Unassociated Document
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB
Quarterly
Report of Small Business Issuers under Section 13 or 15(d) of the Securities
Exchange Act of
1934
for
the quarterly period ended September 30, 2005
Commission
File No. 000-14247
IsoRay,
Inc.
(Exact
name of registrant as specified in its charter)
Minnesota
(State
or other jurisdiction of incorporation or organization)
|
41-1458152
(I.R.S.
Employer Identification No.)
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|
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350
Hills St., Suite 106
Richland,
Washington
(Address
of principal executive offices)
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99354
(Zip
Code)
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|
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Issuer's
telephone number, including area code: (509)
375-1202
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The
issuer has (1) filed all reports required to be filed by Section
13 or
15(d) of the Exchange Act during the past 12 months (or for such
shorter
period that the registrant was required to file such reports), and
(2)
been subject to such filing requirements for the past 90
days.
The
registrant is not a shell company (as defined in Rule 12b-2 of the
Exchange Act).
|
Number
of shares outstanding of each of the issuer's classes of common
equity:
|
|
Class
|
Outstanding
as of November 14, 2005
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Common
stock, $0.001 par value
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9,767,026
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The
issuer is not using the Transitional Small Business Disclosure format.
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ISORAY,
INC.
Table
of Contents
Page
PART
I FINANCIAL INFORMATION
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1
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Item
1. Consolidated Unaudited Financial Statements
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1
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Consolidated
Unaudited Balance Sheet
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1
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Consolidated
Unaudited Statements of Operations
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2
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Consolidated
Unaudited Statements of Cash Flows
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3
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Notes
to Consolidated Unaudited Financial Statements
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4
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Item
2. Management's Discussion and Analysis of Financial Condition
and Results
of Operations
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7
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Item
3. Controls and Procedures
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13
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PART
II OTHER INFORMATION
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15
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Item
2. Unregistered Sales of Equity Securities
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15
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Item
5. Other Information
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15
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Item
6. Exhibits and Reports on Form 8-K
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15
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SIGNATURES
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17
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PART
I. FINANCIAL
INFORMATION
Item
1. Financial
Statements (Unaudited)
IsoRay,
Inc. and Subsidiary
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Consolidated
Balance Sheet (Unaudited)
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September
30, 2005
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$
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211,642
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|
Accounts
receivable, net of allowance for doubtful
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|
|
|
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accounts
of $17,075
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136,025
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Inventory
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120,152
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Prepaid
expenses
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242,724
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Total
current assets
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710,543
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Fixed
assets, net of accumulated depreciation and amortization
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1,050,195
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Other
assets, net of accumulated amortization
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792,622
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Total
assets
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$
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2,553,360
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LIABILITIES
AND SHAREHOLDERS' (DEFICIT)
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Current
liabilities:
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Accounts
payable
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$
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468,712
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Accrued
payroll and related taxes
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248,101
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Accrued
interest payable
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93,818
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Notes
payable, due within one year
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43,748
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Capital
lease obligations, due within one year
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8,820
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Total
current liabilities
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863,199
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Notes
payable, due after one year
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542,156
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Capital
lease obligations, due after one year
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15,960
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Convertible
debentures payable, due after one year
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4,137,875
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Total
liabilities
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5,559,190
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Shareholders'
(deficit):
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Preferred
stock, $.001 par value, 6,000,000 shares authorized:
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1,000,000
shares allocated to Series A: No shares issued and outstanding
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5,000,000
shares allocated to Series B: 1,260,732 shares issued and outstanding
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1,261
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IsoRay,
Inc. common stock , $.001 par value; 194,000,000 shares authorized;
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9,060,221shares
issued and outstanding
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9,060
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Additional
paid-in capital
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4,271,671
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Accumulated
deficit
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(7,287,821
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)
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Total
shareholders' (deficit)
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(3,005,829
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)
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Total
liabilities and shareholders' (deficit)
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$
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2,553,360
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The
accompanying notes are an integral part of the financial
statements.
IsoRay,
Inc, and Subsidiary
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Consolidated
Statements of Operations
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Three
Months Ended September 30, 2005 and 2004 (Unaudited)
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2005
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2004
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Product
sales
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$
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210,915
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$
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-
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Cost
of product sales
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720,166
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-
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Gross
profit (loss)
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(509,251
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)
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-
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Operating
expenses:
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Research
and development
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25,782
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-
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Sales
and marketing expenses
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315,039
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-
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General
and administrative expenses
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960,949
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4,169
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Total
operating expenses
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1,301,770
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4,169
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Operating
loss
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(1,811,021
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)
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(4,169
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)
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Non-operating
income (expense):
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Interest
income
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6,959
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-
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Financing
expense
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(155,628
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)
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-
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Non-operating
income (expense), net
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(148,669
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)
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-
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Net
loss
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$
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(1,959,690
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)
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$
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(4,169
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)
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Net
loss per weighted-average share of common stock
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$
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(0.22
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)
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$
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Nil
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Basic
weighted average shares outstanding
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8,830,965
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2,415,215
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The
accompanying notes are an integral part of the financial
statements.
IsoRay,
Inc. and Subsidiary
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Consolidated
Statements of Cash Flows
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Three
Months Ended September 30, 2005 and 2004 (Unaudited)
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2005
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2004
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CASH
FLOWS FROM OPERATING ACTIVITIES:
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Net
loss
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$
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(1,959,690
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)
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$
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(4,169
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)
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Adjustments
to reconcile net loss to net cash used by operating activities:
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Depreciation
and amortization of fixed assets
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45,961
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-
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Amortization
of deferred financing costs and other assets
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55,592
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-
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Compensation
recorded in connection with issuance of common stock
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330,000
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-
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Changes
in operating assets and liabilities:
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Accounts
receivable, net
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(86,056
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)
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-
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Inventory
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(38,226
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)
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-
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Prepaid
expenses
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(61,458
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)
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-
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Accounts
payable
|
|
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(248,232
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)
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|
395
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Accrued
payroll and related taxes
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90,177
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-
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Accrued
interest payable
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52,493
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-
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Net
cash used by operating activities
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(1,819,439
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)
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(3,774
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)
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CASH
FLOWS FROM INVESTING ACTIVITIES:
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Purchases
of fixed assets
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(253,833
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)
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-
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Additions
to other assets
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(54,458
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)
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-
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Net
cash used by investing activities
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(308,291
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)
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-
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CASH
FLOWS FROM FINANCING ACTIVITIES:
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Funds
advanced by officer/shareholder
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3,774
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Proceeds
from sales of convertible debentures payable
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550,000
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-
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Principal
payments on notes payable
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(19,436
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)
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-
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Principal
payments on capital lease obligations
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(4,408
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)
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-
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Proceeds
from cash received on exercise of warrants
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56,937
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-
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Proceeds
from cash received on exercise of options
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70,548
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-
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Net
cash provided by financing activities
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653,641
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3,774
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Net
increase (decrease) in cash and cash equivalents
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(1,474,089
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)
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-
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Cash
and cash equivalents, beginning of period
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1,685,731
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-
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CASH
AND CASH EQUIVALENTS, END OF PERIOD
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$
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211,642
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$
|
-
|
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The
accompanying notes are an integral part of the financial
statements.
NOTE
1— ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
Organization:
The
accompanying consolidated financial statements are those of IsoRay, Inc. (“the
Company”), formerly known as Century Park Pictures Corporation, and its
subsidiary operating company, IsoRay Medical, Inc. (“IsoRay Medical” or the
"Subsidiary"). Both
companies are headquartered in Richland, Washington.
The
accompanying consolidated financial statements should be read in conjunction
with the Company's audited financial statements and the notes thereto as of
June
30, 2005, and for the nine months then ended, as contained in the Company's
transition report on Form 10-KSB, and with the audited financial statements
of
IsoRay Medical as of June 30, 2005 and 2004, and for the years then ended,
as
filed with the Company's Form 8-K on November 3, 2005.
The
Company was incorporated in Minnesota on July 13, 1983. Since 1998, and until
the completion of the recent merger with IsoRay Medical, which became effective
July 28, 2005 (July 1, 2005 for accounting purposes), the Company did not
conduct any business operations and had minimal assets and liabilities. Although
the Company formerly had a September 30 fiscal year end, pursuant to the merger,
the Company’s year end was changed to June 30 to coincide with that of IsoRay
Medical.
Segment
Reporting and Major Customers:
IsoRay
Medical operates in a single segment: isotope-based medical devices. IsoRay
Medical began production and sales of its initial FDA approved product, the
IsoRay 131Cs
brachytherapy seed, in October 2004 for the treatment of prostate cancer. Sales
of the 131Cs
brachytherapy seed comprise all operating revenues of both companies. Three
customers individually comprised more than 10% of product sales for the three
month period ended September 30, 2005: Chicago Prostate Cancer Center, Texas
Cancer Clinic, and Warren General Hospital.
Summary
of Significant Accounting Policies:
Basis
of Presentation
- The accompanying unaudited consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America and reflect all normal recurring adjustments which,
in
the opinion of management of the Company, are necessary for a fair presentation
of the results for the periods presented. The results of operations for such
periods are not necessarily indicative of the results expected for the full
fiscal year or for any future period.
Basis
of Consolidation -
The accompanying unaudited consolidated financial statements reflect the balance
sheets of IsoRay, Inc. and its Subsidiary as of September 30, 2005, and the
results of operations and statements of cash flows for the three months then
ended net of all adjustments for inter-company transactions.
Use
of Estimates
- The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates and assumptions.
Cash
and Cash Equivalents
- Such
assets consist of demand deposits, including interest-bearing money market
accounts, held in one financial institution. These amounts are potentially
subject to concentration of credit risk. The accounts are guaranteed by the
Federal Deposit Insurance Corporation (FDIC) up to $100,000. At September 30,
2005, uninsured cash balances totaled $166,973.
Inventory
- Inventory
is reported at the lower of cost, determined using the weighted average method,
or net realizable value.
Revenue
Recognition - Revenue
for the three months ended September 30, 2005 was derived solely from sales
of
the 131Cs
brachytherapy seed. This product is shipped FOB shipping point, and is invoiced
and the sale recorded in accounts receivable at the time of
shipment.
Stock-Based
Compensation - SFAS
No.
123, Accounting
for Stock-Based Compensation,
as
amended by SFAS No. 148, requires companies to recognize stock-based expense
based on the estimated fair value of employee stock options. Alternatively,
SFAS
No. 123 allows companies to retain the current approach set forth in Accounting
Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB
25),
provided that expanded footnote disclosure is presented. The Company has not
adopted the fair value method of accounting for stock-based compensation under
SFAS No. 123, but provides the pro forma disclosure required when appropriate.
Income
Tax
- Deferred taxes are provided, when material, on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. There were no material temporary
differences for the periods presented. Deferred tax assets, subject to a
valuation allowance, are recognized for future benefits of net operating losses
being carried forward.
Earnings
Per Share -
Statement
of Financial Accounting Standards No. 128, “Earnings per Share,” requires dual
presentation of basic earnings per share (“EPS”) and diluted EPS on the face of
all income statements issued after December 15, 1997 for all entities with
complex capital structures. Basic EPS is computed as net income divided by
the
weighted average number of common shares outstanding for the period. Diluted
EPS
reflects the potential dilution that could occur from common shares issuable
through stock options, warrants, and other convertible securities. For the
periods ended September 30, 2005 and 2004, the effect of the Company’s
outstanding options and common stock equivalents would have been anti-dilutive.
Accordingly, only basic EPS is presented, and is
computed on the basis of the weighted-average number of common shares
outstanding during the period presented. At September 30, 2005, the Company
had
1,260,732 shares of preferred stock which are exchangeable, on a one-to-one
basis, with common stock, debentures which could be converted into 995,882
shares of common stock, options and warrants to purchase 2,939,682 shares of
common stock, and warrants to purchase 224,305 shares of preferred stock (which
could be exchanged to common stock) issued and outstanding. If the Company
had
been profitable as of the end of the period, these 5,420,601 derivatives that
are convertible, exercisable or exchangeable into common stock would have been
included in a separate calculation for diluted EPS.
NOTE
2 — RELATED PARTY TRANSACTIONS:
On
July
28, 2005, the Board of Directors granted 100,000 options to purchase common
stock to each of three independent Directors: Thomas Lavoy, Stephen Boatwright,
and Robert Kauffman. The requisite Form 4 has been filed with the SEC for each
grantee. Additionally, the Board voted to compensate each of the independent
Directors $1,000 per meeting for their attendance at the Board meetings.
Directors who are also serving as management of the Company were not granted
stock options for Director service, and will not be paid for attendance at
Board
meetings.
Mr.
Boatwright is a member of Keller Rohrback, PLC, which provides legal services
to
the Company and IsoRay Medical. During the three-month period ended September
30, 2005, IsoRay Medical paid Keller Rohrback, PLC approximately $140,000 for
legal services.
NOTE
3 - INCOME TAX:
As
of
September 30, 2005, the deferred tax asset related to the Company’s net
operating loss carryforward is fully reserved. Due to the provisions of Internal
Revenue Code Section 338, the Company may have limited net operating loss
carryforwards available to offset financial statement or tax return taxable
income in future periods as a result of the July 28, 2005 merger which involved
a change in control of more than 50 percentage points of the issued and
outstanding securities of the Company.
NOTE
4 - GOING CONCERN:
The
financial statements have been prepared assuming that the Company will continue
as a going concern. Certain conditions indicate that the Company may be unable
to continue as a going concern. These conditions include the Company’s cash
balance of $211,642 at September 30, 2005, coupled to the cash expenditure
rate
of approximately $500,000 per month. Management has implemented plans to obtain
additional cash for the Company (see Note 5). However, there is no assurance
these plans will be successful in providing the Company the cash it needs on
a
timely basis through the end of the current fiscal year. The accompanying
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern.
NOTE
5 - SUBSEQUENT EVENTS:
On
October 14, 2005, a shareholder provided the Company a short-term loan in the
amount of $250,000. This loan bears interest at ten percent and matures on
December 1, 2005. In connection with the loan, the Company granted a warrant
to
purchase 12,500 shares of common stock at an aggregate exercise price of
$10.00.
On
October 17, 2005, the Company commenced an offering of Investment Units
(“Units”) for sale pursuant to a Private Placement Offering (the “Offering”).
The Offering consists of a maximum of 200 Units, each Unit consisting of 5,000
shares of Common Stock and a Warrant to purchase 5,000 shares of Common Stock
at
an exercise price of $6.00 per share. This maximum can be increased, at the
sole
discretion of the Company, to a maximum of 300 Units. The Units are being sold
for $20,000 per Unit, and as of November 11, 2005, a total of 51.1 Units had
been sold for $1,022,000.
ITEM
2.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
IsoRay,
Inc. (formerly known as Century Park Pictures Corporation) was incorporated
on
July 13, 1983 in accordance with the laws of the State of
Minnesota.
Prior
operations. In
prior
periods, the Company developed, produced and marketed various intellectual
products of entities engaged in the motion picture, television, and theatrical
stage industries, such as creative writers, producers and directors, for the
motion picture, pay/cable and commercial television markets.
The
Company had no operations, and minimal assets and liabilities since its fiscal
year ended September 30, 1999 through May 27, 2005.
Merger
with IsoRay Medical, Inc.
On May
27, 2005, the Company; a newly-formed, wholly-owned subsidiary, Century Park
Transitory Subsidiary, Inc., a Delaware corporation; Thomas Scallen and Anthony
Silverman, shareholders of the Company; and IsoRay Medical, Inc. entered into
a
Merger Agreement.
On
July
28, 2005, the Merger contemplated by the Merger Agreement dated May 27, 2005
was
completed with the filing of a Certificate of Merger with the Secretary of
State
of Delaware, merging Century Park Transitory Subsidiary, Inc. into IsoRay
Medical, Inc. As a result of the Merger and pursuant to the Merger Agreement,
IsoRay Medical became a wholly-owned subsidiary of the Company.
Following
the Merger, the Company had approximately 10,237,797 shares of common and
preferred stock outstanding. The total amount of shares outstanding, on a
fully-diluted basis, at the time of the merger was 13,880,822, which includes
not only shares of common stock, but also shares of preferred stock, warrants,
options and convertible debentures that could be exercised or converted into
shares of common stock. Following the Merger, on a fully diluted basis, the
shareholders of IsoRay Medical owned approximately 82% of the Company’s
outstanding securities.
The
acquisition of IsoRay Medical by the Company on July 28, 2005 effected a change
in control and was accounted for as a “reverse acquisition” whereby IsoRay
Medical is the accounting acquirer for financial statement purposes. From an
accounting perspective, the merger was treated as a recapitalization rather
than
a purchase. Accordingly, assets acquired were minimal and non-material, no
liabilities were assumed, no goodwill was recognized, no research and
development assets were acquired and written off, and there are no contingent
payments to be made. As permitted by Statement of Financial Accounting Standards
(SFAS) No. 141, the effective date of the merger for accounting purposes has
been established as July 1, 2005. In accordance with SFAS No. 141, the following
proforma consolidated statement of operations of the Company and IsoRay Medical
is presented as though the merger had occurred at the beginning of the three
month period ended September 30, 2004.
IsoRay,
Inc. and Subsidiary
|
|
|
|
Proforma
Consolidated Statement of Operations
|
|
|
|
Three
Months Ended September 30, 2004 (Unaudited)
|
|
|
|
|
|
|
|
Product
sales
|
|
$
|
-
|
|
Cost
of product sales
|
|
|
-
|
|
Gross
profit (loss)
|
|
|
-
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
15,515
|
|
Sales
and Marketing expenses
|
|
|
9,313
|
|
General
and administrative expenses
|
|
|
669,665
|
|
Total
operating expenses
|
|
|
694,493
|
|
Operating
loss
|
|
|
(694,493
|
)
|
|
|
|
|
|
Non-operating
income (expense):
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
225
|
|
Financing
expens
|
|
|
(8,825
|
)
|
Net-operating
income (expense), net
|
|
|
(8,600
|
)
|
Net
loss
|
|
$
|
(703,093
|
)
|
|
|
|
|
|
Net
loss per share of common stock
|
|
$
|
(0.10
|
)
|
Basic
weighted average shares outstanding
|
|
|
7,145,883
|
|
Due
to the fact
the
Company had no operations and minimal assets or liabilities prior
to its merger with IsoRay Medical, Inc., management believes that comparisons
to
prior period financial statements do not provide meaningful information to
users
of the Company’s financial statements. Accordingly no comparisons to prior
period financial statements are discussed.
Current
and Planned Operations. IsoRay
Medical intends to utilize its patented radioisotope technology, chemists,
engineers and management team to create a major therapeutic medical isotope
and
medical device company with the goal of providing improved patient outcomes
in
the treatment of prostate cancer and other solid cancer tumors. IsoRay Medical
began production and sales of its initial FDA approved product, the IsoRay
131Cs
brachytherapy seed, in October 2004 for the treatment of prostate cancer.
Management believes its technology will allow it to capture a leadership
position in an expanded brachytherapy market. The physical characteristics
of
the Cesium-131 (Cs-131 or 131Cs)
isotope are expected to decrease radiation exposure to the patient and reduce
the severity and duration of side effects, while treating cancer cells as
effectively, if not more so than, other isotopes used in seed brachytherapy.
Cesium-131 could also enable meaningful penetration in other solid tumor
applications such as breast, lung, liver, brain and pancreatic cancer, expanding
the total available market opportunity. The second radioisotope, Yttrium-90
(Y-90 or 90Y),
is
currently being used in the treatment of non-Hodgkin's lymphoma and is in
clinical trials for other applications. Other manufacturers have received FDA
approval for 90Y
and
IsoRay Medical believes production will not require clinical trials or an
extensive FDA application process. Production is expected to begin in 2006.
Brachytherapy
seeds are small devices used in an internal radiation therapy procedure. In
recent years the procedure has become one of the primary treatments for prostate
cancer and is now used more often than surgical removal of the prostate. The
seed brachytherapy procedure places radioactive seeds as close as possible
to
(in or near) the cancer tumor (the word "brachytherapy" means close therapy).
The seeds deliver therapeutic radiation by
killing the tumor cells and cells located in the immediate vicinity of the
tumor
while minimizing exposure to adjacent healthy tissue.
This
allows doctors to administer a higher dose of radiation at one time than is
possible with external beam radiation. Each seed contains a radioisotope sealed
within a welded titanium capsule. Approximately 85 to 135 seeds are permanently
implanted in the prostate in a 45-minute outpatient procedure. The isotope
decays over time and the seeds become inert. The seeds may be used as a primary
treatment or in conjunction with other treatment modalities such as external
beam radiation therapy, chemotherapy, or as treatment for residual disease
after
excision of primary tumors.
Management
believes that the IsoRay 131Cs
seed
represents the
first
major advancement in brachytherapy technology in over 18 years with attributes
that could make it the long term "seed of choice" for internal radiation
procedures. The 131Cs
seed
has FDA approval for treatment of malignant disease (e.g. cancers of the head
and neck, brain, liver, lung, breast, prostate, etc.) and may be used in
surface, interstitial, and intracavity applications for tumors with known
radiosensitivity.
Results
of Operations.
Three
month period ended September 30, 2005.
Revenues.
During
the three months ended September 30, 2005, the company generated $210,915 in
sales of its 131Cs
seed.
IsoRay Medical, Inc. began sales of its 131Cs
seed
on October 26, 2004 with one medical center customer. We began the three month
period ended September 30, 2005 with seven customers who had ordered the
131Cs
seed
from us. At November 11, 2005 the number of medical center customers who have
ordered the 131Cs
seed
has grown to thirteen. We believe revenue in the subsequent period should
reflect this growth in customers.
Gross
profit (loss). Gross
profit (loss) was ($509,251) for the three months ended September 30, 2005.
Of
the cost of product sales of $720,166, approximately $235,000 was paid to
Pacific Northwest National Laboratory (PNNL) for use of their facilities and
personnel, which are provided under contract in support of our current
production. In the three-month period, we also recorded approximately $28,000
in
depreciation expense of tenant improvements we made to the production facilities
at PNNL prior to inception of production. The tenant improvements will be fully
depreciated in the three-month period ending December 31, 2005, and no further
PNNL tenant improvement depreciation will be recorded after that time.
Additionally, in the three month period ended September 30, 2005, we spent
in
excess of $100,000 for production materials and small tools, none of which
individually exceeded the $2,500 threshold we use in determining whether to
capitalize production equipment. These materials and small tools are needed
to
commence production in our new facility, the PEcoS-IsoRay Radiological
Laboratory (PIRL). Most are long-lived items, and should not need replacing
in the current fiscal year. The $720,166 cost of product sales for the period
also includes an estimate of $7,750 for accrued vacation expense for production
personnel. We anticipate moving production operations to our independent
production facility PIRL in the three-month period ending December 31, 2005,
and
once production operations are transitioned from PNNL to PIRL we will no longer
have expenses for use of PNNL facilities and personnel.
Research
and Development. Research
and development expenses for the three month period ended September 30, 2005
were approximately $25,782. Of this amount, $3,200 was paid in conjunction
with
development of a protocol study on the results of the 100 patients included
in
this protocol. The balance was paid for ongoing research and development of
our
Y-90 product.
Sales
and Marketing Expenses. Sales
and
marketing expenses were $315,039 for the three-month period ended September
30,
2005. Of this amount, approximately $219,000 was paid for wages, including
payroll-related taxes, travel, office and other support expenses on behalf
of
our sales and marketing and customer service staff, and includes approximately
$4,750 for accrued vacation expense for sales and marketing and customer service
personnel. The balance was spent on advertising, market research, trade shows
and conferences.
General
and Administrative Expenses.
General
and administrative expenses for the three months ended September 30, 2005
amounted to $960,949. During this period, and in conjunction with the merger
of
the Company and IsoRay Medical, we recognized a one-time compensation expense
of
$330,000, representing the value of 200,000 shares of IsoRay Medical common
stock issued to an individual as a finder’s fee. The valuation was based on the
most recent sales of IsoRay Medical common stock in conjunction with a Private
Placement Memorandum which commenced in October 2004. In the three month period
ended September 30, 2005, these 200,000 shares of IsoRay Medical stock were
canceled and exchanged as part of the recent merger with 168,472 shares
of
IsoRay, Inc. common stock. Approximately $255,000 was paid in wages and related
benefits and taxes during the period. Legal expenses were approximately $161,000
for the period, and included approximately $56,000 spent in conjunction with
an
out-of-court settlement of an employment dispute. General and
administrative expenses for the period also included approximately $12,500
for
accrued vacation expense.
Operating
(Loss).
In the
quarter ended September 30, 2005, the Company had an operating loss of
$(1,811,021).
Non-Operating
Income (Expense).
During
the three-month period ended September 30, 2004, the Company earned $6,959
interest income on funds held in certain near-liquid accounts. During this
period, financing expense was $155,628. Of this amount, approximately $104,000
was paid as interest on loans, notes and convertible debentures outstanding.
The
balance of the financing expense was amortization of pre-paid financing cost,
consisting primarily of the January 2005 issuance of common stock to guarantors
of certain loans made to the company, and commissions and legal costs paid
in
conjunction with the issuance of convertible debentures.
Liquidity
and Capital Resources.
Due to
our significant research and development expenditures and nominal product
revenues, we have not been profitable and have generated operating losses since
our inception. The Company had approximately $500,000 cash on hand as of
November 14, 2005. At the Company's current monthly required operating cash
expenditures of approximately $500,000 per month, cash on hand would fund the
Company's operations through December 15, 2005, not including $1.9 million
in
approved loans to fund operations for a longer period of time. In addition,
we
are raising funds through our Private Placement Memorandum dated October 17,
2005. As of November 11, 2005, we had received cash proceeds of $1,022,000
from
the issuance of units, consisting of common stock and warrants to purchase
common stock, pursuant to this Private Placement Memorandum.
Our
growth plan for 2006 includes expanding sales to existing customers, continuing
a trend that has improved in the last half of 2005; discontinuing production
efforts at Pacific Northwest National Laboratory, which should decrease
operating costs; enhancing efforts to reduce the internal cost of goods; and
expanding the base of suppliers of direct materials and value added services
to
direct materials.
IsoRay
Medical has five outstanding loans. The first, from Tri-City Industrial
Development Council, with an original principal amount of $40,000, was funded
in
2001 and requires a final principal only payment of $10,000 in August 2006.
It
is non-interest bearing and unsecured. The second loan is from the
Benton-Franklin Economic Development District in an original principal amount
of
$230,000 and was funded in December 2004. It bears interest at eight percent
and
has a sixty month term with a final balloon payment. As of November 7, 2005,
the
principal balance owed was $215,795. This loan is secured by certain equipment,
materials and inventory of IsoRay Medical, and also required personal
guarantees, for which the guarantors have been issued approximately 70,455
shares of our common stock. The third loan is a line of credit from Columbia
River Bank, which provides credit in the amount of $395,000. It bears interest
at a floating prime plus two percent rate, and is secured by certain accounts
receivable and inventory and personal guarantees, for which the guarantors
have
been issued approximately 107,401 shares of our common stock. As of November
7,
2005, $200,000 was owed on the line of credit. The fourth loan is with Columbia
River Bank in the amount of $150,000, of which $50,000 was funded as of October
31, 2005. This loan is to be used for equipment purchases only and is secured
by
the equipment purchased with the borrowed funds. It bears interest at seven
percent for thirty-six months. As of November 7, 2005, the principal balance
owed was approximately $35,925. The fifth loan is with Albert Smith in the
amount of $250,000, and was funded on October 14, 2005. This loan bears interest
at ten percent and matures on December 1, 2005. In connection with the loan
by
Mr. Smith, IsoRay, Inc. granted a warrant to purchase 12,500 shares of common
stock at an aggregate exercise price of $10.00 to Mr. Smith. IsoRay Medical
applied to the Hanford Area Economic Investment Fund Committee (HAEIFC) for
a
$1,400,000 loan to fund equipment for IsoRay's leased production facility.
The
HAEIFC Board has preliminarily approved this loan with an interest rate of
prime
plus 2% and a ten year amortization period. The loan will be secured in part
by
the equipment acquired as well as personal guarantees. These guarantors will
be
issued approximately one share of our common stock for every $12.00 of the
loan
guaranteed.
IsoRay
Medical also had $4,132,948 in principal amount of convertible debentures
outstanding as of November 7, 2005, which were issued between February and
June
2005. These debentures could be converted into 995,891 shares of common stock
at
a conversion rate of $4.15 per share. Each debenture bears interest at an annual
rate of eight percent (not compounded), and has a twenty-four month term with
accrued interest paid quarterly.
On
April
4, 2005 a capital lease agreement was executed by IsoRay Medical with Nationwide
Funding LLC, whereby the lessor funded the $75,000 acquisition of a glove box
being built to the Company's specifications by Premier Technology, Inc. of
Pocatello, ID. This is a 48 month agreement with minimum monthly lease payments
of $2,475.38.
On
May
16, 2005 a capital lease agreement was executed by IsoRay Medical with Vencore
Solutions LLC. This is a capital lease for a hot cell with a lease line in
the
amount of $430,000. This is a 36 month lease, with a purchase option at fair
market value, defined in the lease agreement as not more than 15% of the initial
fair value purchase price. Based on this amount, for the first five months,
the
minimum monthly lease payment will be $8,348.50. The minimum monthly lease
payment increases to $17,500 for the remaining 31 months, based on the entire
value of the $430,000 lease line. In connection with the lease agreement, IsoRay
Medical granted warrants to purchase 6,757 shares of its common stock at
$3.50/share.
At
September 30, 2005, cash and cash equivalents amounted to $211,642. During
the
three months ended September 30, 2005, the Company issued 97,917 shares of
common stock pursuant to the exercise of warrants to purchase common stock
and
warrants to purchase preferred stock, which were exchanged for common stock
immediately upon exercise. This exercise of warrants provided the Company with
approximately $56,937. Also during the three months ended September 30, 2005,
the Company issued 56,284 shares of common stock pursuant to the exercise of
options to purchase common stock. This exercise of options provided the Company
with approximately $70,548.
Management
believes the Company will also need to draw down on the $1.4 million loan that
has been preliminarily approved by the Hanford Area Economic Investment Fund
Committee to provide cash for operations and acquisition of capital equipment
needed for the balance of the fiscal year ending June 30, 2006.
We
expect
to finance our future cash needs through the sale of equity securities and
possibly strategic collaborations or debt financing or through other sources
that may be dilutive to existing shareholders. If we need to raise additional
money to fund our operations, funding may not be available to us on acceptable
terms, or at all. If we are unable to raise additional funds when needed, we
may
not be able to market our products as planned or continue development and
regulatory approval of our future products. If we raise additional funds through
equity sales, these sales may be dilutive to existing investors.
We
have
no material commitments for capital expenditures and no off-balance sheet
arrangements.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The
Company's Form 10-KSB, any Form 10-QSB or any Form 8-K of the Company or any
other written or oral statements made by or on behalf of the Company may contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934,
as amended, and subject to the safe harbor created by the Private Securities
Litigation Reform Act of 1995, which reflect the Company's current views with
respect to future events and financial performance. The words "believe,"
"expect," "anticipate," "intends," "estimate," "forecast," "project," and
similar expressions identify forward-looking statements. 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. Such
"forward-looking statements" are subject to risks and uncertainties set forth
from time to time in the Company's SEC reports and are generally set forth
below
and particularly discussed in the Company's Form 10-KSB for the transition
period ended June 30, 2005 and in the Company's Registration Statement on Form
SB-2 filed on November 10, 2005.
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.
Risk
Factors
You
should consider the following discussion of risks as well as other information
regarding our operations. The risks and uncertainties described below are not
the only ones. Additional risks and uncertainties not presently known to us
or
that we currently deem immaterial also may impair our business operations.
|
·
|
Our
independent accountants have expressed uncertainty about our ability
to
continue as a going concern.
|
|
·
|
Our
revenues depend upon one product, our 131Cs
brachytherapy seed, which is used to treat only one type of cancer
as of
the date of this report, although it is approved to treat any malignant
tissue.
|
|
·
|
We
have limited data on the clinical performance of the 131Cs
seed.
|
|
·
|
We
will need to raise additional capital to fund our operations through
2006.
|
|
·
|
The
passage of Initiative 297, which may in the future impose restrictions
on
sites generating certain types of radioactive wastes in Washington,
may
result in the relocation of our manufacturing
operations.
|
|
·
|
We
have limited manufacturing experience and may not be able to meet
future
demand without increasing our supply of the isotopes used to manufacture
our product and also increasing our level of
staffing.
|
|
·
|
We
have limited specific experience with the sales and marketing of
the
131Cs
seed.
|
|
·
|
Our
quarterly operating results will be subject to significant
fluctuations.
|
|
·
|
We
rely heavily on a limited number of
suppliers.
|
|
·
|
We
are subject to uncertainties regarding reimbursement for use of our
product.
|
|
·
|
It
is possible that other treatments may be deemed superior to brachytherapy
for the treatment of cancer and if this were to occur, demand for
our
product would decline.
|
|
·
|
Our
industry is intensely competitive, and many of our competitors are
larger
than we are and possess greater
resources.
|
|
·
|
We
may be unable to adequately protect or enforce our intellectual property
rights or secure rights to third-party patents, the value of our
granted
patent and our patents pending is uncertain, and one of our licensed
patents may be terminated under certain
conditions.
|
|
·
|
Failure
to comply with government regulations, which are quite complex, could
harm
our business.
|
|
·
|
Our
business exposes us to product liability claims and also involves
environmental risks.
|
|
·
|
We
rely upon our executive officers and key scientific
personnel.
|
|
·
|
Our
ability to expand into foreign markets is
uncertain.
|
|
·
|
Our
ability to successfully commercialize our product is
uncertain.
|
|
·
|
Our
reporting obligations as a public company are costly and our significant
internal control deficiencies have not been
remediated.
|
|
·
|
There
is a limited market for our common stock, and our stock price is
likely to
be volatile.
|
|
·
|
Our
common stock may be subject to penny stock regulation.
|
|
·
|
Future
sales by shareholders of the shares available for sale in the public
market, or the perception that such sales may occur, may depress
the price
of our common stock.
|
ITEM
3. CONTROLS
AND PROCEDURES
(a) 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 September 30, 2005. 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 in timely
alerting them to material information required to be included in the Company's
periodic reports filed with the SEC under the Exchange Act. 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.
(b) In
connection with the review of our consolidated financial statements for the
period ended September 30, 2005, our independent registered public accounting
firm advised the Board of Directors and management of certain significant
internal control deficiencies that they considered to be, in the aggregate,
a
material weakness. In particular, our independent registered public accounting
firm identified the following weaknesses in our internal control system: (1)
a
lack of segregation of duties and (2) a lack of formal procedures relating
to
all areas of financial reporting. The independent registered public accounting
firm indicated that they considered these deficiencies to be reportable
conditions as that term is defined under standards established by the American
Institute of Certified Public Accountants. A material weakness is a significant
deficiency in one or more of the internal control components that alone or
in
the aggregate precludes our internal controls from reducing to an appropriately
low level of risk that material misstatements in our financial statements will
not be prevented or detected on a timely basis. The Company considered these
matters in connection with the period end closing of accounts and preparation
of
the related consolidated financial statements and determined that no prior
period financial statements were materially affected by such matters.
Notwithstanding the material weaknesses identified by our independent registered
public accountants, we believe that the financial statements, and other
financial information included in this report, fairly present in all material
respects, the financial condition, results of operation and cash flows of the
Company as of, and for, the periods represented in this report.
The
size
of the Company has prevented us from being able to employ sufficient resources
at this time to enable us to have an adequate level of supervision and
segregation of duties within our internal control system. Set forth below is
a
discussion of the significant internal control deficiencies that had not been
remediated as of the end of the period covered by this report.
Lack
of segregation of duties.
Our
size has prevented us from being able to employ sufficient resources to enable
us to have an adequate level of segregation of duties within our internal
control system. There are one full-time and three part-time persons involved
in
processing of transactions. Therefore, it is difficult to effectively segregate
accounting duties. While we strive to segregate duties as much as practicable,
budgetary considerations have not previously allowed the hiring of additional
full time staff. We plan to seek, but cannot be assured that we will be able
to
find, a qualified person to perform month end accounting procedures. As a
result, this significant internal control deficiency had not been remediated
as
of the end of the period covered by this report, nor do we know if we will
be
able to remediate this weakness in the foreseeable future. However, we will
continue to monitor and assess the costs and benefits of additional
staffing.
Lack
of formal procedures relating to all areas of financial reporting including
a
lack of review by management.
Due to
the size of our Company, and as a consequence of the lack segregation of duties,
we do not have formal month end close procedures. As a result, there is a lack
of timely review of the financial statements and Form 10-QSB. This significant
internal control deficiency has not been remediated as of the end of the period
covered by this report.
If
we are
unable to remediate the identified material weaknesses, there is a more than
remote likelihood that a material misstatement to our SEC reports will not
be
prevented or detected, in which case investors could lose confidence in the
accuracy and completeness of our financial reports, which could have an adverse
effect on our ability to raise additional capital and could also have an adverse
effect on our stock price.
PART
II - OTHER INFORMATION
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES
On
July
28, 2005, the Company issued warrants to purchase 25,000 shares of its common
stock to Patrick Lambert as a consulting fee, in reliance on the exemption
from
registration provided by § 4(2) of the Securities Act of 1933, as
amended.
ITEM
5. OTHER INFORMATION
The
Company’s
Board of Directors engaged DeCoria, Maichel & Teague, P.S., the independent
auditor for the Company's wholly-owned subsidiary, to be its new independent
auditor effective November 15, 2005, which was also the effective date of S.W.
Hatfield, CPA’s dismissal as the Company’s certifying accountant by the
Board.
Except
for an expression of doubt about our ability to continue as a going concern,
S.W. Hatfield audit reports on the Company’s financial statements as of June 30,
2005 and September 30, 2004 did not contain an adverse opinion or disclaimer
of
opinion, nor were they qualified or modified as to uncertainty, audit scope
or
accounting principles.
During
the two fiscal years ended June 30, 2005 and September 30, 2004, and through
November 15, 2005 there were no disagreements with S.W. Hatfield on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements, if not resolved to the
satisfaction of S.W. Hatfield would have caused it to make a reference to the
subject matter of the disagreements in connection with its report; and there
were no reportable events as described in Item 304(a)(1)(iv)(B) of Regulation
S-B promulgated by the Securities and Exchange Commission (the “SEC”) pursuant
to the Securities Exchange Act of 1934, as amended.
The
Company provided S.W. Hatfield with a copy of this disclosure and requested
that
S.W. Hatfield furnish the Company with a letter addressed to the SEC stating
whether it agrees with the foregoing statements by the Company and, if not,
stating the respects in which it does not agree. A copy of the letter from
S.W.
Hatfield is filed herewith as Exhibit 16.1.
During
the Company’s two most recent fiscal years and through November 15, 2005, the
Company did not consult DeCoria, Maichel & Teague with respect to the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered
on
the Company’s financial statements, or any other matters or reportable events
listed in Item 304(a)(2) of Regulation S-B. However, IsoRay Medical, the
Company's wholly-owned subsidiary, has consulted with DeCoria, Maichel &
Teague, its independent auditor, during these time periods solely in connection
with IsoRay Medical's financial statements.
ITEM
6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
|
10.19 |
Express
Pricing Agreement, dated October 5, 2005 between Federal Express
Corp. and
IsoRay Medical, Inc.
|
|
10.20
|
Girard
Employment Agreement, dated October 6, 2005, between Roger E. Girard
and
IsoRay, Inc.
|
|
10.21
|
Contract
Modification Quality Class G, dated October 25, 2005, to Contract
Number
X40224 between Energy Northwest and IsoRay,
Inc.
|
|
16.1 |
Letter from S.W. Hatfield, CPA to the SEC dated
November
21, 2005. |
|
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 |
(b) Reports
on Form 8-K:
On
August
3, 2005, the Company filed a Current Report on Form 8-K announcing its
acquisition of IsoRay Medical, Inc. as its wholly-owned subsidiary and the
accompanying change in the Company's name to IsoRay, Inc.
On
August
15, 2005, the Company filed an amendment to its Current Report on Form 8-K
filed
on August 3, 2005, in which the Company provided audited financial statements
and pro forma financial information for IsoRay Medical, Inc.
On
August
17, 2005, the Company filed a Current Report on Form 8-K announcing the new
trading symbol, "ISRY.PK", for its common stock.
On
November 3, 2005, the Company filed a Current Report on Form 8-K providing
audited financial statements for IsoRay Medical, Inc. for the years ended June
30, 2005 and 2004.
On
November 3, 2005, the Company filed a Current Report on Form 8-K announcing
the
commencement of quotations of its common stock on the OTC Bulletin Board under
the symbol "ISRY.OB" and IsoRay Medical, Inc.'s nomination for a FLC Award
for
Excellence in Technology Transfer.
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated:
November 21, 2005
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ISORAY,
INC., a Minnesota corporation |
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By: |
/s/ Roger
E. Girard |
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Roger
E. Girard, Chief Executive
Officer |
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By: |
/s/ Michael
K. Dunlop |
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Michael
K. Dunlop, Chief Financial
Officer |