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| ISR > SEC Filings for ISR > Form 10-Q on 14-Feb-2013 | All Recent SEC Filings |
14-Feb-2013
Quarterly Report
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, 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 December 31, 2012, there had been no material changes to any of the critical accounting policies contained therein.
Results of Operations
Three months ended December 31, 2012 compared to three months ended December 31, 2011.
Revenues.
Prostate Brachytherapy.
The overall decrease in revenue generated by prostate brachytherapy is consistent with revenue decreases experienced by this segment of the industry as a whole. 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 robotic-assisted surgery but that combination treatments incorporating brachytherapy with other modalities in the prostate and treatment of other body sites with brachytherapy have the potential to continue to increase.
Other Brachytherapy including Brain and Lung.
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 partially mitigate the lost revenue from the prostate brachytherapy segment. The timeline of developing and bringing new products from concept to revenue production in the pharmaceutical/medical device segment is lengthy and is typically measured in years. The probability of any new cancer treatment product reaching the stage at which it produces revenue is very low.
Company management has been investing in development of alternative uses for the Company's brachytherapy seed that management believes have the ability to generate revenue in the near-term to offset development costs. New treatments such as those being initiated by the Company can be expected to experience a staged entry to market in which primary adopters demonstrate the suitability of a treatment, after which wider adoption is possible. The products being implemented by the Company are very dependent on first adopters as a source of revenue, and there is initially a steep growth in revenue that will reach a plateau due to capacity until the mainstream adoption occurs, when and if there is favorable publication of the experiences and treatment outcomes of the first adopters. Management strategy includes soliciting the use of other applications for the Company's brachytherapy seeds at major medical institutions that are more likely to publish their outcomes and that are training the next generation of decision makers. 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.
GliaSite Radiation Therapy System.
The Company made the first sales of its recently FDA cleared GliaSite Radiation Therapy System (GliaSite RTS) for use in clinical treatment and sold an additional inventory of catheters to the same customer for use in future cases during the three months ended December 31, 2011. All product sales are generated by the brachytherapy seeds and the related methods of application except for the revenue generated by the sales of GliaSite RTS which come from sale of the liquid isotope, catheter trays and access trays.
During the three months ended December 31, 2012, a customer returned five catheters that had been purchased as part of a sale of six catheters for a procedure performed in the three months ended September 30, 2012. The Company historically has sold catheters in sets of six (two of each size) to its customers with all the catheters to be paid up front and the unused catheters to be held by the hospital in its inventory for future use. Typically, the hospital will replace the consumed catheter to have on-hand two of each size in its inventory for use in its next procedure. As there were no sales of product in the three months ended December 31, 2012, the return of these catheters resulted in an overall reduction in revenue.
The conversion of prospects to new GliaSite RTS customers has been a longer process than originally anticipated by the Company. The Company has experienced lengthy timelines in the internal processes of the medical facilities in reviewing and approving the use of the product at the request of their physician(s). These longer than anticipated internal processes are compounded by uncertain timelines and delays in receiving the approval for the requested modification of each facility's nuclear materials license, which is required to begin using GliaSite RTS and is dependent on external government regulators.
Key operating factors
Three months Three months
Description ended 12-31-12 ended 12-31-11 Variance ($) Variance (%)
Product Sales (Prostate) $ 840,819 $ 1,037,867 $ (197,048 ) (19 )%
Product Sales (Brain) 33,868 46,220 (12,352 ) (27 )%
Product Sales (Lung) 108,865 83,953 24,912 30 %
Product Sales (GliaSite) (15,750 ) 34,035 (49,785 ) (146 )%
Product Sales (Other) 7,655 26,580 (18,925 ) (71 )%
Total product sales $ 975,457 $ 1,228,655 $ (253,198 ) (21 )%
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Cost of product sales.
Cost of product sales was influenced to a large degree by two key operating factors, amortization and depreciation expense and material cost, while overall costs increased approximately 10% or $104,000 during the three months ended December 31, 2012 compared to the three months ended December 31, 2011.
The two key operating factors that changed in the three months ended December 31, 2012 as compared to the three months ended December 31, 2011 were amortization and depreciation expense and materials expense. Amortization and depreciation expense decreased as the direct result of fixed assets reaching the end of their depreciable lives. During the three months ended December 31, 2012, materials cost increased primarily as a result of the Company's Russian isotope supplier providing a non-recurring reduction in both quantity and cost of isotope during the three months ended December 31, 2011 which was not provided in the three months ended December 31, 2012. Management negotiated this temporary reduction in isotope cost during the three months ended December 31, 2011 to allow the Company to recover the additional isotope cost that was incurred during the three months ended September 30, 2011 as the result of an unscheduled outage at the Russian supplier's reactor facility that resulted in the Company having to build an inventory of irradiated Ba-130 to supply a volume of Cs-131 to cover the supply shortfall.
Key operating factors
Three months Three months
Description ended 12-31-12 ended 12-31-11 Variance ($) Variance (%)
Amortization and depreciation $ 176,403 $ 216,615 $ (40,212 ) (19 )%
Materials 472,692 361,764 110,928 31 %
Other cost of product sales (Seeds) 463,811 431,200 32,611 8 %
GliaSite RTS 21,177 20,178 999 5 %
Total cost of product sales $ 1,134,083 $ 1,029,757 $ 104,326 10 %
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Gross profit/(loss). Gross profit for the three months ended December 31, 2012 decreased compared to the three month period ended December 31, 2011 as a result of reduced revenue from product sales combined with an increase in isotope cost as the result of the non-recurring reduction in isotope cost that was recorded in the three months ended December 31, 2011 which was partially offset by a decrease in amortization and depreciation expense. Management continues to seek to control variable costs, however, at this time most remaining production costs are of a fixed nature and related to minimum personnel costs to meet peak demand orders.
Key operating factor
Three months Three months
Description ended 12-31-12 ended 12-31-11 Variance ($) Variance (%)
Gross profit / (loss) $ (158,626 ) $ 198,898 $ (357,524 ) (180 )%
Gross profit / (loss) percentage (16 )% 16 %
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Research and development. Research and development costs were influenced by a single key operating factor for the three months ended December 31, 2012 compared to the three months ended December 31, 2011. This key operating factor was payroll and benefit expense which decreased as the result of a decrease in payroll and benefits expense through the decrease in allocation of salary, tax and benefits expenses from other operating departments toward research and development projects.
Key operating factors
Three months Three months
Description ended 12-31-12 ended 12-31-11 Variance ($) Variance (%)
Payroll and benefit expense $ 74,927 $ 100,808 $ (25,881 ) (26 )%
Research and development (Other) 74,249 88,853 (14,604 ) (16 )%
Total research and development $ 149,176 $ 189,661 $ (40,485 ) (21 )%
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Sales and marketing expenses. Sales and marketing expenses increased in the three months ended December 31, 2012 compared to the three months ended December 31, 2011 primarily as the result of a single operating factor.
This single operating factor influencing the increase in sales and marketing expenses was payroll and benefits expense which includes share-based compensation which was primarily created by the increased number of sales employees in the field during the three months ended December 31, 2012 when compared to the three months ended December 31, 2011.
Key operating factors
Three months Three months
Description ended 12-31-12 ended 12-31-11 Variance ($) Variance (%)
Payroll and benefits $ 209,330 $ 190,047 $ 19,283 10 %
Sales and marketing (Other) 112,764 114,073 (1,309 ) (1 )%
Total sales and marketing $ 322,094 $ 304,120 $ 17,974 6 %
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General and administrative expenses. General and administrative expenses decreased in the three months ended December 31, 2012 compared to the three months ended December 31, 2011 with no individual expense creating the overall decrease in cost.
Key operating factors
Three months Three months
Description ended 12-31-12 ended 12-31-11 Variance ($) Variance (%)
General and administrative (Other) $ 469,559 $ 497,168 $ (27,609 ) (6 )%
Total general and administrative $ 469,559 $ 497,168 $ (27,609 ) (6 )%
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Operating loss. Operating loss for the three months ended December 31, 2012 increased compared to the three months ended December 31, 2011. The increase in cost was primarily as a result of the continued decrease in product sales from prostate brachytherapy coupled with an increase in materials cost as the result of the temporary and non-recurring discount on isotope cost from the Company's Russian supplier that only occurred in the three months ended December 31, 2011, which was partially offset by the decrease in operating expenses.
Key operating factor
Three months Three months
Description ended 12-31-12 ended 12-31-11 Variance ($) Variance (%)
Operating loss $ (1,099,455 ) $ (792,051 ) $ (307,404 ) 39 %
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Interest income. Interest income for the three months ended December 31, 2012 was reduced compared to the three months ended December 31, 2011 as a direct result of reduced cash and cash equivalent balances when coupled with reduced short-term interest rates.
Key operating factor
Three months Three months
Description ended 12-31-12 ended 12-31-11 Variance ($) Variance (%)
Interest income $ 128 $ 268 $ (140 ) (52 )%
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Change in fair value of warrant liability. During the three months ended December 31, 2012 and December 31, 2011, there were warrant liabilities established upon issuance of warrants during October 2011 and December 2011 to the purchasers and underwriters in the Company's registered public offering and warrants issued to the purchaser in the Company's registered public offering during November 2010. Per ASC 820, the warrant liability requires periodic evaluation for changes in fair value. As required at December 31, 2012 and December 31, 2011, the Company evaluated the fair value of the warrant liability using the Black-Scholes option pricing model on which the original warrant liability was based and applied updated inputs as of those dates. The resulting change in fair value was recorded as of December 31, 2012 and December 31, 2011.
Key operating factor
Three months Three months
Description ended 12-31-12 ended 12-31-11 Variance ($) Variance (%)
Change in fair value of warrant liability $ (55,000 ) $ 166,000 $ (221,000 ) (133 )%
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Financing and interest expense.Financing and interest expense for the three months ended December 31, 2012 decreased when compared to the three months ended December 31, 2011 as a direct result of the October 2011, December 2011 and November 2010 equity transactions and their related amortization of deferred offering costs throughout the life of the warrant liability.
Key operating factor
Three months Three months
Description ended 12-31-12 ended 12-31-11 Variance ($) Variance (%)
Deferred financing expense $ - $ (2,962 ) $ 2,962 100 %
Total financing and interest expense $ - $ (2,962 ) $ 2,962 100 %
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Six months ended December 31, 2012 compared to six months ended December 31, 2011.
Revenues.
Prostate Brachytherapy.
The overall decrease in revenue generated by prostate brachytherapy is consistent with revenue decreases experienced by this segment of the industry as a whole. 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 robotic-assisted surgery but that combination treatments incorporating brachytherapy with other modalities in the prostate and treatment of other body sites with brachytherapy have the potential to continue to increase.
Other Brachytherapy including Brain and Lung.
During the six months ended December 31, 2012, the strategy implemented by management in the prior year of diversifying the number of body sites being actively treated with the Proxcelan Cs-131 brachytherapy seed has continued to partially mitigate the lost revenue from the prostate brachytherapy segment which in total remains unchanged from the six months ended December 31, 2011. The timeline of developing and bringing new products from concept to revenue production in the pharmaceutical/medical device segment is lengthy and is typically measured in years. The probability of any new cancer treatment product reaching the stage at which it produces revenue is very low.
Company management has been investing in development of alternative uses for the Company's brachytherapy seed that management believes have the ability to generate revenue in the near-term to offset the development costs. New treatments such as those being initiated by the Company can be expected to experience a staged entry to market in which primary adopters demonstrate the suitability of a treatment, after which wider adoption is possible. The products being implemented by the Company are very dependent on first adopters as a source of revenue, and there is initially a steep growth in revenue that will reach a plateau due to capacity until the mainstream adoption occurs, when and if there is favorable publication of the experiences and treatment outcomes of the first adopters. Management strategy includes soliciting the use of other applications for the Company's brachytherapy seeds at major medical institutions that are more likely to publish their outcomes and that are training the next generation of decision makers. 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.
GliaSite Radiation Therapy System.
The Company made the first sales of its recently FDA cleared GliaSite Radiation Therapy System (GliaSite RTS) for use in clinical treatment and sold an additional inventory of catheters to the same customer for use in future cases during the three months ended December 31, 2011. All product sales are generated by the brachytherapy seeds and the related methods of application except for the revenue generated by the sales of GliaSite RTS which come from sale of the liquid isotope, catheter trays and access trays.
During the six months ended December 31, 2012, revenue from the GliaSite RTS has increased by approximately 32% or $11,000 compared to the six months ended December 31, 2011. The timeline of developing and bringing new products from concept to revenue production in the pharmacy - medical device segment is lengthy, typically measured in years, and the success rate for each product reaching the stage at which it produces revenue is very low. The GliaSite RTS is in the early stages of adoption and the Company is actively soliciting medical institutions to serve as the first adopters to facilitate the wider adoption of the product. The conversion of prospects to new GliaSite RTS customers has been a longer process than was originally anticipated by the Company. The Company has experienced lengthy timelines in the internal processes of the medical facilities in reviewing and approving the use of the product at the request of their physician(s). These longer than anticipated internal processes are compounded by uncertain timelines and delays in receiving the approval for the requested modification of each facility's nuclear materials license, which is required to begin using GliaSite RTS and is dependent on external government regulators.
Key operating factors
Six months Six months
Description ended 12-31-12 ended 12-31-11 Variance ($) Variance (%)
Product Sales (Prostate) $ 1,722,675 $ 2,134,345 $ (411,670 ) (19 )%
Product Sales (Brain) 58,442 62,171 (3,729 ) (6 )%
Product Sales (Lung) 172,865 178,779 (5,914 ) (3 )%
Product Sales (GliaSite) 45,054 34,035 11,019 32 %
Product Sales (Other) 32,653 32,742 (89 ) 0 %
Total product sales $ 2,031,689 $ 2,442,072 $ (410,383 ) (17 )%
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Cost of product sales. Cost of product sales related to brachytherapy seed sales increased for the six months ended December 31, 2012 compared to the six months ended December 31, 2011. Two cost segments that largely offset each other were a decrease in depreciation and amortization and an increase in payroll and benefits expense as detailed in the table below. Depreciation and amortization expense decreased as the result of fixed assets reaching the end of their depreciable lives which was offset by an increase in payroll and benefits as the result of a reduced allocation of cost to research and development costs. Cost of product sales related to the GliaSite RTS segment increased as the result of an expired inventory of catheters being expensed in the six months ended December 31, 2012 when compared to the six months ended December 31, 2011.
Key operating factors
Six months Six months
Description ended 12-31-12 ended 12-31-11 Variance ($) Variance (%)
Depreciation and amortization $ 377,186 $ 434,632 $ (57,446 ) (13 )%
Payroll and benefits 441,596 373,982 67,614 18 %
Cost of product sales (Other) 1,354,992 1,347,928 7,064 1 %
GliaSite RTS 36,966 20,290 16,676 82 %
Total cost of product sales $ 2,210,740 $ 2,176,832 $ 33,908 2 %
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Gross profit/(loss). Gross profit for the six month period ended December 31, 2012 decreased compared to the six month period ended December 31, 2011 primarily as a result of the previously discussed reduction in sales in the prostate market, a lack of continued growth in the sales of non-prostate applications and inability to decrease fixed costs required regardless of revenue levels. Most remaining production costs are of a fixed nature and related to minimum personnel costs required to meet peak demand orders.
Key operating factor
Six months Six months
Description ended 12-31-12 ended 12-31-11 Variance ($) Variance (%)
Gross profit / (loss) $ (179,051 ) $ 265,240 $ (444,291 ) (168 )%
Gross profit / (loss) percentage (9 )% 11 %
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Research and development. Research and development costs were decreased by three key operating factors for the six months ended December 31, 2012 compared to the six months ended December 31, 2011. The first key operating factor was payroll and benefits which decreased as a result of the cost of production staff no longer being used in research and development on projects. The second key operating factor was protocol expense which decreased as the result of the Company having a temporary no cost period on one of the protocol agreements. The third key operating factor that decreased was other organ research cost, as the significant effort that was undertaken in the six months ended December 31, 2011 in the areas of brain and lung applications did not recur in the six months ended December 31, 2012. During the six months ended December 31, 2012 and . . .
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