Isoray, Inc. (Form: 10-Q, Received: 11/13/2019 16:36:50)

For the three months ended September 30, 2019 and 2018

1.	Basis of Presentation

The accompanying unaudited interim consolidated financial statements are those of Isoray, Inc., and its wholly-owned subsidiaries, referred to herein as “Isoray” or the “Company”. All significant intercompany accounts and transactions have been eliminated in the consolidation. In the opinion of management, all adjustments necessary for the fair presentation of the consolidated financial statements have been included. These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes as set forth in the Company’s annual report filed on Form 10-K for the year ended June 30, 2019.

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

Certain prior period amounts have been reclassified to conform to the current period’s presentation. The results of operations for the periods presented may not be indicative of those which may be expected for a full year. The Company anticipates that as the result of continuing operating losses and the significant net operating losses available from prior fiscal years, its effective income tax rate for fiscal year 2020 will be 0%.

2.	New Accounting Standards

Accounting Standards Updates Adopted

In February 2016, the FASB issued ASU 2016-02 Leases (Subtopic 842), which will require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by most leases. The update is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. The ASU became effective for, and was adopted by, the Company in the first quarter of the fiscal year ending June 30, 2020. The Company elected the transition option to apply the new guidance at the effective date without adjusting comparative periods presented.

Accounting Standards Updates to Become Effective in Future Periods

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606, which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic 606. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is in the process of evaluating the impact the standard will have on its financial statements.

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

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4.	Inventory

Inventory consisted of the following at September 30, 2019 and June 30, 2019 (in thousands):

	September 30,		June 30,
	2019		2019
Raw materials	$	330	$	333
Work in process		161		166
Finished goods		10		31
Total inventory, current	$	501	$	530

	September 30,		June 30,
	2019		2019
Enriched barium, non-current	$	117	$	117
Raw materials, non-current		28		38
Total inventory, non-current	$	145	$	155

Inventory, non-current represents raw materials that were ordered in quantities to obtain volume cost discounts which based on current and anticipated sales volumes will not be consumed within an operating cycle. On August 25, 2017, the Company entered into a Consignment Agreement and related Services Agreement with MedikorPharma-Ural LLC to begin utilizing our enriched barium-130 carbonate inventory. The Company originally anticipated obtaining enough Cesium-131 under this arrangement to obtain over 4,000 curies of Cesium-131. During the three months ended September 30, 2019 the Company obtained 31 curies of Cesium-131 under this agreement which has been used in production. At September 30, 2019, the Company estimates that the remaining enriched barium will result in 894 curies; approximately 60 of which will be obtained in the next twelve months and 834 will be obtained after September 30, 2020. There is no assurance as to whether the agreement will be terminated before this full amount is obtained and other supply sources are used, nor is there assurance that the agreements with the third-party Cesium-131 suppliers will be executed.

5.	Property and Equipment

Property and equipment consisted of the following at September 30, 2019 and June 30, 2019 (in thousands):

	September 30,			June 30,
	2019			2019
Land	$	366		$	366
Equipment		3,872			3,825
Leasehold improvements		4,143			4,143
Other¹		696			645
Property and equipment		9,077			8,979
Less accumulated depreciation		(7,408	)		(7,370	)
Property and equipment, net	$	1,669		$	1,609

1 Plant and equipment, not placed in service are items that meet the capitalization threshold or which management believes will meet the threshold at the time of completion and which have yet to be placed into service as of the date of the balance sheet, and therefore, no depreciation expense has been recognized. Also included at September 30, 2019 and June 30, 2019 are costs associated with advance planning and design work on the Company’s new production facility of $207,000.

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6.	Share-Based Compensation

The following table presents the share-based compensation expense recognized during the three months ended September 30, 2019 and 2018 (in thousands):

	Three Months ended September 30,
	2019		2018
Cost of product sales	$	8	$	10
Research and development expenses		19		18
Sales and marketing expenses		25		22
General and administrative expenses		39		43
Total share-based compensation	$	91	$	93

As of September 30, 2019, total unrecognized compensation expense related to stock-based options was approximately $537,000 and the related weighted-average period over which it is expected to be recognized is approximately 0.98 years.

A summary of stock options within the Company’s share-based compensation plans as of September 30, 2019 was as follows (in thousands except for exercise prices and terms):

					Weighted
			Weighted		Average
	Number of		Exercise		Contractual		Intrinsic
As of September 30, 2019	Options		Price		Term (Years)		Value
Outstanding		4,621	$	0.64		7.70	$	-
Vested and expected to vest		4,621	$	0.64		7.70	$	-
Vested and exercisable		2,909	$	0.74		6.92	$	-

There were no stock options exercised during the three months ended September 30, 2019 and 2018, respectively. The Company’s current policy is to issue new shares to satisfy stock option exercises.

There were 10,000 and 82,500 option awards granted with a fair value of approximately $3,000 and $35,000 during the three months ended September 30, 2019 and 2018, respectively.

There were 8,250 and 10,000 stock option awards which expired during three months ended September 30, 2019 and 2018, respectively.

There were 26,250 and 38,750 stock option awards forfeited during three months ended September 30, 2019 and 2018, respectively.

10.	Leases

The Company maintains a production facility located at Applied Process Engineering Laboratory (APEL) in Richland, Washington. The APEL facility became operational in September 2007. The production facility has over 15,000 square feet and includes space for isotope separation, seed production, order dispensing, a clean room for assembly of our product offerings, and a dedicated shipping area. In 2015, the Company entered into a modification to the production facility lease that modified the requirement to return the facility to ground at the time of exit at Company discretion, exercised an extension in 2017 to increase the lease term to April 30, 2021, and reduced the required notice to terminate the lease early from twelve months to six months. In July 2019, the Company entered into another modification of the production facility lease that extends the term to April 20, 2026, maintains the current rental rate through April 2020, and provides for an eighteen month termination notice with an early termination penalty of up to $40,000 which decreases each year.

Upon the adoption of Topic 842 on July 1, 2019, the Company recognized a right-of-use asset and lease liability of approximately $1.2 million. In determining the amount of the right-of-use asset and lease liability, we assumed the termination of the lease in April 2024 and incurring a termination penalty of $20,000. As of the date of adoption, the operating lease is included on the balance sheet at the present value of the future base payments discounted at a 6% discount rate using the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment as the lease does not provide an implicit discount rate. The weighted average remaining term and discount rate as of September 30, 2019 was 4.5 years and 6%, respectively.

For the three months ended September 30, 2019, our operating lease expense was approximately $73,000. Operating right-of-use asset amortization was approximately $55,000 for the three months ended September 30, 2019. Due to lease expense in excess of payments made, the lease liability decreased approximately $54,000 for the three months ended September 30, 2019.

The following table presents the future operating lease payments and lease liability included on the condensed balance sheet related to the Company’s operating lease as of September 30, 2019 (in thousands):

Year Ending June 30,
2020 (remaining nine months of the year)	$	217
2021		290
2022		290
2023		290
2024		237
Total		1,324
Less: Imputed Interest		(151	)
Total Lease Liability	$	1,173
Less current portion		(225	)

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Asset Retirement Obligation

The Company has an asset retirement obligation (ARO) associated with the facility it currently leases. In connection with the lease modification executed in July 2019, the ARO changed as follows (in thousands):

	Three months ended September 30,
	2019			2018
Beginning balance	$	621		$	590
Accretion of discount		7			8
Gain on change in ARO estimate due to lease modification		(73	)		-
Ending Balance	$	555		$	598

The original facility lease was scheduled to expire in the fourth quarter 2016. Upon the end of the original lease term, the initial asset retirement estimate was fully accreted and the related ARO asset was fully amortized. During the three months ended September 30, 2019, the Company extended the lease term an additional five years thus extending the time before asset retirement costs would be incurred. This resulted in a decrease in the ARO balance to a fair value of $555,000 and the Company recognized a gain on change in the estimate of $73,000 for the three months ended September 30, 2019.

11.	Shareholders’ Equity

On July 11, 2018, the Company completed the closing of a registered direct offering with several institutional and accredited investors (each an “Investor”) for the sale of a total of 11,000,000 shares of common stock of the Company (“Shares”) at a price per share of $0.75, for aggregate gross proceeds to the Company of $8.25 million. Cash expenses relating to this offering were approximately $0.75 million.

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In a concurrent private placement, the Company sold to each Investor, at no additional consideration, unregistered warrants to purchase up to the number of shares of common stock of the Company equal to 50% of such Investor’s Shares or a total of 5,500,000 shares, with an exercise price of $0.75 per share, exercisable from January 11, 2019 until January 11, 2024 (the “Investor Warrants”). The Company also issued warrants to purchase up to 330,000 shares of common stock of the Company, at an exercise price of $0.9375, to representatives of H.C. Wainwright & Co., LLC (“Wainwright”), the placement agent for the registered direct offering, as part of its compensation (the “Placement Agent Warrants” and together with the Investor Warrants, the “Warrants”).

The aggregate number of shares of our common stock issuable upon the exercise of the Warrants is 5,830,000 shares relating to this offering. We will receive gross proceeds from this offering solely to the extent any Warrants are exercised for cash.

12.

Contracts with Customers

We routinely enter into agreements with customers that include general commercial terms and conditions, notification requirements for price increases, shipping terms, and in most cases, prices for the products that we offer. However, these agreements do not obligate us to provide goods to the customer and there is no consideration promised to us at the onset of these arrangements. For customers without separate agreements, we have a standard list price established for all products and our invoices contain standard terms and conditions that are applicable to those customers where a separate agreement is not controlling. Our performance obligations are established when a customer submits a purchase order or e-mail notification (in writing, electronically or verbally) for goods, and we accept the order. We identify performance obligations as the sale of our products and services as requested from our customers. We generally recognize revenue upon the satisfaction of these criteria when control of the product has been transferred to the customer at which time we have an unconditional right to receive payment. Our prices are fixed and are not affected by contingent events that could impact the transaction price. We do not offer price concessions and do not accept payment that is less than the price stated when we accept the purchase order, except in rare credit related circumstances. We do not have any material performance obligations where we are acting as an agent for another entity.

Revenues for all products are typically recognized at the time the product is shipped, at which time the title passes to the customer, and there are no further performance obligations.

Sources of Revenue

We have identified the following revenues disaggregated by revenue source:

	1.	Domestic – direct sales of products and services.

	2.	International – direct sales of products and services.

During the three months ended September 30, 2019, the Company did not have any international revenue and a nominal amount during the three months ended September 30, 2018. For the three months ended September 30, 2019, prostate brachytherapy comprised 90% of our revenue while other revenue comprised 10% compared to 88% and 12%, respectively, during the three months ended September 30, 2018.

Contract Balances

We incur obligations on general customer purchase orders and e-mails that have been accepted but unfulfilled. Due to the short duration of time between order acceptance and delivery of the related product, we have determined that the balance related to these obligations is generally immaterial at any point in time. We monitor the value of orders accepted but unfulfilled at the close of each reporting period to determine if disclosure is appropriate.

Warranty

Our general product warranties do not extend beyond an assurance that the product delivered will be consistent with stated specifications and do not include separate performance obligations.

Returns

Generally, we allow returns if not implanted and we are notified within a few weeks after satisfying our performance obligations of a return. Returns after shipment may result in a 50% restocking fee.

Significant Judgments in the Application of the Guidance in ASC 606

There are no significant judgments associated with the satisfaction of our performance obligations. We generally satisfy performance obligations upon shipment of the product to the customer. This is consistent with the time in which the customer obtains control of the products. Therefore, the value of unsatisfied performance obligations at the end of any reporting period is generally immaterial. We use historical information along with an analysis of the expected value to properly calculate and to consider the need to constrain estimates of variable consideration. Such amounts are included as a reduction to revenue from the sale of products in the periods in which the related revenue is recognized and adjusted in future periods as necessary.

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Commissions and Contract Costs

We expense commissions on orders to our sales team upon satisfaction of our performance obligations. We generally do not incur incremental charges associated with securing agreements with customers which would require capitalization and recovery over the life of the agreement.

Practical Expedients

Our payment terms for sales direct to customers and distributors are substantially less than the one year collection period that falls within the practical expedient in determination of whether a significant financing component exists.

Shipping and Handling Charges

Fees charged to customers for shipping and handling of products are included as revenue and the costs for shipping and handling of products are included as a component of cost of sales.

Taxes Collected from Customers

As our products are used in another service and are exempt, to this point we have not collected taxes. If we were to collect taxes they would be on the value of transaction revenue and would be excluded from revenues and cost of sales and would be accrued in current liabilities until remitted to governmental authorities.

Concentration of Customers

One group of customers, facilities or physician practices has revenues that aggregate to greater than 10% of total Company sales. While the aggregate members of the group aggregate to more than 10% of total Company sales, no single member of the group has revenues greater than 10% of total Company sales. These facilities are serviced by the same physician group, one of whom is our Medical Director:

Three Months Ended September 30,

Facility

2019
% of
total

revenue

2018
% of
total

revenue

El Camino, Los Gatos, & other facilities

23.64

25.18

Delaware	41-1458152
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer 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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value	ISR	NYSE American

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

Class	Outstanding as of November 11, 2019
Common stock, $0.001 par value	67,388,047

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

	Consolidated Statements of Changes in Shareholders' Equity (Unaudited)	4

	Notes to the Consolidated Unaudited Financial Statements	5

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3	Quantitative and Qualitative Disclosures About Market Risk	18

Item 4	Controls and Procedures	18

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	19

Item 1A	Risk Factors	19

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	19

Item 3	Defaults Upon Senior Securities	19

Item 4	Mine Safety Disclosures	19

Item 5	Other Information	19

Item 6	Exhibits	20

Signatures		21

	☑	QUARTERLY Report PURSUANT TO Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended September 30, 2019

	☐	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the transition period from __________ to ____________

	September 30,			June 30,
	2019			2019
ASSET
Current assets:
Cash and cash equivalents	$	4,575		$	5,326
Accounts receivable, net		1,521			1,154
Inventory		501			530
Prepaid expenses and other current assets		209			305

Total current assets		6,806			7,315

Property and equipment, net		1,669			1,609
Right of use asset, net (Note 10)		1,172			-
Restricted cash		181			181
Inventory, non-current		145			155
Other assets, net of accumulated amortization		151			162

Total assets	$	10,124		$	9,422

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued expenses	$	984		$	683
Lease liability (Note 10)		225			-
Accrued protocol expense		25			133
Accrued radioactive waste disposal		83			74
Accrued payroll and related taxes		194			89
Accrued vacation		155			142

Total current liabilities		1,666			1,121
Long-term liabilities:
Lease liability, non-current (Note 10)		948			-
Asset retirement obligation		555			621

Total liabilities		3,169			1,742
Commitments and contingencies (Note 7)

Shareholders' equity:
Preferred stock, $.001 par value; 7,000,000 shares authorized:
Series B: 5,000,000 shares allocated; 59,065 shares issued and outstanding		-			-
Common stock, $.001 par value; 200,000,000 shares authorized; 67,388,047 shares issued and outstanding		67			67
Additional paid-in capital		92,196			92,105
Accumulated deficit		(85,308	)		(84,492	)

Total shareholders' equity		6,955			7,680

Total liabilities and shareholders' equity	$	10,124		$	9,422

	Quarter ended September 30,
	2019			2018

Sales, net	$	2,315		$	1,562
Cost of sales		1,079			1,038
Gross profit		1,236			524

Operating expenses (income):
Research and development
Proprietary research and development		233			394
Collaboration arrangement, net of reimbursement		-			26
Total research and development		233			420
Sales and marketing		815			649
General and administrative		1,097			973
Gain on change in estimate of asset retirement obligation (Note 10)		(73	)		-
Total operating expenses (income)		2,072			2,042

Operating loss		(836	)		(1,518	)

Non-operating income:
Interest income, net		20			10
Non-operating income, net		20			10

Net loss		(816	)		(1,508	)
Preferred stock dividends		(3	)		(3	)

Net loss applicable to common shareholders		(819	)		(1,511	)

Basic and diluted loss per share	$	(0.01	)	$	(0.02	)

Weighted average shares used in computing net loss per share:
Basic and diluted		67,388			66,147

	Series B Preferred Stock				Common Stock
	Shares		Amount		Shares		Amount		Additional Paid-in Capital		Accumulated Deficit			Total

Balances at June 30, 2018		59,065	$	-		56,331,147	$	56	$	84,322	$	(79,348	)	$	5,030

Issuance of common stock pursuant to registered direct offering, net						11,000,000		11		7,483					7,494
Share-based compensation										93					93
Net loss												(1,508	)		(1,508	)

Balances at September 30, 2018		59,065	$	-		67,331,147	$	67	$	91,898	$	(80,856	)	$	11,109

	Fair Value at September 30, 2019
	Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	4,575	$	4,575	$	-	$	-

	Fair Value at June 30, 2019
	Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	5,326	$	5,326	$	-	$	-

	Three months
	ended September 30,
	2019			2018
Net cash (used) by operating activities	$	(653	)	$	(1,612	)
Net cash (used) by investing activities		(98	)		(6,289	)
Net cash provided by financing activities		-			7,494
Net (decrease) in cash and cash equivalents	$	(751	)	$	(407	)

Working capital	$	5,140		$	9,631
Current ratio		4.09			6.88

Exhibits:
3.1		Certificate of Incorporation, incorporated by reference to Exhibit A of the Form Def 14A filed on November 9, 2018.

3.2		Bylaws, incorporated by reference to Exhibit C of the Form Def 14A filed on November 9, 2018.

10.1		Addendum No. 9 to Contract between Isoray Medical, Inc. and Joint Stock Company «Isotope», dated July 11, 2019, incorporated by reference to Exhibit 10.41 of the Form 10-K filed on September 27, 2019.

10.2		Amended and Restated Employment Agreement between Isoray Inc. and Jennifer Streeter, dated effective July 19, 2019, incorporated by reference to Exhibit 10.1 of the Form 8-K filed on July 24, 2019.

10.3		Supply Contract, dated July 30, 2019, between Isoray Medical, Inc., and Joint Stock Company «Isotope» (confidential portions of the exhibit have been omitted), incorporated by reference to Exhibit 10.1 of the Form 8-K filed on August 5, 2019.


10.4		Contract Modification, entered into on August 19, 2019 with an effective date of July 3, 2019, to Contract No. X-40403 between Energy Northwest and Isoray Medical, Inc, incorporated by reference to Exhibit 10.45 of the Form 10-K filed on September 27, 2019.

31.1*		Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer

31.2*		Rule 13a-14(a)/15d-14(a) Certification of Co-Principal Financial Officer

31.3*		Rule 13a-14(a)/15d-14(a) Certification of Co-Principal Financial Officer

32.1**		Section 1350 Certifications

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

Dated: November 13, 2019
		ISORAY, INC., a Delaware corporation
		/s/ Lori A. Woods
		Lori A. Woods
		Chief Executive Officer (Principal Executive Officer)

		/s/ Jonathan Hunt
		Jonathan Hunt
		Chief Financial Officer (Co-Principal Financial Officer)

		/s/ Mark J. Austin
		Mark J. Austin
		Controller (Co-Principal Financial and Principal Accounting Officer)

	/s/ Lori A. Woods
	Lori A. Woods
	Chief Executive Officer
	(Principal Executive Officer)

	/s/ Jonathan Hunt
	Jonathan Hunt
	Chief Financial Officer
	(Co-Principal Financial Officer)

	/s/ Mark J. Austin
	Mark J. Austin
	Controller
	(Co-Principal Financial and Principal Accounting Officer)