IsoRay, Inc. (Form: 10-Q, Received: 02/09/2016 17:15:28)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY Report PURSUANT TO Section 13 or 15( d ) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2015

Transition Report pursuant to Section 13 or 15( d ) of the Securities Exchange Act of 1934

For the transition period from __________ to ____________

Commission File No. 001-33407

ISORAY, INC.

(Exact name of registrant as specified in its charter)

Minnesota	41-1458152
(State or other jurisdiction of incorporation or	(I.R.S. Employer
organization)	Identification No.)

350 Hills St., Suite 106, Richland, Washington	99354
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: (509) 375-1202

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer x	Non-accelerated filer ¨
	Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x

Number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date:

Class		Outstanding as of February 8, 2016
Common stock, $0.001 par value		55,013,553

ISORAY, INC.

Table of Contents

PART I	FINANCIAL INFORMATION

Item 1	Consolidated Unaudited Financial Statements	1

	Consolidated Balance Sheets	1

	Consolidated Statements of Operations (Unaudited)	2

	Consolidated Statements of Cash Flows (Unaudited)	3

	Notes to the Consolidated Unaudited Financial Statements	4

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4	Controls and Procedures	26

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	27

Item 1A	Risk Factors	27

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3	Defaults Upon Senior Securities	28

Item 4	Mine Safety Disclosures	28

Item 5	Other Information	28

Item 6	Exhibits	2 9

Signatures		30

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

IsoRay, Inc. and Subsidiaries

Consolidated Balance Sheets

	(Unaudited)
	December 31,			June 30,
	2015			2015
ASSETS

Current assets:
Cash and cash equivalents	$	678,906		$	5,226,740
Certificates of deposit (Note 3)		11,918,558			9,362,574
Accounts receivable, net of allowance for doubtful accounts of $30,000 and 30,000, respectively		975,342			1,049,041
Inventory		476,749			403,955
Other receivables		8,715			19,615
Prepaid expenses and other current assets		224,819			263,597

Total current assets		14,283,089			16,325,522

Fixed assets, net of accumulated depreciation		335,753			574,840
Certificates of deposit, non-current (Note 3)		5,163,615			5,106,775
Restricted cash		181,277			181,262
Inventory, non-current		547,287			569,854
Other assets, net of accumulated amortization		233,011			245,031

Total assets	$	20,744,032		$	23,003,284

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued liabilities	$	681,312		$	498,253
Accrued protocol expense		78,703			124,131
Accrued radioactive waste disposal		153,500			129,500
Accrued payroll and related taxes		72,545			212,795
Accrued vacation		92,653			127,515

Total current liabilities		1,078,713			1,092,194

Long-term liabilities:
Warrant derivative liability		123,000			181,000
Asset retirement obligation		991,310			947,849

Total liabilities		2,193,023			2,221,043

Commitments and contingencies (Note 8)

Shareholders' equity:
Preferred stock, $.001 par value; 7,001,671 shares authorized:
Series A: 1,000,000 shares allocated; no shares issued and outstanding		-			-
Series B: 5,000,000 shares allocated; 59,065 shares issued and outstanding		59			59
Series C: 1,000,000 shares allocated; no shares issued and outstanding		-			-
Series D: 1,671 shares allocated; no shares issued and outstanding		-			-
Common stock, $.001 par value; 192,998,329 shares authorized; 55,013,553 and 54,967,559 shares issued and outstanding		55,014			54,968
Treasury stock, at cost, 13,200 shares		(8,390	)		(8,390	)
Additional paid-in capital		82,566,531			82,467,111
Accumulated deficit		(64,062,205	)		(61,731,507	)

Total shareholders' equity		18,551,009			20,782,241

Total liabilities and shareholders' equity	$	20,744,032		$	23,003,284

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

IsoRay, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

	Three months ended December 31,						Six months ended December 31,
	2015			2014			2015			2014

Product sales	$	1,189,008		$	1,065,585		$	2,450,330		$	2,107,686
Cost of product sales		1,162,097			1,103,549			2,339,960			2,200,452

Gross profit / (loss)		26,911			(37,964	)		110,370			(92,766	)

Operating expenses:
Research and development		58,235			140,627			202,138			317,237
Sales and marketing		254,471			303,783			532,892			657,526
General and administrative		1,124,683			537,940			1,876,395			1,113,891

Total operating expenses		1,437,389			982,350			2,611,425			2,088,654

Operating loss		(1,410,478	)		(1,020,314	)		(2,501,055	)		(2,181,420	)

Non-operating income (expense):
Interest income		55,890			72,360			113,307			145,055
Change in fair value of warrant derivative liability		43,000			41,000			58,000			347,000
Financing and interest expense		-			-			(950	)		(3,451	)

Non-operating income / (expense), net		98,890			113,360			170,357			488,604

Net loss		(1,311,588	)		(906,954	)		(2,330,698	)		(1,692,816	)
Preferred stock dividends		(2,658	)		(2,658	)		(5,316	)		(5,316	)


Net loss applicable to common shareholders	$	(1,314,246	)	$	(909,612	)	$	(2,336,014	)	$	(1,698,132	)

Basic and diluted loss per share	$	(0.02	)	$	(0.02	)	$	(0.04	)	$	(0.03	)

Weighted average shares used in computing net loss per share: Basic and diluted		55,013,553			54,883,445			55,013,227			54,875,749

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

IsoRay, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Six months ended December 31,
	2015			2014

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(2,330,698	)	$	(1,692,816	)
Adjustments to reconcile net loss to net cash used by operating activities:
Allowance for doubtful accounts		-			(8,607	)
Depreciation of fixed assets		274,200			305,147
Amortization of other assets		28,098			15,469
Change in fair value of derivative warrant liability		(58,000	)		(347,000	)
Accretion of asset retirement obligation		43,461			39,734
Share-based compensation		63,363			42,907
Changes in operating assets and liabilities:
Accounts receivable, gross		73,700			124,275
Inventory		(72,794	)		(51,683	)
Other receivables		10,899			42,104
Prepaid expenses and other current assets		61,345			(15,120	)
Accounts payable and accrued expenses		183,059			(86,534	)
Accrued protocol expense		(45,428	)		9,947
Accrued radioactive waste disposal		24,000			(33,524	)
Accrued payroll and related taxes		(140,250	)		(89,537	)
Accrued vacation		(34,862	)		(12,387	)

Net cash used by operating activities		(1,919,907	)		(1,757,625	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets		(35,113	)		(48,657	)
Additions to licenses and other assets		(16,078	)		(2,296	)
Proceeds from maturity of certificates of deposit		3,526,999			5,013,694
Purchases of certificates of deposit		(6,082,983	)		(5,058,080	)
Purchases of certicates of deposit - non-current		(56,840	)		(4,695,282	)
Change in restricted cash		(15	)		(27	)

Net cash used by investing activities		(2,664,030	)		(4,790,648	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred dividends paid		(10,632	)		(10,632	)
Proceeds from sales of common stock, pursuant to exercise of warrants, net		46,735			70,411
Proceeds from sales of common stock, pursuant to exercise of options		-			145,274

Net cash provided by financing activities		36,103			205,053

Net increase (decrease) in cash and cash equivalents		(4,547,834	)		(6,343,220	)
Cash and cash equivalents, beginning of period		5,226,740			7,680,073

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	678,906		$	1,336,853

Non-cash investing and financing activities:
Reclassification of derivative warrant liability to equity upon exercise	$	-		$	17,000

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

IsoRay, Inc.

Notes to the Unaudited Consolidated Financial Statements

For the three and six months ended December 31, 2015 and 2014

Basis of Presentation

The accompanying unaudited interim consolidated financial statements are those of IsoRay, Inc., and its wholly-owned subsidiaries (IsoRay or the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts in the prior-period financial statements have been reclassified to conform to the current-period presentation.

In the opinion of management, the accompanying unaudited interim consolidated financial statements and notes to the interim consolidated financial statements contain all adjustments, consisting of normal recurring items, necessary to present fairly, in all material respects, the financial position of IsoRay, Inc. and its wholly-owned subsidiaries. These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes as set forth in the Company’s annual report filed on Form 10-K for the year ended June 30, 2015.

The results of operations for the periods presented may not be indicative of those which may be expected for a full year. The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures are adequate for the information not to be misleading.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting period, and the disclosures of contingent liabilities. Accordingly, ultimate results could differ materially from those estimates. The Company anticipates that as the result of continuing operating losses and the significant net operating losses available from prior fiscal years, its effective income tax rate for fiscal year 2016 will be 0%.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes the revenue recognition requirements in FASB Accounting Standards Codification (ASC) Topic 605, Revenue Recognition. The guidance requires that an entity recognize revenue in a way that depicts the transfer of promised goods or services to customers in the amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. The guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and is to be applied retrospectively, with early application not permitted. The Company is currently evaluating the new standard and its impact on the Company's consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11 – Inventory. The guidance requires an entity’s management to measure inventory within the scope of this ASU at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early application is permitted. The Company is currently evaluating the new standard and its impact on the Company's consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01 – Financial Instruments – Overall. The guidance requires an entity’s management to measure equity investments except those accounted for under the equity method of accounting or those that result in consolidation of the investee to be measured at fair value; simplifies the impairment assessment of equity investments; eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for non-public entities: eliminates the requirement for a public entity to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; r equires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early application is not permitted except as contained in the early adoption guidance. The Company is currently evaluating the new standard and its impact on the Company's consolidated financial statements.

Certificates of deposit

The Company has maintained all excess cash in certificates of deposit at certain banks in certificates of deposit and through the Certificate of Deposit Account Registry Service (CDARS), which is a system that allows the Company to invest in certificates of deposit through a single financial institution that exceed the $250,000 limit to be fully insured by the Federal Deposit Insurance Corporation (FDIC). The Company ensures that principal amounts of certificates of deposit are fully insured. There may from time to time be short periods following maturity that amounts held in the money market account at the CDARS host bank will exceed FDIC coverage. In cases where the period that uninsured amounts will be held beyond ten banking days, the funds will be transferred to the primary operating account of the Company’s operating subsidiary, IsoRay Medical, Inc. (Medical), that incorporates a sweep function that keeps the funds FDIC insured during that time.

	As of December 31, 2015
	Under 90		91 days to		Six months to		Greater
	Days		six months		1 year		than 1 year
CDARS	$	6,031,813	$	5,886,745	$	-	$	5,163,615

	As of June 30, 2015
	Under 90		91 days to		Six months to		Greater
	Days		six months		1 year		than 1 year
CDARS	$	3,523,167	$	500,064	$	5,339,343	$	5,106,775

Loss per Share

Basic and diluted earnings per share is calculated by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding, and does not include the impact of any potentially dilutive common stock equivalents. At December 31, 2015 and 2014, the calculation of diluted weighted average shares did not include convertible preferred stock, common stock warrants, or options that are potentially convertible into common stock as those would be antidilutive due to the Company’s net loss position.

Securities not considered in the calculation of diluted weighted average shares, but that could be dilutive in the future as of December 31, 2015 and 2014, were as follows:

	December 31,
	2015		2014
Series B preferred stock		59,065		59,065
Common stock warrants		360,800		396,574
Common stock options		2,126,360		2,180,858

Total potential dilutive securities		2,546,225		2,636,497

Inventory

Inventory consisted of the following at December 31, 2015 and June 30, 2015:

	December 31,		June 30,
	2015		2015
Raw materials	$	275,456	$	143,669
Work in process		165,726		204,760
Finished goods		35,567		55,526

	$	476,749	$	403,955

	December 31,		June 30,
	2015		2015

Enriched barium, non-current	$	469,758	$	469,758
Raw materials, non-current		77,529		100,096

Total inventory, non-current	$	547,287	$	569,854

Inventory, non-current is (i) raw materials that were ordered in quantities to obtain volume cost discounts for key components of our brachytherapy seed including titanium lids, titanium tubes, gold wires that are used for imaging markers, and our proprietary seed core, which were ordered based on current and anticipated sales volumes and will not be consumed within an operating cycle, and (ii) enriched barium, which is classified as non-current, and is only expected to be utilized if required to obtain volumes of isotope that is not able to be purchased from an existing source in either the short- or long-term. Management does not anticipate the need to utilize the enriched barium within the current operating cycle unless there is an unanticipated interruption to the isotope supply that requires its use. If such a need were to occur, then management would evaluate the need to reclassify some or all of the inventory as a current asset.

Fixed Assets

	December 31,			June 30,
	2015			2015
Production equipment	$	3,186,857		$	3,180,933
Office equipment		248,857			224,576
Furniture and fixtures		152,238			148,265
Leasehold improvements		4,129,977			4,129,977
Other		6,860			5,925

		7,724,789			7,689,676
Less accumulated depreciation		(7,389,036	)		(7,114,836	)

Fixed assets, net	$	335,753		$	574,840

Depreciation expense related to fixed assets for the three and six months ended December 31, 2015 was $137,531 and $274,200, respectively. Depreciation expense related to fixed assets for the three and six months ended December 31, 2014 was $135,176 and $305,147, respectively.

Share-Based Compensation

The following table presents the share-based compensation expense recognized during the three months ended December 31, 2015 and 2014:

	Three months
	ended December 31,
	2015		2014
Cost of product sales	$	17,632	$	7,972
Research and development expenses		3,567		3,117
Sales and marketing expenses		2,994		2,158
General and administrative expenses		6,858		8,206
Total share-based compensation	$	31,051	$	21,453

The following table presents the share-based compensation expense recognized during the six months ended December 31, 2015 and 2014:

	Six months
	ended December 31,
	2015		2014
Cost of product sales	$	35,190	$	15,945
Research and development expenses		7,132		6,235
Sales and marketing expenses		6,486		4,317
General and administrative expenses		14,555		16,410
Total share-based compensation	$	63,363	$	42,907

As of December 31, 2015, total unrecognized compensation expense related to stock-based options was $372,627 and the related weighted-average period over which it is expected to be recognized is approximately 1.32 years.

A summary of stock options within the Company’s share-based compensation plans as of December 31, 2015 was as follows:

			Weighted		Weighted
			Exercise		Average
	Number of		Price		Contractual		Intrinsic
	Options		(Years)		Term		Value

Outstanding at December 31, 2015		2,126,360	$	1.88		4.89	$	235,064
Vested and expected to vest at December 31, 2015		2,026,059	$	1.90		4.77	$	226,839
Vested and exercisable at December 31, 2015		1,709,894	$	1.91		3.85	$	231,563

There were 45,994 and 133,564 stock options exercised and $21,654 and $252,308 of intrinsic value associated with these exercises during the six months ended December 31, 2015 and December 31, 2014, respectively. The Company’s current policy is to issue new shares to satisfy stock option exercises.

There were 20,000 and no stock option awards granted during the six months ended December 31, 2015 and 2014, respectively.

There were 264,320 and 39,002 stock option awards which expired during the six months ended December 31, 2015 and 2014, respectively.

There were 21,608 and 84,236 stock option awards forfeited during the six months ended December 31, 2015 and 2014, respectively.

Commitments and Contingencies

Patent and Know-How Royalty License Agreement

The Company is the holder of an exclusive license to use certain “know-how” developed by one of the founders of a predecessor to the Company and licensed to the Company by the Lawrence Family Trust, a Company shareholder. The terms of this license agreement require the payment of a royalty based on the Net Factory Sales Price, as defined in the agreement, of licensed product sales. Because the licensor’s patent application was ultimately abandoned, only a 1% “know-how” royalty based on Net Factory Sales Price, as defined in the agreement, remains applicable. To date, management believes that there have been no product sales incorporating the “know-how” and therefore no royalty is due pursuant to the terms of the agreement. Management believes that ultimately no royalties should be paid under this agreement as there is no intent to use this “know-how” in the future.

The licensor of the “know-how” has disputed management’s contention that it is not using this “know-how”. On September 25, 2007 and again on October 31, 2007, the Company participated in nonbinding mediation regarding this matter; however, no settlement was reached with the Lawrence Family Trust. After additional settlement discussions, which ended in April 2008, the parties failed to reach a settlement. The parties may demand binding arbitration at any time.

Class Action Lawsuit Related to Press Release

On May 22, 2015, the first of three lawsuits was filed against IsoRay, Inc. and two of its officers – Dwight Babcock and Brien Ragle – related to a press release on May 20, 2015 regarding a May 19 online publication of the peer-reviewed article in the journal Brachytherapy titled “Analysis of Stereotactic Radiation vs. Wedge Resection vs. Wedge Resection Plus Cesium-131 Brachytherapy in Early-Stage Lung Cancer” by Dr. Bhupesh Parashar, et al. The lawsuits are class actions alleging violations of the federal securities laws. By Order dated August 17, 2015, all of the pending lawsuits were consolidated into one case – In re IsoRay, Inc. Securities Litigation; Case No. 4:15-cv-05046-LRS, in the US District Court for the Eastern District of Washington. IsoRay retained Wilson Sonsini Goodrich & Rosati as its and its officers’ defense counsel.

On October 16, 2015, an amended complaint was filed with more detailed allegations relating to violations of federal securities laws and requesting damages through a jury trial. Mr. Ragle was dismissed from the complaint. On December 15, 2015, IsoRay filed a motion to dismiss the complaint altogether. Oral argument is scheduled on this motion on April 21, 2016.

IsoRay believes the lawsuit is without merit and is seeking its dismissal.

Property Transaction between Medical and The Port of Benton

On September 10, 2015, the Company’s operating subsidiary, Medical, entered into a Real Estate Purchase and Sale Agreement with The Port of Benton, a municipal corporation of the State of Washington. The Agreement is for the sale of undeveloped real property of approximately 4.2 acres located adjacent to the Company’s existing manufacturing facility and corporate offices. The purchase price for the property is One Hundred Sixty-Eight Thousand Dollars ($168,000) which is payable on closing.

On October 15, 2015, the Agreement was amended through an addendum, which extended the closing date to February 5, 2016.

The Company placed a $25,000, non-refundable deposit in escrow with the title company and closed on the property on Friday, February 5, 2016, remitting the balance of $143,000 at the time of closing.

Medical is bound to comply with a Development Plan for a ten year period, which requirements include but are not limited to the following:

(1) Certain specified site configurations and design with a minimum of 12,000 square feet of warehouse and production space and 4,000 square feet of office space;

(2) Completion of all construction in two years;

(3) Use of facility as primary production facility for ten (10) years; and

(4) Provision of jobs for not less than 25 full time employees.

The purchase price for the property was adjusted in consideration of the Development Plan’s covenants. Failure to comply with these covenants will result in a breach of the Agreement and if not cured, will obligate Medical to pay the Port the difference in the sales price and the appraised value of the property at the time of default. The Benton County 2015 assessed value of the land was $423,720, and management believes this approximates the current appraised value. The difference in the sales price and management’s estimate of the current appraised value of the property is approximately $256,000. This is subject to subsequent changes in valuation of the property.

Fair Value Measurements

The table below sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2015 and June 30, 2015, respectively, and the fair value calculation input hierarchy level the Company has determined applies to each asset and liability category.

	Fair value at December 31, 2015

	Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	678,906	$	678,906	$	-	$	-
Warrant derivative liability		123,000		-		123,000		-

	Fair value at June 30, 2015

	Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	5,226,740	$	5,226,740	$	-	$	-
Warrant derivative liability		181,000		-		181,000		-

10.

Preferred Dividends

On December 10, 2015, the Board of Directors declared a dividend on the Series B Preferred Stock of all currently payable and accrued outstanding and cumulative dividends through December 31, 2015 in the amount of $10,632. The dividends outstanding and cumulative through December 31, 2015 of $10,632 and through December 31, 2014 of $10,632 were paid as of those dates.

11.

Shareholders’ Equity

Warrant derivative liability

Based on the guidance contained in ASC 815 “Derivatives and Hedging”, management has concluded that the warrants issued in the 2011 offering should be classified as a derivative liability and has recorded a liability at fair value.

A summary of the change in fair value of derivative warrant liability is as follows for the fiscal years presented.

	Quantity ¹			Amount
Balance at June 30, 2014		238,696		$	573,000
Change in fair value					(374,605	)
Warrants exercised		(13,209	)		(17,395	)
Balance at June 30, 2015		225,087		$	181,000
Change in fair value					(15,000	)
Balance at September 30, 2015		225,087			166,000
Change in fair value		(43,000	)
Balance at December 31, 2015		225,087		$	123,000

¹ Quantity of warrants either issued or outstanding as of the date of valuation.

Warrants

The following table summarizes all warrants outstanding as of the beginning of the fiscal year, all activity related to warrants issued, cancelled, exercised or expired during the period and weighted average prices for each category.

				Weighted average
	Warrants			exercise price
Outstanding as of June 30, 2015		385,800		$	1.22
Warrants expired		(25,000	)		2.00
Outstanding as of December 31, 2015		360,800		$	1.17

The following table summarizes additional information about the Company’s common warrants outstanding as of December 31, 2015:

Number of				Expiration
Warrants		Exercise Prices		Date
	130,713		1.56	May 2016
	199,437		0.94	October 2016
	25,650		0.94	December 2016
	5,000		0.98	June 2017
	360,800

12.

Related Party Transaction

During the six months ended December 31, 2015 and 2014, the Company continued to engage the services of APEX Data Systems, Inc., owned by Dwight Babcock, the Company’s former Chairman and Chief Executive Officer, to modify and maintain the Company’s web interfaced data collection application to aggregate patient data in a controlled environment. The cost recorded during the six months ended December 31, 2015 and 2014 from APEX Data Systems, Inc. for the maintenance of the web interfaced data collection applications in combination with the updating of the Company website was $6,000 and $6,000 respectively. An additional $6,000 was spent on the maintenance of Customer Relationship Management (CRM) software in the six months ended December 31, 2015 and 2014, respectively. At December 31, 2015 and 2014, services during the prior month had been accrued and remained unpaid in the amount of $2,000. These amounts were each paid in the subsequent month.

13.

Concentrations of Credit and Other Risks

The Company’s cash, cash equivalents and investments are deposited with several financial institutions with FDIC coverage. At times, deposits for a limited period of time in these institutions may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses in such accounts and believes that it is not exposed to any significant risk on these balances.

For the six months ended December 31, 2015 and 2014, there were one and two customers (one of which was a group of customers supported by a single physician group) that each represented 10% or more of total net revenue, respectively.

At December 31, 2015, a single customer accounted for 10% or more of the Company’s total accounts receivable with a single customer (a group of seven legal entities) that represents 35% of total accounts receivable. At June 30, 2015, one customer (a group of seven legal entities) accounted for 27% of total accounts receivable.

Accounts receivable are typically not collateralized. The Company maintains ongoing dialogue with its customers about invoice payments. Some of our customers are small outpatient surgery centers that pay invoices for our products at the time they receive a decision regarding payment by the insurer providing benefits which in the case of prostate cancer is predominately Medicare. A qualitative review of outstanding customer balances is performed at least quarterly and the allowance for doubtful accounts is adjusted based on historical performance of the customer and management knowledge regarding specific invoices. Accounts are charged against the allowance for doubtful accounts once collection efforts are deemed unsuccessful. Prior to utilizing an external collection agency and interrupting the supply of our product, customers may be provided the opportunity to continue purchasing product on the basis of pre-paying via guaranteed funds the amount due on their current order prior to producing and shipping the order plus the amount due on their oldest outstanding invoice.

Single source suppliers presently provide the Company with several components. Management believes that it would be able to locate other sources for these components subject to any regulatory qualifications, if required.

During the three months ended December 31, 2015, the Company experienced an unplanned supply disruption of radioisotope from its Russian supplier. No customer orders were missed or delayed while the Company increased production at its second supplier to compensate for the unplanned outage. This event has led management to conduct a review of the Company’s current supply interruption plan in such a situation to ensure its ability to continue to produce a sufficient supply of radioisotope at either facility in the case of an extended supply interruption at either reactor. Over the next six to twelve months, management will completely vet, test and modify where appropriate the Company’s current plan as required to ensure this capability.

14.

Subsequent Events

On January 6, 2016, Dwight Babcock, the Company’s Chairman and CEO, informed the Board of his retirement from all positions held with the Company and its subsidiaries, including from Board service, effective as of January 7, 2016. In connection with his retirement, on January 6, 2016, Mr. Babcock entered into a Severance Agreement, Waiver and Release (the "Agreement") with the Company and its subsidiaries, which was amended and restated on January 12, 2016. Pursuant to the Agreement, Mr. Babcock will continue to receive his base salary through January 6, 2017, and Mr. Babcock has agreed to a waiver and release of claims. The Company recorded a liability of approximately $300,000 in the quarter ended December 31, 2015 relating to the Agreement.

The Board appointed William Cavanagh III, the Company’s Vice President, Research and Development, as interim CEO, and elected Thomas LaVoy, Chair of the Audit Committee, as Chairman, each of whom took office on January 7, 2016. On January 13, 2016, the Board appointed Thomas LaVoy as CEO, to take office on February 15, 2016.

Effective January 13, 2016, the Board, on the recommendation of the Nominating Committee, appointed Alan Hoffmann, CPA to the Board to fill the vacancy created by Mr. Babcock’s departure. Mr. Hoffmann will stand for re-election at the Company’s fiscal 2016 annual meeting. Mr. Hoffmann was appointed to serve on the Nominations and Corporate Governance Committee and the Compensation Committee, and to chair the Audit Committee.

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, 2015 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 14, 2015 are those that depend most heavily on these judgments and estimates. As of December 31, 2015, there had been no material changes to any of the critical accounting policies contained therein.

Overview

Products and Market.

IsoRay, Inc. is a brachytherapy device manufacturer with FDA clearance and CE marking for two medical devices that can be delivered to the physician in multiple configurations as prescribed. The Company manufactures and sells these products as the Proxcelan® Cesium-131 brachytherapy seed and the GliaSite® Radiation Therapy System (GliaSite® RTS). Each brachytherapy seed order is manufactured to the physician’s specifications for a named patient on a specific treatment date. The GliaSite® RTS utilizes a balloon catheter system, which allows the physician to later place a specified dose of radioisotope (either Cesitrex ^® or Iotrex ^® solution) in the treatment location.

The Proxcelan ^® brachytherapy seeds utilize Cesium-131, with a 9.7 day half-life, as their 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. In the case of the GliaSite ^® RTS, the Company believes that in the long-term, Cesitrex ^® , which is Cesium-131-based, is the best radioisotope solution for this treatment, but it continues to offer Iotrex ^® , an Iodine-125 based isotope solution, as it works to re-establish the market for this product. To date, Iotrex ^® has been the primary isotope solution utilized in the GliaSite ^® RTS; Cesitrex ^® is available for sale and only utilized in U.S. treatment.

The Company continues to enter into distribution agreements outside of the United States through its subsidiary IsoRay International LLC. 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 December 31, 2015, the Company had distributors in Australia and New Zealand, Germany (which includes rights to Austria, Switzerland, and Luxembourg as well), Italy, and the Russian Federation.

Management is encouraged by the overall growth in revenue from sales of the Company’s Proxcelan ^® brachytherapy seeds during the prior four consecutive fiscal quarters. The growth from the sales of brachytherapy seeds during the prior four fiscal quarters compared to the same quarters in the prior fiscal year has averaged 21% with minimum revenue growth of 7% and maximum revenue growth of 45%.

Management is encouraged by the growth trend in our core business treating prostate cancer, with five of the past six fiscal quarters experiencing increases over the same quarter in the prior fiscal year. During the prior four fiscal quarters, the prostate segment growth has averaged 21% growth with the minimum revenue growth of 7% and maximum revenue growth of 44%. As the Company has a very small share of the overall prostate brachytherapy market, there is significant opportunity for expansion.

Net revenue from other treatments utilizing the Proxcelan ^® brachytherapy seeds during the prior four fiscal quarters have averaged revenue growth of 27% when compared to the same quarter in the prior fiscal year with minimum revenue growth of 9% and maximum revenue growth of 49% during that period. Growth in revenue from treating brain cancer during the preceding four consecutive fiscal quarters compared to the same quarters during the prior fiscal year has averaged 79% with minimum revenue growth of 9% and maximum revenue growth of 258%. While these treatments are still heavily dependent on the purchasing behaviors of key physicians which has created volatility in revenue, management is encouraged by the upward trend in revenues.

Management believes that the current growth is the result of additional peer-reviewed articles that share the treatment experience and these publications are building awareness of and communicating the treatment advantages of our products. Management also believes that as the impact of the Affordable Care Act’s cost containment measures continues to be felt, the payors will have to react by modifying methods of reimbursement to encourage facilities to utilize other modalities that offer equal or better results with a lower total cost of treatment. Management expects cost containment decisions to be favorable to seed brachytherapy as external beam radiation makes up the majority of the overall treatment market for prostate cancer and a significant portion of the market in other body sites in which the Company competes for business.

When brachytherapy seeds are implanted during a surgical procedure for brain cancer, lung cancer and certain other non-prostate cancers, under Medicare, the brachytherapy seeds are not separately reimbursed when surgery is performed and the patient is admitted to the hospital. Management is developing a strategy to address this gap in the payment system in consultation with consultants experienced in healthcare reimbursement, representatives of the facilities utilizing our products and the final payors for our products. External beam radiation treatments for these same cancers are reimbursed in addition to the cost of surgery as they are administered as separate treatments following surgery with a significantly greater cost of treatment, increased duration of treatment and decreased convenience for the patient. While the cost of external beam radiation is significantly greater than the cost of brachytherapy procedures, the separate reimbursement for external beam radiation treatments results in the hospital receiving a payment in addition to payment for the surgical procedure itself. With brachytherapy performed concurrent with the surgery, the hospital receives the same reimbursement for the surgical procedure whether seeds are implanted or not, resulting in brachytherapy treatment being an additional cost for the hospital.

The Company believes that long-term success of the Proxcelan ^® Cesium-131 brachytherapy seed is dependent on a number of factors including the following:

Increased awareness by physicians of the benefits of utilizing Proxcelan ^® Cesium-131 brachytherapy seeds;

The Affordable Care Act (ACA) implementing cost containment measures in the evaluation of treatment methodologies and reimbursement, particularly in prostate cancer where costly intensity-modulated radiation therapy (IMRT) treats an increasing percentage of the overall U.S. prostate cancer treatment market and growth in the market is expected with the increase in men younger than Medicare age obtaining health insurance;

Increased patient awareness of the comparability and benefits of low dose rate (LDR) brachytherapy when compared to external beam radiation therapy, including comparable urinary symptoms, fewer bowel toxicities, and better sexual function;

Increased attention by payors and patients to the increased cost being paid for IMRT and the potential conflict of interest resulting from the in-office referral of prostate cancer patients for IMRT utilizing equipment in which the physician has an ownership interest, which can be allowed through an exception, for in-office ancillary services, to the federal laws that generally prohibit self-referrals;

Changes in the reimbursement methodology regarding the utilization of brachytherapy seeds in the treatment of brain cancer, lung cancer and other cancers;

Continued evolution in protocols demonstrating the safety, efficacy and other benefits of using Proxcelan® Cesium-131 brachytherapy seeds to treat tumors throughout the body;

Continued publication of peer reviewed journal articles and presentations at society meetings about the treatment outcomes achieved utilizing Proxcelan® Cesium-131 brachytherapy seeds in the treatment of prostate cancer, brain cancer, lung cancer, gynecological cancer and other tumors throughout the body;

Expanded sales through distributors into other countries particularly those in which external beam radiation has not established a significant presence; and

Continued ability of the Company to deliver product that meets the standards of the Company and the expectations of its customers.

Revenue from GliaSite® RTS during the prior four consecutive fiscal quarters compared to the same quarters in the previous year has decreased by an average of 65% with the decreases ranging from a maximum of (100%) to a minimum of (25%). This has been the result of reduced purchases from foreign distributors as the US dollar has strengthened against the Euro making the product increasingly more expensive for those distributors. Domestic adoption of the GliaSite® RTS has been slower than anticipated by management and a clinical study has not been conducted to aggregate outcomes for publication in peer reviewed journals.

The Company believes that long-term success of the GliaSite ^® RTS is dependent on a number of factors including the following:

Implementation of a protocol to support the publication of peer reviewed journal articles and presentations at society meetings about the treatment outcomes achieved utilizing GliaSite ^® RTS;

Greater awareness among doctors of the historical use of GliaSite ^® RTS and the treatment outcomes achieved;

Greater awareness of the availability of Cesitrex ^® as an alternative isotope to Iotrex ^® ; and

Recovery of foreign economies and currencies to increase the overall market.

Results of Operations

Three and six months ended December 31, 2015 and 2014.

	Three months ended December 31,
	2015						2014						2015- 2014 %
	Amount			% (a)			Amount			% (a)			Change
Product sales, net	$	1,189,008			100		$	1,065,585			100			12
Cost of product sales		1,162,097			98			1,103,549			104			5
Gross profit / (loss)		26,911			2			(37,964	)		(4	)		171

Research and development expenses		58,235			5			140,627			13			(59	)
Sales and marketing expenses		254,471			21			303,783			29			(16	)
General and administrative expenses		1,124,683			95	%		537,940			50			-109	%
Net loss attributable to shareholders	$	(1,314,246	)		-111	%	$	(909,612	)		(85	)		-44	%

	Six months ended December 31,
	2015						2014						2015- 2014 %
	Amount			% (a)			Amount			% (a)			Change
Product sales, net	$	2,450,330			100		$	2,107,686			100			16
Cost of product sales		2,339,960			95			2,200,452			104			6
Gross profit / (loss)		110,370			5			(92,766	)		(4	)		219

Research and development expenses		202,138			8			317,237			15			(36	)
Sales and marketing expenses		532,892			22			657,526			31			(19	)
General and administrative expenses		1,876,395			77	%		1,113,891			53			-68	%
Net loss attributable to shareholders	$	(2,336,014	)		-95	%	$	(1,698,132	)		(81	)		-38	%

(a) Expressed as a percentage of product sales, net

Revenues.

Total revenue from product sales increased approximately $123,000 or 12% in the three months ended December 31, 2015 as compared to the three months ended December 31, 2014. The 12% growth during the three months ended December 31, 2015 as compared to the three months ended December 31, 2014 was the result of an increase of approximately $137,000 or 13% overall growth in seed brachytherapy treatments which more than offset the 44% decrease in GliaSite ^® revenues. During the three months ended December 31, 2015, 99% of product sales came from brachytherapy seed treatments compared with 97% during the three months ended December 31, 2014.

Total revenue from product sales increased approximately $343,000 or 16% in the six months ended December 31, 2015 as compared to the six months ended December 31, 2014. The 16% growth during the six months ended December 31, 2015 as compared to the six months ended December 31, 2014 was the result of an increase of approximately $382,000 or 19% overall growth in seed brachytherapy treatments which more than offset the 69% decrease in GliaSite ^® revenues. During the six months ended December 31, 2015, 99% of product sales came from brachytherapy seed treatments compared with 97% during the six months ended December 31, 2014.

Prostate Brachytherapy.

During the three months ended December 31, 2015 and 2014, respectively, prostate brachytherapy was 87% and 86% of total revenues. The growth in revenue from prostate brachytherapy of 13% was the result of a 7% increase in the total number of seeds sold combined with the change in product mix ordered by physicians during the three months ended December 31, 2015 compared to the three months ended December 31, 2014. Physicians ordered 18% fewer seeds configured into strands and/or pre-loaded in needles, 45% fewer seeds in a loose seed configuration, 38% fewer seeds for calibration applications, 389% more seeds pre-loaded using C4 spacers, and 15% more seeds configured in Mick ^® cartridges during the three months ended December 31, 2015 compared to the three months ended December 31, 2014. Pre-loaded configurations result in more revenue per seed than loose seeds.

During the six months ended December 31, 2015 and 2014, respectively, prostate brachytherapy was 88% and 87% of total revenues. The growth in revenue from prostate brachytherapy of 17% was the result of a 12% increase in the total number of seeds sold combined with the change in product mix ordered by physicians during the six months ended December 31, 2015 compared to the six months ended December 31, 2014. Physicians ordered 9% fewer seeds configured into strands and/or pre-loaded in needles, 52% fewer seeds in a loose seed configuration, 14% fewer seeds for calibration applications, 786% more seeds pre-loaded using C4 spacers, and 17% more seeds configured in Mick ^® cartridges during the six months ended December 31, 2015 compared to the six months ended December 31, 2014. Pre-loaded configurations result in more revenue per seed than loose seeds.

Management believes that the growth in the Company’s prostate brachytherapy revenue is the result of physicians, payors and patients increasingly considering overall treatment cost in combination with treatment outcomes and quality of life. Management also believes the recent publication of additional data in peer reviewed journal articles on treatment outcomes achieved with low-dose-rate (LDR) prostate brachytherapy with the Company’s Proxcelan ^® Cs-131 brachytherapy seeds, indicating it is more cost effective, has faster resolution of urinary side effects and a reduced impact on the healthy tissue surrounding the tumor, when compared to competing treatments such as high-dose-rate brachytherapy and intensity modulated radiation therapy, is a driver of the recent growth in the Company’s prostate brachytherapy revenue. There is no assurance this trend will continue.

Other Brachytherapy.

The strategy implemented by management in diversifying the number of body sites being actively treated with the Proxcelan ^® Cs-131 brachytherapy seed has continued to provide an additional source of revenue. While individually these treatment sites do not represent a significant contribution to revenue, the sites as a group increased their revenue contribution by 18% during the three months ended December 31, 2015 when compared to the three months ended December 31, 2014. The largest revenue contributions in this classification came from brain cancer and gynecological cancer treatments. During the three months ended December 31, 2015 and 2014, respectively, other brachytherapy represented approximately $139,000 or 12% of total revenue and approximately $118,000 or 11% of total revenue.

These sites as a group increased their revenue contribution by 30% during the six months ended December 31, 2015 when compared to the six months ended December 31, 2014. The largest revenue contributions in this classification came from brain cancer and gynecological cancer treatments. During the six months ended December 31, 2015 and 2014, respectively, other brachytherapy represented approximately $285,000 or 12% of total revenue and approximately $219,000 or 10% of total revenue.

These other brachytherapy treatments continue to be 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 vary significantly from quarter to quarter.

GliaSite ^® Radiation Therapy System.

All product sales are generated by brachytherapy seeds and their related methods of application except for the revenue generated by sales of GliaSite ^® RTS, which come from sale of the liquid isotope, catheter trays and access trays. Product sales from GliaSite ^® RTS decreased 44%, with revenue of $17,000 in the three months ended December 31, 2015 compared to revenue of $31,000 in the three months ended December 31, 2014.

Product sales from GliaSite ^® RTS decreased 69%, with revenue of $17,000 in the six months ended December 31, 2015 compared to revenue of $56,000 in the six months ended December 31, 2014.

The lack of sales was partially impacted by the unfavorable change in the exchange rate between the US dollar and the Euro as the dollar continued to be stronger during fiscal year 2016 compared with fiscal year 2015, which effectively increased the cost to European customers as all transactions are conducted in the US dollar.

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 medical facilities in reviewing and approving the use of the product at the request of their physician(s).

Cost of product sales.

The cost of product sales for the production of brachytherapy seeds increased by approximately $61,000 or 6% during the three months ended December 31, 2015 when compared to the three months ended December 31, 2014. The increase in cost of products for the production of brachytherapy seeds was the result of increased payroll, benefits and share-based compensation of approximately $29,000 or 13% and increased third-party seed loading cost of approximately $29,000 or 288%. The increased payroll, benefits and share-based compensation expense are the result of the additional costs related to producing the 9% increase in the number of brachytherapy seeds produced and the related changes in configuration along with the additional expense related to the employee stock options issued in June 2015 to production employees. The increased cost of third-party seed loading expense is the result of the increased quantity of seeds ordered by physicians at MD Anderson Cancer Center utilizing the C4 marker. Until the volume of C4 markers is sufficient to justify the additional cost of adding an in-house loading and sterilization capability, they will be loaded via a third-party seed loader.

The cost of product sales for the production of brachytherapy seeds increased by approximately $140,000 or 6% during the six months ended December 31, 2015 when compared to the six months ended December 31, 2014. The increase in cost of products for the production of brachytherapy seeds was the result of increased cost of materials of approximately $104,000 or 12% and increased third-party seed loading cost of approximately $50,000 or 372%, partially offset by decreased occupancy expense of approximately $24,000 or 16%. The increased cost of materials was a function of increased isotope cost, increased consumption of raw materials and work in process to produce the increased quantity of seeds ordered. The increased cost of third-party seed loading expense is the result of the increased quantity of seeds ordered by physicians at MD Anderson Cancer Center utilizing the C4 marker. These increases were partially offset by a decrease in occupancy costs that was the result of a change in the allocation of rent and utility expenses.

Although not required by our contract with our Russian isotope supplier, we purchase isotope at specific volumes on a weekly basis to provide additional certainty of our ability to meet forecasted demands based on the lead times required in the ordering of isotope and therefore incur this cost regardless of usage. The Company is a just in time manufacturer of brachytherapy seeds which is the result of the unique properties of Cesium-131, primarily the half-life or decay rate of 9.7 days. The Company requires isotope on-hand to meet known orders as well as anticipated orders which may or may not materialize. The Company does not manufacture to inventory as other brachytherapy seed manufacturers may. When the Company has isotope available for production in excess of the current demand, orders due to ship in the near future will be manufactured early to maximize the number of viable seeds that can be manufactured from any given lot of radioisotope.

During the three and six months ended December 31, 2015 compared to the three and six months ended December 31, 2014, the decrease in the cost of product sales for the GliaSite ^® RTS was an immaterial amount as there has not been significant activity related to this product line.

Gross profit / (loss).

Gross profit for the three months ended December 31, 2015 improved by approximately $65,000 or 171% compared to the gross loss for the three months ended December 31, 2014, primarily as a result of the increased product sales, with minimal incremental costs related to materials and labor to increase seed production outputs.

Gross profit for the six months ended December 31, 2015 improved by approximately $203,000 or 219% compared to the gross loss for the six months ended December 31, 2014, primarily as a result of the increased product sales, with minimal incremental costs related to materials and labor to increase seed production outputs.

Both increases in gross profit were significantly impacted by the ability of the Company to utilize isotope that was already purchased to ensure an adequate supply of isotope on a weekly basis to produce orders and that would have otherwise been expensed as it decayed during the operating cycle.

Research and development.

Research and development costs decreased by approximately $82,000 or 59% in the three months ended December 31, 2015 compared to the three months ended December 31, 2014, primarily as an adjustment to the accrued cost of protocols for on-going activities.

Research and development costs decreased by approximately $115,000 or 36% in the six months ended December 31, 2015 compared to the six months ended December 31, 2014, primarily as an adjustment to the accrued cost of protocols for on-going activities in combination with the reduced legal expense related to intellectual property.

Sales and marketing expenses.

Sales and marketing expenses decreased by approximately $49,000 or 16% during the three months ended December 31, 2015 compared to the three months ended December 31, 2014 . The Company had an expected temporary reduction in travel expenses and payroll related expenses of approximately $30,000 or 47% and approximately $21,000 or 11% related to the open national sales director and territory sales manager positions that were unfilled during the three months ended December 31, 2015, partially offset by a tradeshow expense in October 2015.

Sales and marketing expenses decreased by approximately $125,000 or 19% during the six months ended December 31, 2015 compared to the six months ended December 31, 2014, primarily as the result of decreased conventions and tradeshow expenses of approximately $24,000 or 41% as the American Society for Radiation Oncology (ASTRO) convention costs were decreased year over year along with not having a national sales meeting in fiscal year 2016 . The Company also had a planned temporary reduction in travel expenses and payroll related expenses of approximately $47,000 or 39% and approximately $34,000 or 8% related to the open national sales director and territory sales manager positions that were unfilled during the six months ended December 31, 2015.

General and administrative expenses.

General and administrative expenses increased by $587,000 or 109% in the three months ended December 31, 2015 compared to the three months ended December 31, 2014. Approximately $488,000 or 83% of the $587,000 increase in general and administrative expense was the result of non-recurring legal fees related to the class action shareholder suit and the accrual of the severance costs of approximately $300,000 associated with the retirement of the CEO. The Company has incurred $213,000 of legal expense applicable to our deductible of $250,000. Ongoing costs of defense in excess of an additional $37,000 will be covered by our insurance carrier up to our policy limits. Public company expense increased approximately $25,000 from the addition of a third independent board member as part of the change to being an accelerated filer as defined by the US Securities and Exchange Commission, increased costs of being a listed company on the NYSE MKT and increased investor relations expenses.

General and administrative expenses increased by 763,000 or 68% in the six months ended December 31, 2015 compared to the six months ended December 31, 2014. Approximately $519,000 or 68% of the $763,000 increase in general and administrative expense was the result of non-recurring costs for legal fees related to the class action shareholder suit and the accrual of the severance costs of approximately $300,000 associated with the retirement of the CEO. The other increases in expense were in consulting expense of $22,000, office expenses of $22,000, occupancy expense of $34,000 and public company expense of approximately $28,000. Legal expense increased from a combination of the expanded reporting obligations related to the Company’s filing status change from a smaller reporting company to an accelerated filer effective June 30, 2015 and the legal fees related to the class action shareholder lawsuit. Consulting expense increased from audit and other services from British Standards Institute who is the notified body for the Company related to the quality system. The notified body is the party that audits the quality system of the Company for compliance with the applicable standards for medical devices to be sold in the European Economic Area (EEA). Office expenses increased as part of an information technology upgrade including computer hardware, computer software and office supplies that are below the capitalization threshold. Occupancy expense increased as the allocation of cost changed in the three months ended September 30, 2015 compared to the three months ended September 30, 2014. Although the overall rent did not change, the amount of cost being allocated to general and administrative functions did change, resulting in reductions to other functions which offset this increase to general and administrative. Public company expense increased from the addition of a third independent board member, additional costs of being a listed company on the NYSE MKT and increased investor relations expenses.

Operating loss.

Operating loss for the three months ended December 31, 2015 increased approximately $390,000 or 38% compared to the three months ended December 31, 2014, primarily as a result of the substantial increase in general and administrative expenses which is primarily related to the $179,000 in legal fees related to the class action shareholder lawsuit and the accrual of severance cost of approximately $300,000 associated with the retirement of the CEO.

Operating loss for the six months ended December 31, 2015 increased approximately $320,000 or 15% compared to the six months ended December 31, 2014. Operating loss would have substantially declined but for the increase in general and administrative expenses which is primarily related to the $218,000 in legal fees related to the class action shareholder lawsuit and the accrual of severance cost of approximately $300,000 associated with the retirement of the CEO.

Interest income.

Interest income decreased approximately $16,000 or 23% during the three months ended December 31, 2015 when compared to the three months ended December 31, 2014 due to a decrease in the available excess cash to invest in laddered CDs in the Certificate of Deposit Account Registry Service ^® (CDARS) and which are in amounts that are fully insured by the Federal Deposit Insurance Corporation (FDIC).

Interest income decreased approximately $32,000 or 22% during the six months ended December 31, 2015 when compared to the six months ended December 31, 2014 due to a decrease in the available excess cash to invest in laddered CDs in the Certificate of Deposit Account Registry Service ^® (CDARS) and which are in amounts that are fully insured by the Federal Deposit Insurance Corporation (FDIC).

Change in fair value of warrant derivative liability.

The warrant derivative liability requires periodic evaluation for changes in fair value. As required at December 31, 2015 and December 31, 2014, 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 December 31, 2015 and December 31, 2014.

Liquidity and capital resources . The Company has historically financed its operations through selling stock to investors. During the six months ended December 31, 2015 and December 31, 2014, the Company used existing cash reserves to fund its operations and capital expenditures.

Our cash flows for the six months ended December 31, 2015 and 2014, respectively, are summarized as follows:

	Six months ended December 31,
	2015			2014
Net cash used by operating activities	$	(1,919,907	)	$	(1,757,625	)
Net cash used by investing activities		(2,664,030	)		(4,790,648	)
Net cash provided by financing activities		36,103			205,053
Net decrease in cash and cash equivalents	$	(4,547,834	)	$	(6,343,220	)

Cash flows from operating activities

Net cash used by operating activities in the six months ended December 31, 2015 was $1.92 million as compared to $1.76 million used in the six months ended December 31, 2014.

Net cash used by operating activities in the six months ended December 31, 2015:

Net loss of approximately $2.33 million;

Net loss was offset by non-cash items of approximately $351,000 related to the depreciation of fixed assets, amortization of other assets, change in fair value of derivative warrant liability, accretion of asset retirement obligation and share-based compensation;

Decrease in accounts receivable of approximately $74,000, the result of the increased collection effectiveness during the six months ended December 31, 2015;

Increase in inventory of approximately $73,000, the result of purchases of inventory, consisting of titanium lids, titanium tubing and gold wire produced to the specifications of the Company, in quantities to obtain best pricing;

Decrease in other receivables of $11,000, which is related to the timing of collecting on non-revenue receivables;

Decrease in prepaid expenses and other current assets of $61,000, which represent the difference in timing on payments issued for vendor invoices due after month end and paid prior to month end;

Decrease in accounts payable and accrued expenses of approximately $183,000, the result of the timing of paying operating expenses and the accrual of severance cost of approximately $300,000 associated with the retirement of the CEO;

Increase in accrued protocol expense of $45,000 which represents a timing difference between incurring an expense and payment;

Decrease in radioactive waste disposal expense of $24,000 which represents a timing difference between incurring an expense and payment;

Increase in accrued payroll and related taxes expense of approximately $140,000 which represents a timing difference; and

Increase in accrued vacation of $35,000 which represent the timing difference of employees accruing vacation and the actual payment when the vacation is used.

Net cash used by operating activities in the six months ended December 31, 2014:

Net loss of approximately $1.69 million;

Net loss was offset by non-cash items of approximately $47,000 related to the allowance for doubtful accounts, depreciation of fixed assets, amortization of other assets, change in fair value of derivative warrant liability, accretion of asset retirement obligation and share-based compensation;

Decrease in accounts receivable of approximately $124,000, the result of the increased collection effectiveness during the six months ended December 31, 2014;

Increase in inventory of approximately $52,000, the result of purchases of inventory, consisting of titanium lids, titanium tubing and gold wire produced to the specifications of the Company, in quantities to obtain best pricing;

Decrease in other receivables of $42,000, which is related to the timing of collecting on non-revenue receivables;

Increase in prepaid expenses and other current assets of $15,000, which represent the difference in timing on payments issued for vendor invoices due after month end and paid prior to month end;

Increase in accounts payable and accrued expenses of approximately $87,000, the result of the timing of paying operating expenses;

Decrease in accrued protocol expense of $10,000 which represents a timing difference between incurring an expense and payment;

Increase in radioactive waste disposal expense of $34,000 which represents a timing difference between incurring an expense and payment;

Increase in accrued payroll and related taxes expense of approximately $90,000 which represents a timing difference; and

Increase in accrued vacation of $12,000 which represent the timing difference of employees accruing vacation and the actual payment when the vacation is used.

Cash flows from investing activities

Net cash used by investing activities in the six months ended December 31, 2015 was $2.66 million as compared to $4.79 million used in the six months ended December 31, 2014.

Net cash used by investing activities in the six months ended December 31, 2015:

Increased by purchases of fixed assets of approximately $35,000;

Increased by additions to licenses and other assets of approximately $16,000;

Decreased by proceeds from certificates of deposit that matured of $3.53 million;

Increased by purchases of certificates of deposit of $6.06 million;

Approximately $3.53 million of the cash used for the certificates of deposit purchased came from certificates of deposit that reached maturity during the six months ended December 31, 2015;

$2.5 million of the cash used for the purchase of certificates of deposit came from certificates of deposit that matured during June 2015 and were in cash and cash equivalents at June 30, 2015;

The remaining cash used for the purchase of certificates of deposit of approximately $56,000 was from interest earned during the period and added to the existing certificates of deposit; and

Increased by purchases of certificates of deposit, non-current of approximately $57,000 which came from the interest earned.

Net cash used by investing activities in the six months ended December 31, 2014:

Increased by purchases of fixed assets of approximately $49,000;

Decreased by maturity of certificates of deposit of approximately $5.01 million

Increased by purchases of certificates of deposit of approximately $5.06 million; and

Increased by purchases of certificates of deposit, non-current of $4.70 million.

Cash flows from financing activities

Net cash provided by financing activities in the six months ended December 31, 2015 was $36,000 as compared to $205,000 provided in the six months ended December 31, 2014.

Net cash provided by financing activities in the six months ended December 31, 2015:

Decreased by payment of preferred dividends of approximately $11,000; and

Increased from the sale of common stock from the exercise of stock options of approximately $47,000.

Net cash provided by financing activities in the six months ended December 31, 2014:

Decreased by payment of preferred dividends of approximately $11,000;

Increased from the sale of common stock from the exercise of warrants of approximately $70,000; and

Increased from the sale of common stock from the exercise of stock options of approximately $145,000.

Projected Fiscal Year 2016 Liquidity and Capital Resources

At December 31, 2015, the Company held cash and cash equivalents of $679,000, CDARS of $11.92 million that mature in the current operating cycle and CDARS of $5.16 million that mature within the next twenty months.

	Amount
Cash and cash equivalents	$	678,906
Certificates of deposit maturing in less than 90 days		6,031,813
Certificates of deposit maturing greater than 90 days and less than six months		5,886,745
Certificates of deposit maturing greater than one year and less than two years		5,163,615
Cash, cash equivalents and certificates of deposit total	$	17,761,079

The Company had approximately $6.35 million of cash and cash equivalents, $5.89 million of certificates of deposit and $5.16 million of certificates of deposit, non-current as of February 5, 2016. The short-term investments mature in June 2016. At the time of maturity, Company management will assess the cash requirements of the Company and reinvest excess cash as it deems appropriate.

The Company’s monthly required cash operating expenditures were approximately $320,000 and $293,000 during the six months ended December 31, 2015 and 2014, respectively, which represents a 9% increase. As we intend to fill several open positions and hire additional management personnel, our monthly cash operating expenses are expected to show a long term increase from historical levels.

Management forecasts that fiscal year 2016 cash consumed in production operations will be similar to the prior fiscal year. Company management is early in the design process of the future facility and with the goal of constructing a facility that will have non-cash depreciation that is less than the current monthly rental cost of the current facility. Management is reviewing all aspects of production operations, 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.

Capital expenditures

The Company has not required significant capital equipment investment despite many of the significant items of manufacturing equipment having reached or reaching their depreciable lives this fiscal year. Management believes less than $200,000 will be required to be invested in manufacturing or other capital equipment related to Company operations during fiscal year 2016, but there is no assurance that unanticipated needs for capital equipment or a yet to be determined capital project may not arise; and

The Company placed $25,000 in escrow on raw land as disclosed in financial statement footnote 8 Commitments and Contingencies under the section “Property Transaction between Medical and The Port of Benton”. On February 5, 2016, an additional amount of $143,000 was paid to close on the real property. Future cash requirements related to construction of and moving into the new facility are difficult to project until designs, architectural drawings and contractor estimates of construction costs have been made, but management does not expect to spend more than $50,000 beyond the amounts already paid prior to incurring construction costs. If the covenants associated with the raw land are not fully complied with in a timely manner, the Company would be required to pay the difference between the purchase price and the appraised value of the property, which management has estimated to be $256,000 as of the date of this Report, but this difference is subject to change with changes in the appraised value.

Management intends to continue its existing protocol studies and to begin new protocol studies on brain and lung cancer treatment using Cesium-131. Management believes that approximately $150,000 in expense will be incurred during fiscal year 2016 in protocol expenses relating to lung cancer, inter-cranial cancer and both dual therapy and monotherapy 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 that the cash and cash equivalents of approximately $6.35 million, short-term investments of $5.89 million and investments – other of $5.16 million at February 5, 2016 will be sufficient to meet our anticipated cash needs assuming both revenue and expenses remain at current levels for the next three years.

Management plans to attempt to attain breakeven and generate additional cash flows by increasing revenues from both new and existing customers in the prostate market (through our direct sales channels and through our distributors), and expanding into other market applications which 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. Total product sales have not shown the increases necessary to breakeven during the past seven fiscal years ended June 30, 2015 or for the six months ended December 31, 2015.

For the six months ended December 31, 2015, revenue from other treatment modalities with brachytherapy seeds increased 30% when compared to the six months ended December 31, 2014. 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. There were approximately $17,000 and $56,000 sales of GliaSite ^® RTS in the six months ended December 31, 2015 and 2014, respectively.

There was no material change in the use of proceeds from our public offering as described in our final prospectus supplement filed with the SEC pursuant to Rule 424(b) on March 24, 2014. Through December 31, 2015, the Company had used the net proceeds raised through the March 2014 offering as described in the table below and held the remaining net proceeds in cash and cash equivalents and certificates of deposit. No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of our equity securities or to any other affiliates.

Offering description		Period		Net proceeds				Remaining net proceeds
Registered direct offering		March 2014		$	13,814,742			$	13,814,742

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 shareholders 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 shareholders.

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, 2015. There have been no material changes outside of the ordinary course of business in those obligations during the current quarter.

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 is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (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 six months ended December 31, 2015, there have been no changes to the critical accounting policies and estimates, as discussed in Part II, Item 7 of our Form 10-K for the year ended June 30, 2015.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to the disclosure in the “Quantitative and Qualitative Disclosures about Market Risk Factors” section of our Annual Report on Form 10-K for the year ended June 30, 2015.

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 principal financial officer, 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) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of December 31, 2015. Based on that evaluation, our principal executive officer and our principal financial officer 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 is 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.

Inherent Limitations of Internal Control Over Financial Reporting

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

On December 15, 2015, IsoRay filed a motion to dismiss the complaint altogether. Oral argument is scheduled on this motion on April 21, 2016.

IsoRay believes the lawsuit is without merit and is seeking its dismissal, but there can be no assurance as to the outcome of this proceeding.

From time to time we are also involved in legal proceedings arising in the ordinary course of our business.

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 Form 10-K for the year ended June 30, 2015, and is incorporated herein by reference. There have been no material changes in our risk factors since such filing, except for the following:

We Rely Heavily On Five Customers And Have a Single Customer With A Large Payable . Approximately fifty-four percent (54%) of the Company’s revenues are dependent on five customers and approximately thirty-five percent (35%) of our payables are owed by a single customer. The loss of any of these customers would have a material adverse effect on the Company’s revenues which may not be replaced by other customers particularly as these customers are in the prostate sector which is facing substantial competition from other treatments. Failure to successfully collect our large outstanding payables would have a material adverse effect on our revenues.

We Rely Heavily On A Limited Number Of Suppliers . Some materials used in our products are currently available only from a limited number of suppliers. In fiscal 2015, approximately eighty-three percent (83%) of our Cesium-131 was supplied through JSC INM from a reactor located in Russia and this reliance is continuing in fiscal 2016. Management is evaluating other reactors that meet current specifications to yield Cesium-131 of the purity that the Company requires for use in its products. In November 2015, we experienced a complete shutdown of our Russian supplier and management relied on a combination of inventory from JSC INM and MURR for about a three week period. We believe MURR cannot solely supply our needs for isotope. Management does not believe we could operate for greater than three to four weeks without access to our Russian supplier, and is actively exploring other possible solutions, but there can be no assurance a solution will be found.

Reliance on any single supplier increases the risks associated with concentrating isotope production at a single reactor facility which can be subject to unanticipated shutdowns and political or civil unrest. Failure to obtain deliveries of Cesium-131 from multiple sources could have a material adverse effect on seed production and there may be a significant delay before we could locate alternative suppliers beyond the two currently used.

We may not be able to locate additional suppliers outside of Russia, other than MURR (which we now believe can only provide supply in combination with inventory from our Russian supplier for three to four weeks), capable of producing the level of output of cesium at the quality standards we require. Additional factors that could cause interruptions or delays in our source of materials include limitations on the availability of raw materials or manufacturing performance experienced by our suppliers and a breakdown in our commercial relations with one or more suppliers. Some of these factors may be completely out of our and our suppliers' control. Failure to deliver products based on lack of supply of our isotope could have a material adverse effect on our business and our reputation.

We Have A Single Russian Supplier For Our Cesium-131. In January 2015, the Company entered into an agreement with The Open Joint Stock Company <<Institute of Nuclear Materials>> (JSC INM) to purchase Cesium-131 directly from the Institute of Nuclear Materials (INM) which expired on January 31, 2016. On December 15, 2015, the Company entered into an agreement with The Open Joint Stock Company ‹‹Isotope›› (JSC Isotope) to purchase Cesium. This new agreement expires on March 31, 2017. As a result, the Company relies on JSC Isotope to obtain Cesium-131 from its single Russian reactor source, which is INM. Through the new Agreement, we have obtained fixed pricing for our Russian Cesium-131 through the termination of the contract on March 31, 2017. There can be no guarantee that JSC Isotope will always be able to supply us with sufficient Cesium-131 or will renew our existing contract on favorable terms in March 2017, which could be due in part to risks associated with foreign operations and beyond either our or JSC Isotope's control. If we were unable to obtain supplies of isotopes from Russia in the future, our overall supply of Cesium-131 could be reduced significantly unless we have a source of enriched barium for utilization in domestic reactors beyond the quantity that we already own. The Company has performed a search for enriched barium as part of its annual impairment testing for its existing inventory of enriched barium and has found no other entity that could supply the required quantities of enriched barium. While recent testing of regions within the reactor at MURR has found that Cesium-131 can be produced in economically viable quantities at a viable price, there is no assurance that we can obtain the increased quantity of isotope at the pricing and quantities that the Company requires and we now believe that we would only have three to four weeks to rely on MURR based on supply issues with our Russian supplier that occurred in November 2015. We no longer believe we can rely on our prior plan to utilize our supply of enriched barium to expand into other irradiation sites within MURR or at another reactor to supplement our supply of Cs-131. Management believes that, during the next six to twelve months, a viable radiochemistry process must be developed; it must use an acceptable level of enriched barium for the reactor; and the new process must be validated by performing test runs on actual irradiated targets and by performing the radiochemistry process. Management is actively pursuing alternative solutions beyond those at MURR to meet our needs in the event of a prolonged shutdown of the Russian supplier. There is no assurance as to finding a viable solution or if a solution is found, when it can be implemented.

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

Exhibits:

10.87*	Amended and Restated Severance Agreement, Waiver and Release by and among IsoRay Medical, Inc., IsoRay International LLC, IsoRay, Inc., and Dwight Babcock dated January 12, 2016.

10.88*	Employment Agreement by and between Thomas C. LaVoy and IsoRay, Inc. dated January 13, 2016 with an effective date of February 15, 2016.

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 Principal Financial Officer

32**	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: February 9, 2016

	ISORAY, INC., a Minnesota corporation

	By	/s/ William Cavanagh, III
		William Cavanagh, III, Interim Chief Executive Officer (Principal Executive Officer)

/s/ Brien Ragle

Brien Ragle, Chief Financial Officer

(Principal Financial and Accounting Officer)

Exhibit 10.87

AMENDED AND RESTATED

SEVERANCE AGREEMENT, WAIVER AND RELEASE

This Agreement is made and entered into as of this 12 ^th day of January, 2016 by and among IsoRay Medical, Inc., a Delaware corporation (“Medical”), IsoRay International LLC, a Washington limited liability company (“International”), IsoRay, Inc., a Minnesota corporation (“IsoRay”) and the parent of Medical and International (collectively IsoRay and all of its subsidiaries, including Medical and International, are referred to herein as the “Company”), and Dwight Babcock (“Employee”). This Agreement amends and restates, in its entirety, the Severance Agreement, Waiver and Release dated January 6, 2016 by and between Medical, IsoRay and Dwight Babcock.

WHEREAS , the parties mutually wish to conclude the employment relationship on an amicable basis and set forth in this Agreement a resolution of all matters pertaining to Employee’s employment by Company.

WHEREAS , Employee is the owner of various IsoRay stock options, which may be issued with certain restrictions as outlined in the Non-Qualified Stock Option Agreements between Employee and IsoRay, Inc.

WHEREAS , Employee was employed by the Company in multiple capacities until his resignation from his employment in all capacities with IsoRay and all of its subsidiaries as of the Effective Date (as defined below). He has also agreed to resign from the IsoRay Board and the Medical Board.

WHEREAS , Employee agrees, subject to the terms and conditions of this Agreement, to make the representations, warranties, and covenants contained herein in exchange for the Company making certain payments as described herein.

NOW, THEREFORE , and in consideration of the acts, payments, covenants, and mutual agreements herein described and agreed to be performed, the parties agree as follows:

1. Monetary Payment to Employee . Upon the expiration of the applicable revocation period set forth below, and provided that Employee has not revoked this Agreement, the Company will continue Employee’s current base salary from Effective Date through January 6, 2017 (the “Severance Period”), less applicable payroll tax and other withholding thereon as required by law. The Company shall not continue to provide any welfare plan benefits to Employee after the Effective Date, and Employee acknowledges and agrees that he shall not be entitled to vacation pay during the Severance Period.

Employee acknowledges that this payment constitutes special consideration to Employee in exchange for Employee’s promises and agreements as set forth in this Agreement and that Company was not otherwise obligated to make the above payment.

Company’s Initials

/s/ BR

Employee’s Initials

/s/ DB

Employee agrees that upon the performance of this Agreement, no further compensation is due or owing to Employee from the Company whether in the form of cash or non-cash compensation with respect to any relationship between the Company and Employee.

2. Separation of Employment . Employee acknowledges that Employee’s employment relationship with Company ended on January 7, 2016 (“Effective Date”).

3. Stock Options . Subject to the Non-Qualified Stock Option Agreements and the various IsoRay, Inc. Stock Option Plans pursuant to which the options were granted, Employee has the time set forth in each option to exercise them before they expire as all options granted have vested.

Waiver, Release, And Discharge Of Claims .

a. Expressly subject to the limitation set forth in Section 4(e) below, Employee waives, releases, and discharges all of his existing rights to any relief of any kind (known and unknown) from the Company, affiliates, divisions, directors, officers, members, managers, employees, agents, successors, and assigns (all of whom are referred to herein collectively as the “Released Parties”), including without limitation all claims that arise out of or that relate to his employment or his separation from employment with the Company, all claims that arise out of or that relate to any of the statements or actions of any of the Released Parties, all claims that arise under the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family & Medical Leave Act, the Fair Labor Standards Act, the National Labor Relations Act, the Arizona Civil Rights Act, the Arizona wage payment laws, or the Arizona Employment Protection Act (and any corresponding Washington statutes), all claims for relief or other benefits under any other federal, state, or local statute, ordinance, regulation, rule of decision, or principle of common law, all claims that any of the Released Parties engaged in conduct prohibited on any basis under any federal, state, or local statute, ordinance, regulation, rule of decision, or principle of common law, and all claims for fees, costs, and disbursements (all of which are referred to herein collectively as “Claims”).

b. Employee acknowledges that he may later discover Claims, facts, or causes of action presently unknown, unsuspected, or different from those that he now suspects or believes to be true. Employee expressly waives and assumes the risk that the facts or law may be other than he believes them to be. Employee acknowledges and agrees that this Agreement is a general release of all Claims, known and unknown, regardless of the discovery or existence of any additional or different facts or Claims at any time after he signs this Agreement.

c. Employee will not file or be a party to any lawsuit against any of the Released Parties that seeks to recover under or that arises out of any Claim. If Employee breaches this covenant, he will immediately repay the full consideration that he is receiving in exchange for this Agreement, regardless of the outcome of the lawsuit.

d. Nothing in this Agreement shall be construed to prohibit Employee from filing a charge or a complaint with or participating in any investigation or proceeding conducted by a federal or state administrative agency charged with enforcement of law. This includes, but is not limited to, the EEOC, OSHA, DOL, and the NLRB. Employee shall have a right to engage in protected activity.

Company’s Initials

/s/ BR

Employee’s Initials

/s/ DB

e. Nothing in this Agreement including this Section 4 is intended to nor shall it in any way waive or limit Employee’s claims or rights under any and all of the Company’s insurance policies including, but not limited to, any and all of the Company’s Directors’ and Officers’ insurance policies. Nothing in this Agreement or this Section 4 is intended to nor shall it in any way waive Employee’s right to indemnification and/or advancement of defense expenses pursuant to the Company’s articles, bylaws, indemnification agreements, applicable statute or common law, or otherwise. Nothing in this Agreement or this Section 4 is intended to nor shall it in any way waive Employee’s actual or potential, present or future, claims or rights to indemnification or contribution under applicable law against any person whether that person is defined in this Agreement as a “Released Party” or otherwise. Nothing in this Agreement or this Section 4 is intended to nor shall it in any way waive or limit Employee’s entitlement to the utilization or benefit of any exculpation provisions in the Company’s corporate documents.

Post-Employment Obligations .

a. Notwithstanding Employee’s separation from employment with the Company, Employee will make himself available for such communications and consultations as the Company may reasonably request through the duration of the IsoRay securities class litigation, provided, however, that such communications and consultations do not unduly interfere with his other business or personal arrangements.

b. Employee acknowledges that from time to time during his employment he was entrusted with or received access to certain confidential commercial information of the Company and other entities owned and/or controlled by the Company’s ownership, including without limitation information concerning the Company’s and their financial affairs, business dealings, assets and holdings, liabilities, contractual arrangements with management, personnel, marketing programs, plans, and proposals, and other information about internal systems, processes, concepts, practices, and procedures (“Confidential Information”). Employee further acknowledges that he has been instructed by the Company to, and agrees that he will, preserve and maintain the confidentiality of all such Confidential Information.

c. Employee acknowledges that all documents and other tangible property relating in any way to the business of the Company that he developed or that came into his possession during his employment are the property of the Company. On or before January 12, 2016, Employee will return to the Company all Company-owned property, specifically including all keys and card key badges to company buildings or property, all company-owned equipment, and all company documents and papers, including but not limited to trade secrets or confidential company information. The parties acknowledge that Employee shall be provided with access to company email and documents on the Company’s servers solely as necessary to fulfill his obligations as set forth in Section 5(a) above.

d. Except as expressly permitted in Section 5(c) above, Employee will not access or attempt to access, directly or indirectly, in any manner whatsoever, the Company’s electronic equipment, network or files, including without limitation the Company’s email and voicemail systems, the Company’s electronic document storage and retrieval systems, and the Company’s computer network servers and related equipment.

Company’s Initials

/s/ BR

Employee’s Initials

/s/ DB

e. Employee will not make any comments to any employees, vendors, suppliers, or business partners of the Company that disparage, derogate, defame, besmirch, or reflect adversely upon the reputation, character, image, services, employees, management, or leadership of the Company; provided, however, that this paragraph will not be construed to prevent Employee from making truthful statements in connection with the fulfillment of any legally mandated reporting or disclosure obligations.

f. The IsoRay Board of Directors will not make any comments to any employees, vendors, suppliers, or business partners of the Company that disparage, derogate, defame, besmirch, or reflect adversely upon the reputation, character, or image of Employee; provided, however, that this paragraph will not be construed to prevent the IsoRay Board of Directors from making truthful statements in connection with the fulfillment of any legally mandated reporting or disclosure obligations.

g. Employee will not disclose any of the terms and conditions of this Agreement to any person or entity at any time, except as provided herein. Employee may disclose this Agreement to his spouse, attorneys, accountants, or tax planners, provided that if he discloses the Agreement to any such person, he must simultaneously inform that person that the person must keep the information strictly confidential and that the person may not disclose the information to any other person without the advance written consent of the Company, and provided further that any disclosure of this Agreement by any such person will constitute a disclosure by Employee.

h. If the Company determines that Employee has violated or has not satisfied any obligation imposed upon him under this Agreement, the Company, in addition to any other rights or remedies which it may possess, and without prejudice thereto, may terminate its obligation to provide the benefits set forth in Section 1, above, by submitting written notice to Employee of such termination. In such an event, and upon written demand from the Company therefor, Employee also will immediately remit to the Company the value of the benefits that the Company provided to him under Section 1, above, prior to such determination.

6. Older Workers’ Benefit Protection Act . In accordance with the Older Workers’ Benefit Protection Act of 1990, Employee is aware of the following with respect to the release of any claims under the Age Discrimination in Employment Act (“ADEA”):

a. Employee has the right to consult with an attorney before signing this Agreement, and is hereby advised to do so;

b. Employee has twenty-one (21) days to consider this Settlement Agreement and the release of any ADEA claim, which Employee may waive;

c. Employee has seven (7) days after signing this Agreement to revoke Employee’s release as to any ADEA claim, and the release will not be effective as to any ADEA claim until the eighth day following Employee’s execution of this Agreement; and

d. A portion of the payment received under this Agreement is specifically to release any claims under the ADEA.

Company’s Initials

/s/ BR

Employee’s Initials

/s/ DB

In the event Employee elects to revoke this release pursuant to paragraph 6(c) above, Employee shall notify Company by hand-delivery notice of the revocation, within seven (7) days after signing this Agreement to:

Jodi R. Bohr, Shareholder

Gallagher & Kennedy

2575 E. Camelback Road, Suite 1100

Phoenix, AZ 85016

In the event Employee exercises the right to revoke this release pursuant to paragraph 6(c) above, any and all obligations of Company under this Agreement shall be null and void, Employee agrees that if Employee signs this Agreement prior to the expiration of the twenty-one (21) day period Employee has voluntarily waived the right to consider this Agreement for the full twenty-one (21) day period.

7. No Admission of Liability . Nothing contained in this Agreement shall be construed in any manner as an admission by either party that either party has violated any statute, law or regulation, breached any contract or agreement, or has engaged in any wrongful conduct with respect to Employee or with respect to Company. Company specifically disclaims any liability to or wrongful acts against Employee or any other person, on the part of itself, its employees or its agents. Employee specifically disclaims any liability to or wrongful acts against Company.

8. Remedies . In the event of default or breach by any party, any and all remedies set forth in the above paragraphs are intended to be non-exclusive, and any party may, in addition to said remedies, seek any additional remedies available either at law or equity.

9. Authority and Reliance . Employee warrants and represents that: (i) Employee has relied upon Employee’s own judgment regarding the consideration for and language of this Agreement; (ii) Employee has been given the opportunity to consult with legal counsel regarding the terms of this Agreement; (iii) Employee understands this document and has obtained answers to questions that Employee has raised about the document; and (iv) no statements made by Company have in any way coerced or unduly influenced Employee to execute this Agreement. Employee acknowledges that this Agreement is written in a manner that is understandable to Employee and that Employee has read all of the paragraphs of this Agreement. Employee further acknowledges that Employee is entering into this Agreement freely, knowingly, voluntarily, and with a full understanding of its terms. Each party warrants and represents that the party is not relying on counsel for any other party for the performance of any task, provision of any service or rendering of any advice for any purpose whatsoever, but instead is relying solely and exclusively on the party’s own counsel for all matters relating to the terms of this Agreement.

10. Nature of the Agreement . This Agreement and all provisions thereof, including all representations and promises contained herein, are contractual and not a mere recital and shall continue in permanent force and effect. The terms and conditions contained herein, constitute the entire agreements between the parties, and supersede all previous communications or agreements, either oral or written, between the parties with respect to the subject matter of this Agreement, and no agreement or understanding varying or extending the terms of this Agreement shall be binding upon either party unless in writing signed by or on behalf of such party. In the event that any portion of this Agreement is found to be unenforceable for any reason whatsoever, the other enforceable provisions shall be considered to be severable, and the remainder of the Agreement shall continue in full force and effect.

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11. Applicable Law . This Agreement shall be governed by, interpreted under, and construed and enforced in accordance with the laws of the State of Washington without giving effect to any choice or conflict of law provision or rule (whether of the State of Washington or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Washington. Any action or proceeding concerning this Agreement shall be commenced in Benton County, Washington and the parties irrevocably consent to personal jurisdiction and venue in Benton County, Washington. The parties agree that if any party successfully resorts to legal action to enforce its rights under this Agreement, the losing party shall be liable for reasonable attorneys’ fees incurred by the other party.

12. No Construction Against Either Party . In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local or foreign statute shall be deemed to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word “including” means including, without limitation. The parties intend that representations, warranties, and covenants contained herein shall have independent significance. If any party has breached any representation, warranty, or covenant contained herein in any respect, the fact that there exists another representation, warranty or covenant relating to the same subject matter (regardless of the relative levels of specificity) that the party has not breached shall not detract from or mitigate the fact the party is in breach of the first representation, warranty or covenant.

Acknowledgements and Certifications

a) The parties are signing this Agreement knowingly and voluntarily;

b) Employee has the right to consider the terms of this Agreement for twenty-one (21) days from the Effective Date (the “Review Period”); however, Employee does not have to take all 21 days to consider it, and if Employee takes fewer than 21 days to review this Agreement and Release, Employee expressly waives any and all rights to consider this Agreement for the balance of the 21-Day Review Period; and

c) Employee and the Company agree that any changes that have been made to this Agreement from the version originally presented to Employee (if any) do not extend the Review Period Employee has been given to consider this Agreement, whether those changes are deemed material or non-material.

[Signature Page follows]

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IF YOU SIGN THIS DOCUMENT, IT BECOMES A LEGALLY ENFORCEABLE AGREEMENT.

EMPLOYER:	EMPLOYEE:

IsoRay, Inc., a Minnesota corporation	Dwight Babcock

By: Brien Ragle	/s/ Dwight Babcock
	Signature
Its: CFO
	Date: 1/12/16
/s/ Brien Ragle
Signature

Date: 1/12/16

IsoRay Medical, Inc., a Delaware corporation

By: Brien Ragle
Its: CFO

/s/ Brien Ragle
Signature

Date: 1/12/16

IsoRay International, LLC, a Washington limited liability company

By: Brien Ragle
Its: CFO

/s/ Brien Ragle
Signature

Date: 1/12/16

Company’s Initials

/s/ BR

Employee’s Initials

/s/ DB

Exhibit 10.88

Employment Agreement

This Employment Agreement (“Agreement”) is made in the State of Arizona by and between Thomas C. LaVoy (“Executive”) and IsoRay, Inc. a Minnesota corporation (the “Company”).

WHEREAS, the Company is engaged in the business of providing innovative solutions for the treatment of malignancies using medical isotopes (the “Business”); and

WHEREAS, the parties desire that the Company retain Executive under the terms and conditions set forth in this Agreement; and

WHEREAS, the parties desire to express their mutual agreements, covenants, promises, and understandings in a written agreement;

NOW THEREFORE, in consideration of the premises and the agreements, promises, covenants, and provisions contained in this Agreement, the parties agree and declare as follows:

1. Employment. The Company hereby employs Executive and Executive accepts employment under the terms and conditions of this Agreement.

2. Position and Duties.

a. Executive will faithfully and diligently serve the Company to the best of his ability in his positions as Chief Executive Officer and Chairman of the Board of Directors (the “Board”) and in the performance of such other duties and responsibilities as the Company may assign to him.

b. Executive will devote his full professional time, attention, and energies to the performance of his duties for the Company, and will not, during his employment under this Agreement, engage in any other business activity, whether or not for profit, except for passive investments in firms or businesses that do not compete with the Company, without the advance written and signed consent of the Company. Notwithstanding this Section 2(b) , Executive will be permitted to serve as a director of not for profit and for profit businesses that do not compete with the Company. In addition, Executive shall have until April 30, 2016 to provide services on an as needed basis to his former employer to assist with his transition from that company so long as Executive does not devote more than ten hours per week to this activity.

c. Executive warrants that during the term of his employment under this Agreement, he will not do any act or engage in any conduct, or permit, condone, or acquiesce in any act or conduct of other persons, that he knew for should have known could cause the Company to be in violation of any law or statute, and Executive agrees to indemnify and hold the Company harmless against any and all liabilities, claims, damages, fees, losses, and expenses of any kind or nature whatsoever attributable directly or indirectly to a violation of this warranty.

d. The Company acknowledges that Executive’s principal place of residence is Scottsdale, Arizona and that the Company shall not require Executive to relocate his principal place of residence in furtherance of his employment; provided, however, that Executive agrees and acknowledges that Executive will be expected to travel to Company locations regularly as part of his duties. More specifically, the Company may impose a minimum number of days Executive shall be required to spend in Richland, Washington, subject to Executive’s consent if greater than five (5) days per month.

e. Executive agrees to comply with the policies and procedures of the Company as may be adopted and changed from time to time, including without limitation, those described in the Company’s employee handbook, Code of Ethics for Chief Executive Officer & Senior Financial Officers, and Code of Conduct and Ethics. If this Agreement conflicts with such policies or procedures, this Agreement will control.

f. As an officer of the Company, Executive owes a duty of care and loyalty to the Company as well as a duty to perform such duties in a manner that is in the best interests of the Company.

3. Compensation and Benefits. For and in consideration of all services rendered under this Agreement, the Company will compensate Executive as follows:

a. Salary. During the term of Executive’s employment under this Agreement, Executive will be compensated on the basis of an annual salary of $300,000, payable in accord with the Company’s standard payroll practices.

b. Bonus. In addition to Executive’s base salary ( Section 3(a) ), throughout his employment, Executive will be eligible for an annual discretionary bonus as periodically established by the Board (the “Annual Bonus”), based upon metrics that will be established by the Board in its sole discretion. If Executive becomes entitled to an Annual Bonus for any calendar year under this Section 3(b) , such bonus shall be paid to him by the Company within two and one-half (2-1/2) months after the end of the calendar year in which Executive earned that bonus.

c. Stock Options. Executive shall be eligible to participate in and receive stock options as defined by the relevant plan. Executive shall be issued 250,000 stock options as of the Effective Date (as defined below). The options granted will have an exercise price equal to the fair market value on the date of grant as defined under the relevant plan and shall vest immediately.

d. Expenses. The Company will reimburse Executive for all reasonable and necessary expenses that Executive incurs in carrying out his duties under this Agreement in accordance with the Company reimbursement policies as in effect from time to time, provided that Executive presents to the Company from time to time an itemized account of such expenses in such form as the Company may require.

e. Paid Time Off. Executive shall be granted four (4) weeks of paid time off during each full calendar year worked by Executive. Such paid time shall include time off for sickness, vacation, or personal reasons. The time or times during which leave may be taken shall be by mutual agreement of the Company and Executive. Whenever possible, the Company agrees to accommodate and grant Executive’s request for time. Executive may not borrow against future time. Unused paid time in any year during the term hereof requires approval by the Company to be carried over to any subsequent year.

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4. Term/Termination Of Employment.

a. Initial Term . Executive’s employment under this Agreement will commence on February 15, 2016 (“Effective Date”), and will continue for a period of three (3) years (the “Initial Term”). Thereafter, this Agreement shall renew only upon thirty (30) days written notice as provided in Section 4(b) .

b. Renewal . Upon at least thirty (30) days written notice prior to the end of the Initial Term, and subject to the provisions for termination set forth below, the term of Executive’s employment under this Agreement will extend thereafter for a period of one year (the “Renewal Term”). Upon the expiration of such subsequent term and any term renewed hereunder, and subject to the provisions for termination set forth below, the term of Executive’s employment under this Agreement will require thirty (30) days written notice of renewal for each successive Renewal Term of one-year.

c. Termination . This Agreement and Executive’s employment may be terminated by any of the following events:

i. Expiration of the Initial Term or any Renewal Term without further renewal of the term;

ii. Mutual written agreement between Executive and the Company at any time;

iii. Executive’s death;

iv. Executive’s Disability which renders Executive unable to perform the essential functions of Executive’s job even with reasonable accommodation. “Disability” means a physical or mental condition entitling Executive to benefits under the applicable long-term disability plan of the Company or any of its Subsidiaries, or if no such plan exists, a “permanent and total disability” (within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended and the rules and regulations promulgated thereunder (the “Code”)) or as determined by the Company in accordance with applicable laws. Notwithstanding the foregoing, to the extent that (i) any payment under this Agreement is payable solely upon the Executive’s Disability and (ii) such payment is treated as “deferred compensation” for purposes of Code Section 409A, Disability shall have the meaning provided in Section 1.409A-3(i)(4) of the Treasury Regulations. “Subsidiary” means a corporation, partnership or other entity of which a majority of the voting interests of such corporation, partnership or other entity are at the time owned directly or indirectly through one or more intermediaries or Subsidiaries, or both, by the Company.

v. By the Company For Cause as defined in Section 4(d) below;

vi. Resignation by Executive without Good Reason as defined in Section 4(e) below;

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vii. Termination without cause, which shall mean any termination of employment by the Company which is not defined in Section 4(c)(i) through Section 4(c)(vi) above; or

viii. Resignation by Executive with Good Reason.

d. Termination For Cause. The Company may terminate Executive’s employment under this Agreement immediately upon the occurrence of any of the following events (each, a “For Cause” termination):

i. Executive’s gross inattention to or neglect of, or gross negligence or incompetence in the performance of, duties assigned to him under this Agreement;

ii. Executive’s acceptance of any other employment;

iii. Executive’s conviction by a court of or plea of guilty or nolo contendere to fraud, dishonesty, or other acts of misconduct in rendering services on behalf of the Company;

iv. Any deliberate or unauthorized action or omission by Executive that causes or may cause the Company to breach obligations under any contract;

v. Executive’s material breach of any covenant, promise, provision, or obligation of this Agreement.

e. Voluntary Termination. Executive may voluntarily terminate his employment hereunder by giving at least thirty (30) days prior written notice to the Board of his intention to terminate employment. Such notice must specify the end of a calendar month as the termination date. Notwithstanding the foregoing, if Executive voluntarily terminates his employment hereunder for Good Reason (as defined below) Executive shall be entitled to the severance benefits payable under Section 5(b)(i) below. “Good Reason” shall mean, without Executive’s express written consent a material, adverse change in the Executive’s title, authority, duties or responsibilities (other than temporarily while Executive is physically or mentally incapacitated or as required by applicable law). Executive cannot terminate his employment for Good Reason unless he has provided written notice to the Company of the existence of the circumstances providing grounds for termination for Good Reason within twenty (20) days of the initial existence of such grounds and the Company has had twenty (20) days from the date on which such notice is provided to cure such circumstances. If the Company fails to cure the event giving rise to Good Reason within the twenty (20) day cure period, Executive may terminate his employment for Good Reason, provided that if Executive does not terminate his employment for Good Reason within twenty (20) days after the end of the Company’s twenty (20) day cure period, Executive will be deemed to have waived his right to terminate for Good Reason with respect to such grounds.

5. Company’s Post-Termination Obligations .

a. Termination under Sections 4(c)(i), 4(c)(iii), 4(c)(iv), 4(c)(v) and 4(c)(vi) .

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i. If Executive’s employment terminates for any of the reasons set forth in Sections 4(c)(i), 4(c)(iii), 4(c)(iv), 4(c)(v) and 4(c)(vi) above, then the Company will pay Executive (1) all accrued but unpaid wages, based on Executive’s then current base salary, through the termination date, (2) all approved, but unreimbursed, business expenses, provided that a request for reimbursement of business expenses is submitted in accordance with the Company’s policies and submitted within five (5) business days of Executive’s termination date, and (3) all earned and accrued but unpaid bonuses. Amounts payable pursuant to this Section 5(a)(i) above shall be paid within thirty (30) days of the Executive’s termination date.

b. Termination Under Sections 4(c)(ii) , 4(c)(vii) and 4(c)(viii) .

i. If Executive’s employment terminates for any of the reasons set forth in Sections 4(c)(ii) , 4(c)(vii) and 4(c)(viii) above, then the Company will pay Executive (1) all accrued but unpaid wages through the termination date, based on Executive’s base salary ; (2) the Monthly Compensation (as defined below) for each one month period for the longer of (A) twelve (12) months and (B) the remainder of the then-current Initial Term or Renewal Term, as applicable; (3) all accrued but unpaid paid time off through the termination date, based on Executive’s then current base salary; (4) all approved, but unreimbursed, business expenses, provided that a request for reimbursement of business expenses is submitted in accordance with the Company’s policies and submitted within five (5) business days of Executive’s termination date; and (5) all earned and accrued but unpaid bonuses. Executive shall continue to participate in the Company’s current benefit programs on the same terms and conditions as active employees and in accordance with the terms of those programs through the remainder of the then-current Initial Term or Renewal Term, as applicable, to the extent permitted under the terms of those programs and applicable law. “Monthly Compensation” shall be equal to the greater of (x) the average of the total monthly compensation reported on Executive’s tax returns and attributed to Executive by the Company, which was paid to Executive by the Company for the two (2) years preceding year of the date in which the termination occurred or (y) the preceding calendar year reported on Executive’s tax returns and attributed to Executive by the Company but in each of this Section 5(b)(i)(x) or (y) adding back in contributions made to deferred compensation plans and group insurance plans of the Company.

ii. The cash amounts or benefits payable under this Section 5(b) shall be paid ratably according to the regularly scheduled payroll practices of the Company following the expiration of the Severance Delay Period, with the payments provided in subsections (1), (3), (4) and (5) of Section 5(b)(i) payable within thirty (30) days, and the payments provided in Section 5(b)(i)(2) to be paid over the relevant time periods specified in those subsections. “Severance Delay Period” means, except as otherwise modified by the application of Section 13(b) , the period beginning on the date of the Executive’s termination of employment with the Company and ending on the thirtieth (30th) day thereafter. Notwithstanding the foregoing, in the event that the Executive’s termination of employment occurs in connection with an exit incentive program or other employment termination program offered to a group or class of employees, as defined under the Older Worker Benefit Protection Act, 29 U.S.C. Section 626, the Severance Delay Period shall mean the period beginning on the date of the Executive’s termination of employment with the Company and ending on the sixtieth (60th) day thereafter.

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iii. Except as set forth in this Section 5(b) , the Company shall have no other obligations to Executive for termination pursuant to Sections 4(c)(ii) , 4(c)(vii) and 4(c)(viii) .

c. The Company’s obligation to provide the payments set forth in Section 5(a) and Section 5(b) above shall be conditioned upon the following (the “Separation Conditions”):

i. Executive’s (or, in the case of Executive’s death or Disability, Executive’s estate or trustee, as applicable) execution prior to the expiration of the Severance Delay Period (and the expiration of any applicable revocation period) of a separation agreement in a form prepared by the Company, which will include a general release from liability so that Executive will release the Company and its Subsidiaries from any and all liability and claims of any kind as permitted by law; and

ii. Executive’s compliance with the restrictive covenants ( Sections 6-9 ) and all post-termination obligations, including, but not limited to, the obligations contained in this Agreement.

iii. If Executive refuses to execute (or revokes) an effective separation agreement as set forth in Section 5(c) above prior to the expiration of the Severance Delay Period (or if any applicable revocation period has not yet ended prior to such time), the Company will not provide any payments or benefits to Executive under Section 5(a ) and Section 5(b) until such separation agreement is executed and becomes effective; provided that if the period during which Executive can execute an separation agreement (or revoke a previously executed separation agreement) spans two calendar years, the payment will automatically commence in the later of the two years, regardless of the year in which Executive executes the separation agreement. The Company’s obligation to make the separation payments set forth in Section 5(a) and Section 5(b) shall terminate immediately upon any breach by Executive of any post-termination obligations to which Executive is subject.

iv. Except as provided in this 5, following termination of Executive’s employment pursuant to Section 4 , and except as provided in Section 11 in the event of a Change of Control, the Company shall have no other obligations for compensation of Executive.

d. Set-Off . If Executive has any outstanding obligations to the Company upon the termination of Executive’s employment for any reason, Executive hereby authorizes the Company to deduct any amounts owed to the Company from Executive’s final paycheck and/or any amounts that would otherwise be due to Executive, including under Section 6 or Section 11 , but only to the extent such set-off is made in accordance with Treasury Regulation 1.409A-3(j)(4)(xiii). No other set-off shall be permitted under this Agreement.

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6. Confidential Commercial Information.

a. Executive acknowledges that he will be entrusted with price lists, customer lists, customer contact information, information about customer transactions, development and research work, marketing programs, plans, and proposals, and data contained within internally employed software, data bases, and computer operations developed by or for the Company (“Confidential Commercial Information”); provided, however, that for the purposes of this Agreement Confidential Commercial Information does not include information (i) that was publicly available prior to Executive’s disclosure or use thereof; or (ii) that Executive lawfully received from some person who was not under any obligation of confidentiality with respect thereto; (iii) that becomes publicly available other than as the result of any breach of this Agreement by Executive; or (iv) that is generally known to or readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use. Executive acknowledges that Confidential Commercial Information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and that the Company has made efforts that are reasonable under the circumstances to maintain the secrecy of Confidential Commercial Information.

b. Executive acknowledges that he has been instructed by the Company to, and agrees that he will, maintain the Company’s Confidential Commercial Information in a confidential manner. During his employment, Executive will not, directly or indirectly, disclose any Confidential Commercial Information to any person or entity not authorized by the Company to receive or use such Confidential Commercial Information. After the termination of Executive’s employment, for whatever reason and by whatever party, Executive will not, directly or indirectly, use or disclose to any person or entity any Confidential Commercial Information without the prior written authorization of the Company.

c. All documents and other tangible property relating in any way to the business of the Company that Executive develops or that come into his possession during his employment are the property of the Company, and Executive will return all such documents and tangible property to the Company upon the termination of his employment, or at such earlier time as the Company may request.

d. Executive acknowledges that all of the commercially available software that the Company uses on its computer system that was not developed specially by or for the Company is either owned or licensed for use by the Company, and that the use of such software is governed strictly by the explicit terms and conditions of licensing agreements between the Company and the publisher of the software, and Executive agrees to adhere to those terms and conditions. Executive will not copy, duplicate, download, transfer, or otherwise make personal use of any software on the Company’s computer system without the Company’s express, written consent.

e. Executive represents that to the best of his knowledge, the performance of all the terms of this Agreement and of his duties as an employee of the Company will not breach any agreement to keep in confidence any proprietary information that he acquired in confidence prior to his employment under this Agreement, and that Executive has not entered into, and agrees that he will not enter into, any agreement either written or oral in conflict with this Agreement. Executive represents that to the best of his knowledge, Executive has not brought and will not bring with him to the Company or use in the performance of his responsibilities at the Company any materials or documents of a former employer that are not generally available to the public, unless Executive has obtained express written authorization from the former employer for their possession and use. Executive represents that he has delivered to the Company a true and correct copy of any employment, proprietary information, confidentiality, or non-competition agreement to which he is or was a party with any former employers, and that is or may be in effect as of the date hereof. Executive has been instructed not to breach any obligation of confidentiality that he may have to any former employer, and agrees that he will not commit any such breach during employment with the Company.

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7. Inventions and Copyrights.

a. Executive acknowledges that, as a part of his duties, during his employment, he may develop discoveries, concepts, and ideas concerning or relating to the Business, whether or not patentable, including without limitation processes, methods, formulas, and techniques, as well as improvements thereof or know-how related thereto, and concerning any present or prospective activities of the Company that are published before such discoveries, concepts, and ideas (“Inventions”).

b. Executive will fully disclose and will continue to disclose to the Company all Inventions that he makes or conceives, in whole or in part, at this time or during his employment with the Company.

c. Any and all Inventions will be the absolute property of the Company or its designees and, at the request of the Company and at its expense, but without additional compensation, Executive will make application in due form for United States patents and foreign patents on such Inventions, and will assign to the Company all his right, title, and interest in such Inventions, and will execute any and all instruments and do any and all acts necessary or desirable in connection with any such application for patents or in order to establish and perfect in the Company the entire right, title, and interest in such Inventions, patent applications, or patents, and also execute any instrument necessary or desirable in connection with any continuations, renewals, or reissues thereof or in the conduct of any related proceedings or litigation.

d. The Company will own the copyright in all materials created by Executive relating to the Business and eligible for copyright (which will be deemed work made-for-hire). The Company will have the right to apply for copyright registration, including any renewals or extension, whether under the laws of the U.S. or any country having jurisdiction over the copyright. Executive agrees to execute any documents necessary or appropriate for such registration. The Company will also own any trademark, service mark or trade name created by Executive (alone or in conjunction with others) for the Company and used to identify any present or future product, service, activity, operation, or function of the Company. The Company may obtain trademark or service mark protection of the Company’s rights including, at the Company’s discretion, state, federal and international registration. The Company will own all right, title, and interest in and to all results and the work product of Executive’s services for the Company (all of which will be deemed proprietary), free of any reserved rights by Executive, whether or not specifically enumerated in this Agreement.

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8. Post-Employment Restrictions.

a. Following the termination of Executive’s employment, for whatever reason and by whatever party, and during any Restrictive Period, Executive will not, directly or indirectly, on his own behalf or on behalf of any other person or entity:

i. enter into or engage in any business that provides Competitive Products or Competitive Services within the Restricted Areas;

ii. solicit or accept orders for Competitive Products from any person or entity upon whom he called or with whom he had direct or indirect contact on behalf of the Company and who at the time of such conduct is a customer or client of the Company;

iii. solicit or accept orders for Competitive Products from any person or entity who was a customer or client of the Company during his engagement and who at the time of such conduct is a customer or client of the Company;

iv. solicit or accept orders for Competitive Products from any person or entity who at the time of such conduct is a customer or client of the Company;

v. encourage, entice, induce, or influence, directly or indirectly, any person or entity not to do business with the Company;

vi. encourage, entice, induce, or influence, directly or indirectly, any person to terminate his or her employment with the Company; or

vii. hire, retain, or offer to hire or retain for the performance of any service in connection with the marketing, distribution, or sale of any Competitive Product any person who at the time of such conduct is an employee of the Company or who was an employee of the Company within the 180-day prior to such conduct.

viii. solicit or accept orders for Competitive Services from any person or entity upon whom he called or with whom he had direct or indirect contact on behalf of the Company and who at the time of such conduct is a customer or client of the Company;

ix. solicit or accept orders for Competitive Services from any person or entity who was a customer or client of the Company during his engagement and who at the time of such conduct is a customer or client of the Company;

x. solicit or accept orders for Competitive Services from any person or entity who at the time of such conduct is a customer or client of the Company.

b. The Restrictive Periods are: (a) the 90-day period commencing on the termination of Executive’s employment with the Company (“the First Restrictive Period”); and (b) the 90-day period commencing on the expiration of the First Restrictive Period (“the Second Restrictive Period”); and (c) the 90-day period commencing on the expiration of the Second Restrictive Period (“the Third Restrictive Period”); and (d) the 90-day period commencing on the expiration of the Third Restrictive Period (“the Fourth Restrictive Period”).

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c. The term of any Restrictive Period set forth in this Agreement will be tolled for any time during which Executive is in violation of any provision of this Agreement and for any time during which there is pending any action or arbitration (including any appeal from any final judgment) brought by any person, whether or not a party to this Agreement, in which action the Company seeks to enforce this Agreement or in which any person contests the validity of such agreements and covenants or their enforceability, or seeks to avoid their performance or enforcement.

d. “Competitive Products” means any supplies, equipment, products, goods, or services that are similar to or competitive with supplies, equipment, products, goods, or services that the Company marketed, distributed, or sold during Executive’s employment with the Company.

e. “Competitive Services” means any services that are similar to any services that Executive performed for the Company during Executive’s employment with the Company.

f. The Restrictive Areas are: (1) the area within a 10 air-mile radius of any location of the Company at which Executive performed services during his employment under this Agreement; and (2) Maricopa County, Arizona; and (3) the state of Arizona; and (4) the state of Washington; and (5) the Mountain Time Zone and the Pacific Time Zone of the United States; and (6) that portion of the United States west of the Mississippi River; (7) the United States; and (8) any country in which the Company is conducting business at the time of Executive’s separation from employment.

9. Non-Disparagement. Executive agrees that during the term of Executive’s services to the Company, and at any time thereafter, not to make or communicate any comments or other remarks which are negative or derogatory to the Company or which would tend to disparage, slander, ridicule, degrade, harm or injure the Company (or any business relationship of the Company) or any officer, partnership member, or other employee of the Company or its affiliates.

10. Remedies.

a. The parties expressly agree that, in the event of any failure by the Company to pay any wages to which Executive may become entitled in connection with his employment in violation of Ariz. Rev. Stat. §§ 23-350 through 23-362, the amount of Executive’s recovery will be limited to the amount of actual wages that the court or arbitrator determines to have been unpaid, and, notwithstanding the provisions of Ariz. Rev. Stat. § 23-355, no greater amount. Executive hereby expressly waives any remedy that he may have or that may later become available to his under Ariz. Rev. Stat. § 23-355 for any additional amounts.

b. Any breach of the duties and obligations imposed upon Executive by this Agreement would cause irreparable harm to the Company, and the Company could not be fully compensated for any such breach with money damages. Therefore, injunctive relief is an appropriate remedy for any such breach. Such injunctive relief will be in addition to and not in limitation of or substitution for any other remedies or rights to which the Company may be entitled at law or in equity, including without limitation liquidated damages under this Agreement.

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11. Change of Control . Notwithstanding anything to the contrary in the Company’s existing or future incentive plans or any award agreement granted to Executive thereunder, upon a Change of Control, all of Executive’s outstanding unvested equity-based awards granted pursuant to the incentive plans, at Executive’s option, shall vest and become immediately exercisable and unrestricted, without any action by the Board or any committee thereof. “Change of Control” shall mean the first of the following events to occur after the Effective Date:

(a) a Person or one or more Persons acting as a group acquires ownership of stock of the Company that, together with the Company stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company;

(b) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company’s stockholders was approved or recommended by a majority of the directors then still in office who either were directors on the Effective Date or whose appointment, election or nomination for election was previously so approved or recommended; and

(c) a Person or one or more Persons acting as a group acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons) assets from the Company equal to or more than forty percent (40%) of the total gross fair market value of all of the assets of the Company determined immediately prior to such acquisition.

For purposes of this Section 11 ,

(i) “Person” shall mean a “person” as defined in Section 7701(a)(1) of the Code, except that such term shall not include (A) the Company (or any Subsidiary thereof), (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company, (C) an underwriter temporarily holding securities pursuant to an offering of such securities, or (D) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.

(ii) Stock ownership shall be determined in accordance with the attribution rules of Section 318(a) of the Code.

(iii) The gross fair market value of an asset shall be determined without regard to any liabilities associated with that asset.

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(iv) A “Change of Control” shall not be occur (A) by virtue of the consummation of any transaction or series of integrated transactions immediately following which the holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions, and (B) as a result of any primary or secondary offering of Company common stock to the general public through a registration statement filed with the Securities and Exchange Commission.

12. Clawback . Notwithstanding anything contained herein to the contrary, any amounts paid or payable to Executive pursuant to this Agreement or otherwise by the Company, including, but not limited to, any equity compensation granted to Executive, may be subject to forfeiture or repayment to the Company in accordance with Internal Revenue Code Section 409A and pursuant to the clawback policy as adopted by the Board and as such may be amended by the Board from time to time, and Executive hereby agrees to be bound by any such policy.

13. Compliance with Code Section 409A .

a. It is intended that each payment or installment of payments provided under this Agreement is a separate “payment” for purposes of Code Section 409A.

b. Notwithstanding anything to the contrary herein, if the Company determines (i) that on the date of Executive’s “separation from service” (as such term is defined under Treasury Regulation 1.409A-1(h)) or at such other time that the Company determines to be relevant, Executive is a “specified employee” (as such term is defined under Treasury Regulation 1.409A-1(i)(1)) of the Company, and (ii) that any payments to be provided to Executive pursuant to this Agreement are or may become subject to the additional tax under Code Section 409A(a)(1)(B) or any other taxes or penalties imposed under Code Section 409A if provided at the time otherwise required under this Agreement, then such payments shall be delayed until the date that is six (6) months after the date of Executive’s “separation from service” (as such term is defined under Treasury Regulation 1.409A-1(h)) or, if sooner, the date of Executive’s death. Any payments delayed pursuant to this Section 13(b) shall be made in a lump sum on the first day of the seventh month following Executive’s “separation from service” (as such term is defined under Treasury Regulation 1.409A-1(h)) or, if sooner, the date of Executive’s death. It is intended that Agreement shall comply with the provisions of Code Section 409A so as not to subject Executive to the payment of additional taxes and interest under Code Section 409A. In furtherance of this intent, this Agreement shall be interpreted, operated, and administered in a manner consistent with these intentions.

c. Notwithstanding anything herein to the contrary, a termination of Executive’s employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of any amounts or benefits upon or following a termination of employment unless such termination is also a “separation from service” within the meaning of Code Section 409A, and for purposes of any such provision of this Agreement, references to a “termination,” “termination of employment,” “termination date,” or similar terms shall mean “separation from service.”

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d. For the avoidance of doubt, the Company shall pay any amounts that are due under this Agreement following Executive’s termination of employment, death, Disability or other event within the periods of time that are specified in this Agreement, provided, however, that the Company, in its sole and absolute discretion, shall determine the date or dates on which any such payment shall be made during such specified period.

e. By accepting this Agreement, Executive hereby agrees and acknowledges that neither the Company nor its Subsidiaries make any representations with respect to the application of Code Section 409A to any tax, economic or legal consequences of any payments payable to Executive hereunder. Further, by the acceptance of this Agreement, Executive acknowledges that (i) Executive has obtained independent tax advice regarding the application of Code Section 409A to the payments due to Executive hereunder, (ii) Executive retains full responsibility for the potential application of Code Section 409A to the tax and legal consequences of payments payable to Executive hereunder and (iii) the Company shall not indemnify or otherwise compensate Executive for any liability incurred as a result of the failure of this Agreement to comply, in form or operation, with the requirements of Code Section 409A. The parties agree to cooperate in good faith to amend such documents and to take such actions as may be necessary or appropriate to comply with Code Section 409A.

14. Prevailing Party’s Litigation Expenses. In the event of litigation between the Company and Executive related to this Agreement, the non-prevailing party shall reimburse the prevailing party for any costs and expenses (including, without limitation, attorneys’ fees) reasonably incurred by the prevailing party in connection therewith.

15. Withholding . All amounts payable to Executive hereunder shall be subject to required payroll deductions and tax withholdings.

16. Adjudication of Agreement.

a. If any court or arbitrator of competent jurisdiction holds that any restriction imposed upon Executive by this Agreement exceeds the limit of restrictions that are enforceable under applicable law, the parties desire and agree that the restriction will apply to the maximum extent that is enforceable under applicable law, agree that the court or arbitrator so holding may reform and enforce the restriction to the maximum extent that is enforceable under applicable law, and desire and request that the court or arbitrator do so.

b. If any court or arbitrator of competent jurisdiction holds that any provision of this Agreement is invalid or unenforceable, the parties desire and agree that the remaining parts of this Agreement will nevertheless continue to be valid and enforceable.

17. Modification Or Waiver Of Agreement. No modification or waiver of this Agreement will be valid unless the modification or waiver is in writing and signed by both of the parties. The failure of either party at any time to insist upon the strict performance of any provision of this Agreement will not be construed as a waiver of the right to insist upon the strict performance of the same provision at any future time.

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18. Notices. Any notices required or permitted under this Agreement will be sufficient if in writing and sent by certified mail to, in the case of Executive, the last address he has filed in writing with the Company or, in the case of the Company, its principal office.

19. Opportunity To Consider Agreement; Legal Representation. Executive acknowledges that he has had a full opportunity to consider this Agreement, to offer suggested modifications to its terms and conditions, and to consult with an attorney of his own choosing before deciding whether to sign it.

20. No Rule Of Strict Construction. The language of this Agreement has been approved by both parties, and no rule of strict construction will be applied against either party.

21. Entire Agreement. This Agreement contains all of the agreements between the parties relating to Executive’s employment with the Company. The parties have no other agreements relating to Executive’s employment, written or oral. This Agreement supersedes all other agreements, arrangements, and understandings relating to Executive’s employment, and no such agreements, arrangements, or understandings are of any force or effect. The parties will execute and deliver to each other any and all such further documents and instruments, and will perform any and all such other acts, as reasonably may be necessary or proper to carry out or effect the purposes of this Agreement.

22. Assignment Of Agreement. Executive has no right to transfer or assign any or all of his rights or interests under this Agreement. The Company may assign its rights and interests under this Agreement to any successor entity as part of any sale, transfer, or other disposition of all or substantially all of the assets of the Company.

23. Headings. The descriptive headings of the paragraphs and subparagraphs of this Agreement are intended for convenience only, and do not constitute parts of this Agreement.

24. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument.

25. Choice Of Forum. The parties agree that the proper and exclusive forum for any action or arbitration arising out of or relating to this Agreement or arising out of or relating to Executive’s employment by the Company will be Maricopa County, Arizona, and that any such action or arbitration will be brought only in Maricopa County, Arizona. Executive consents to the exercise of personal jurisdiction in any such action or arbitration by the courts or arbitrators of Maricopa County, Arizona.

26. Governing Law. This Agreement will be construed in accord with and any dispute or controversy arising from any breach or asserted breach of this Agreement will be governed by the laws of the State of Arizona, without reference to the choice of law principles thereof.

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IN WITNESS WHEREOF, the parties have executed this Agreement on the dates indicated at their respective signatures below.

DATED this 13 ^th day of January, 2016.

	/s/ Thomas C. LaVoy
	Thomas C. LaVoy

DATED this 13 ^th day of January, 2016.

	IsoRay, Inc., a Minnesota corporation

	By:	/s/ Brien Ragle
		Brien Ragle
	Its:	CFO

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Exhibit 31.1

CERTIFICATION

I, William Cavanagh, III certify that:

1. I have reviewed this quarterly report on Form 10-Q of IsoRay, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 9, 2016

	/s/ William Cavanagh, III
	William Cavanagh, III
	Interim Chief Executive Officer
	(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION

I, Brien L. Ragle certify that:

1. I have reviewed this quarterly report on Form 10-Q of IsoRay, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 9, 2016

	/s/ Brien L. Ragle
	Brien L. Ragle
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

Exhibit 32

Section 1350 Certifications

Pursuant to 18 U.S.C. § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of IsoRay, Inc., a Minnesota corporation (the "Company"), hereby certify that:

To my knowledge, the Quarterly Report on Form 10-Q of the Company for the quarterly period ended December 31, 2015 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: February 9, 2016

	/s/ William Cavanagh, III
	WILLIAM CAVANAGH, III
	INTERIM CHIEF EXECUTIVE OFFICER (Principal Executive Officer)

Dated: February 9, 2016

	/s/ Brien Ragle
	BRIEN RAGLE
	CHIEF FINANCIAL OFFICER (Principal Financial and Accounting Officer)