activities   $         (938,629 )   $         (542,086 )   $     (396,543 )               73 %

Cash flows from investing activities

Cash used by investing activities during the three months ended September 30, 2012 and in the three months ended September 30, 2011 was immaterial and primarily related to the acquisition of fixed assets, the amortization of licenses and other assets and the increase in restricted cash.

Key operating factor

                                      Three months           Three months
Description                         ended 09-30-2012       ended 09-30-2011      Variance ($)       Variance (%)
Purchases of fixed assets          $                -     $           (6,795 )   $       6,795               (100 )%
Additions to licenses and other
assets                                         (6,827 )               (9,001 )           2,174                (24 )%
Change in restricted cash                         (42 )                  (71 )              29                (41 )%
Net cash used by
investing activities               $           (6,869 )   $          (15,867 )   $       8,998                (57 )%

Cash flows from financing activities

Cash provided by financing activities in the three months ended September 30, 2012 and September 30, 2011 was the result of sales of common stock in a registered direct offering, through warrant exercises, and through option exercises.

Key operating factor

                                        Three months           Three months
Description                           ended 09-30-2012       ended 09-30-2011       Variance ($)      Variance (%)
Proceeds from sale of common stock   $        3,301,514     $           40,244     $    3,261,270             8,104 %
Net cash provided by
financing activities                 $        3,301,514     $           40,244     $    3,261,270             8,104 %

Projected Fiscal Year 2013 Liquidity and Capital Resources

At September 30, 2012, the Company held cash and cash equivalents of $5,028,727 as compared to $2,672,711 at June 30, 2012.

The Company had approximately $4.83 million of cash and cash equivalents and no short-term investments as of November 9, 2012. The Company's monthly required cash operating expenditures were approximately $313,000 during the three months ended September 30, 2012, which represents a 73% increase of approximately $132,000 in average monthly cash operating expenditures from the three months ended September 30, 2011. The three months ended September 30, 2011 included the collection of the grant receivable from the Internal Revenue Service in the non-cash changes in operating assets and liabilities which represents the difference in net cash used by operating activities between the three months ended September 30, 2012 and September 30, 2011. Without the cash inflow in the three months ended September 30, 2011 from the grant receivable the cash consumed in operations would have been approximately $316,000. When adjusted for the cash from the grant receivable, the actual change is a decrease of $3,000 to $313,000 during the three months ended September 30, 2012. Management forecasts that cash consumed in operation will be similar to the prior fiscal year for the remainder of the fiscal year, however, this is largely impacted by the realized revenue and the timing of payments being received from our customers. Management forecasts that less than $200,000 will be spent on capital expenditures for fiscal year 2013, but there is no assurance that unanticipated needs for capital equipment may not arise.

The Company intends to continue its existing protocol studies and to begin new protocol studies on lung cancer treatment using Cesium-131. The Company continues to believe that approximately $200,000 in expense will be incurred during fiscal year 2013 related to protocol expenses relating to lung cancer and dual therapy and mono therapy prostate protocols but there is no assurance that unanticipated needs for additional protocols in support of the development of new applications of our existing products may not arise.

Based on the foregoing assumptions, management believes cash and cash equivalents of approximately $4.83 million on hand at November 9, 2012 will be sufficient to meet our anticipated cash requirements for operations and capital expenditure requirements through at least the next twelve months assuming both revenue and expenses remain at current levels.

Management plans to attain breakeven and generate additional cash flows by increasing revenues from both new and existing customers (through our direct sales channels and through our distributors), increasing sales of its GliaSite RTS, and expanding into other market applications which initially will include brain, head and neck, and lung implants, while maintaining the Company's focus on cost control. However, there can be no assurance that the Company will attain profitability or that the Company will be able to attain increases in its revenue. Sales in the prostate market have not shown the increases necessary to breakeven during the past five fiscal years and continued to decrease during the three months ended September 30, 2012.

For the three months ended September 30, 2012, revenue from other treatment modalities with brachytherapy seeds has decreased 3% when compared to the three months ended September 30, 2011. These newer brachytherapy product sales (including brain, lung and those reported as other) remain in the early stages of adoption and application in the clinical setting and their purchasing patterns are subject to the influence of a few key physicians who can significantly influence revenue from quarter to quarter. When including the revenue from the sale of GliaSite RTS, revenue from non-prostate treatments increased 49% in the three months ended September 30, 2012 compared to the three months ended September 30, 2011.

There was no material change in the use of proceeds from our public offerings as described in our final prospectus supplements filed with the SEC pursuant to Rule 424(b) on November 24, 2010, December 28, 2010, October 13, 2011 and July 17, 2012. Through September 30, 2012, the Company had used the net proceeds raised through the November 2010 offering, October and December 2011 offering and the July 2012 offering as described in the table below and had invested the remaining net proceeds in cash and cash equivalents. No offering expenses were paid directly or indirectly to any of our directors or officers (or their . . .

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