Unassociated Document
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB/A
Amendment
No. 1
Quarterly
Report of Small Business Issuers under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended December 31,
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.)
|
|
|
350
Hills St., Suite 106
Richland,
Washington
(Address
of principal executive offices)
|
99354
(Zip
Code)
|
|
Issuer's
telephone number, including area code:(509)
375-1202
|
|
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 May 10, 2006
|
Common
stock, $0.001 par value
|
14,722,686
|
|
The
issuer is not using the Transitional Small Business Disclosure
format.
|
ISORAY,
INC.
Table
of Contents
|
Page
|
|
|
PART
I FINANCIAL INFORMATION
|
1
|
|
|
|
|
Item
1. Consolidated Unaudited Financial Statements
|
1
|
|
|
|
|
Consolidated
Unaudited Balance Sheets
|
1
|
|
|
|
|
Consolidated
Unaudited Statements of Operations
|
2
|
|
|
|
|
Consolidated
Unaudited Statements of Cash Flows
|
3
|
|
|
|
|
Notes
to Consolidated Unaudited Financial Statements
|
4
|
|
|
|
|
Item
2. Management's Discussion and Analysis of Financial Condition and
Results
of Operations
|
9
|
|
|
|
|
Item
3. Controls and Procedures
|
15
|
|
|
|
|
PART
II OTHER INFORMATION
|
16
|
|
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
16
|
|
|
|
|
Item
6. Exhibits and Reports on Form 8-K
|
17
|
|
|
|
|
SIGNATURES
|
18
|
PART
I. FINANCIAL
INFORMATION
Item
1. Financial
Statements (Unaudited)
IsoRay,
Inc. and Subsidiary
Consolidated
Balance Sheets
|
|
(Unaudited)
|
|
|
|
December
31,
|
|
June
30,
|
|
|
|
2005
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
648,684
|
|
$
|
1,653,144
|
|
Accounts
receivable, net
|
|
|
467,616
|
|
|
49,969
|
|
Inventory
|
|
|
156,019
|
|
|
81,926
|
|
Prepaid
expenses
|
|
|
208,942
|
|
|
181,266
|
|
Total
current assets
|
|
|
1,481,261
|
|
|
1,966,305
|
|
|
|
|
|
|
|
|
|
Fixed
assets, net of accumulated depreciation and amortization
|
|
|
1,627,443
|
|
|
842,323
|
|
Other
assets, net of accumulated amortization
|
|
|
754,305
|
|
|
793,756
|
|
Total
assets
|
|
$
|
3,863,009
|
|
$
|
3,602,384
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
425,048
|
|
$
|
695,588
|
|
Accrued
payroll and related taxes
|
|
|
222,958
|
|
|
157,924
|
|
Accrued
interest payable
|
|
|
83,390
|
|
|
41,325
|
|
Notes
payable, due within one year
|
|
|
244,219
|
|
|
43,116
|
|
Capital
lease obligations, due within one year
|
|
|
174,930
|
|
|
9,604
|
|
Total
current liabilities
|
|
|
1,150,545
|
|
|
947,557
|
|
|
|
|
|
|
|
|
|
Notes
payable, due after one year
|
|
|
531,194
|
|
|
562,224
|
|
Capital
lease obligations, due after one year
|
|
|
295,874
|
|
|
19,584
|
|
Convertible
debentures payable, due after one year
|
|
|
530,000
|
|
|
3,587,875
|
|
Total
liabilities
|
|
|
2,507,613
|
|
|
5,117,240
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value; 6,000,000 shares authorized:
|
Series
A: 1,000,000 shares allocated; no shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
Series
B: 5,000,000 shares allocated; 292,328 and 1,588,589 issued and
outstanding
|
|
|
292
|
|
|
1,589
|
|
Common
stock, $.001 par value; 194,000,000 shares authorized; 13,383,139
and
7,317,073 shares issued and outstanding
|
|
|
13,383
|
|
|
-
|
|
Subscriptions
receivable (Note 9)
|
|
|
(6,227,067
|
)
|
|
7,317
|
|
Additional
paid-in capital
|
|
|
16,835,833
|
|
|
3,804,369
|
|
Accumulated
deficit
|
|
|
(9,267,045
|
)
|
|
(5,328,131
|
)
|
Total
shareholders' equity
|
|
|
1,355,396
|
|
|
(1,514,856
|
)
|
Total
liabilities and shareholders' equity
|
|
$
|
3,863,009
|
|
$
|
3,602,384
|
|
|
|
|
|
|
|
|
|
IsoRay,
Inc and Subsidiary
Consolidated
Statements of Operations
Three
and Six Months Ended December 31, 2005 and 2004 (Unaudited)
|
|
For
the three months ended
|
|
For
the six months ended
|
|
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales
|
|
$
|
486,247
|
|
$
|
24,170
|
|
$
|
697,162
|
|
$
|
24,170
|
|
Cost
of product sales
|
|
|
916,274
|
|
|
387,051
|
|
|
1,636,440
|
|
|
387,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit (loss)
|
|
|
(430,027
|
)
|
|
(362,881
|
)
|
|
(939,278
|
)
|
|
(362,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
96,837
|
|
|
12,516
|
|
|
122,619
|
|
|
28,031
|
|
Sales
and marketing expenses
|
|
|
340,532
|
|
|
176,303
|
|
|
655,571
|
|
|
260,542
|
|
General
and administrative expenses
|
|
|
675,444
|
|
|
414,639
|
|
|
1,636,393
|
|
|
1,005,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,112,813
|
|
|
603,458
|
|
|
2,414,583
|
|
|
1,293,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(1,542,840
|
)
|
|
(966,339
|
)
|
|
(3,353,861
|
)
|
|
(1,656,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
3,193
|
|
|
70
|
|
|
10,152
|
|
|
295
|
|
Financing
expense
|
|
|
(195,480
|
)
|
|
(11,964
|
)
|
|
(351,108
|
)
|
|
(20,789
|
)
|
Loss
on disposal of fixed assets |
|
|
- |
|
|
- |
|
|
- |
|
|
(52,319 |
) |
Debt
conversion expense (Note 7)
|
|
|
(244,097
|
)
|
|
-
|
|
|
(244,097
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expense), net
|
|
|
(436,384
|
)
|
|
(11,894
|
)
|
|
(585,053
|
)
|
|
(20,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,979,224
|
)
|
$
|
(978,233
|
)
|
$
|
(3,938,914
|
)
|
$
|
(1,677,157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per weighted-average share of common stock
|
|
$
|
(0.17
|
)
|
$
|
(0.17
|
)
|
$
|
(0.36
|
)
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
11,852,047
|
|
|
6,596,144
|
|
|
10,844,913
|
|
|
6,175,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IsoRay,
Inc. and Subsidiary
Consolidated
Statements of Cash Flows
Six
Months Ended December 31, 2005 and 2004 (Unaudited)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,938,914
|
)
|
$
|
(1,623,385
|
)
|
Adjustments
to reconcile net loss to net cash used by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization of fixed assets
|
|
|
95,432
|
|
|
42,561
|
|
Amortization
of deferred financing costs and other assets
|
|
|
103,546
|
|
|
5,285
|
|
Loss
on disposal of fixed assets
|
|
|
-
|
|
|
52,319
|
|
Compensation
recorded in connection with issuance of common stock
|
|
|
330,000
|
|
|
-
|
|
Rent
expense paid by issuance of common stock
|
|
|
30,009
|
|
|
-
|
|
Repair
and maintenance expense paid by issuance of common stock
|
|
|
14,752
|
|
|
-
|
|
Debt
conversion expense (Note 7)
|
|
|
244,097
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(417,647
|
)
|
|
(12,912
|
)
|
Inventory
|
|
|
(74,093
|
)
|
|
(15,512
|
)
|
Prepaid
expenses
|
|
|
62,350
|
|
|
(162,725
|
)
|
Accounts
payable
|
|
|
(291,895
|
)
|
|
35,602
|
|
Accrued
payroll and related taxes
|
|
|
65,032
|
|
|
7,033
|
|
Accrued
interest payable
|
|
|
42,065
|
|
|
(8,235
|
)
|
Net
cash used by operating activities
|
|
|
(3,735,266
|
)
|
|
(1,679,969
|
)
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchases
of fixed assets
|
|
|
(347,357
|
)
|
|
(207,038
|
)
|
Additions
to other assets
|
|
|
(64,096
|
)
|
|
(105,403
|
)
|
Net
cash used by investing activities
|
|
|
(411,453
|
)
|
|
(312,441
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
advances on bank line of credit
|
|
|
200,000
|
|
|
100,000
|
|
Proceeds
from issuance of notes payable
|
|
|
250,000
|
|
|
315,000
|
|
Proceeds
from sales of convertible debentures payable
|
|
|
550,000
|
|
|
-
|
|
Principal
payments on notes payable
|
|
|
(279,926
|
)
|
|
(10,000
|
)
|
Principal
payments on capital lease obligations
|
|
|
(66,329
|
)
|
|
-
|
|
Proceeds
from cash sales of common stock, and LLC member shares, net
of issuance costs
|
|
|
2,324,168
|
|
|
1,642,438
|
|
Proceeds
from cash sales of common stock, pursuant to exercise of
warrants
|
|
|
59,565
|
|
|
4,500
|
|
Proceeds
from cash sales of common stock, pursuant to exercise of
options
|
|
|
72,928
|
|
|
-
|
|
Payments
to common shareholders in lieu of issuing fractional
shares
|
|
|
(734
|
)
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
3,109,672
|
|
|
2,051,938
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(1,037,047
|
)
|
|
59,527
|
|
Cash
and cash equivalents, beginning of period
|
|
|
1,685,731
|
|
|
470,439
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
648,684
|
|
$
|
529,966
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
205,497
|
|
$
|
29,024
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Exchange
of convertible debentures payable for shares of common
stock
|
|
$
|
3,607,875
|
|
$
|
-
|
|
Fixed
assets acquired by capital lease obligations
|
|
$
|
507,947
|
|
$
|
-
|
|
Prepaid
rent paid by issuance of common stock
|
|
$
|
90,026
|
|
$
|
-
|
|
Reversal
of dividends payable to IsoRay Products LLC members
|
|
$
|
-
|
|
$
|
91,795
|
|
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”).
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
transitional report on Form 10-KSB, as amended, and with the audited financial
statements of IsoRay Medical as of June 30, 2005 and 2004, and for the years
then ended, filed on Form 8-K on November 3, 2005.
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 the combined companies.
Two customers individually comprised more than 10% of product sales for the
three month period ended December 31, 2005: Chicago Prostate Cancer Center
and
Community Hospital of Los Gatos.
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.
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 transitional report on Form 10-KSB, as
amended,
and with
the audited financial statements of IsoRay Medical as of June 30, 2005 and
2004,
and for the years then ended, filed
on
Form 8-K on November 3, 2005.
Basis
of consolidation -
The
accompanying unaudited consolidated financial statements reflect the balance
sheets of IsoRay, Inc. and its subsidiary as of December 31, 2005, and the
results of operation and statements of cash flows for the three and six 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 the Company’s
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 and affect the amounts reported in the financial
statements.
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 December 31,
2005, uninsured cash balances totaled $615,246.
Inventory
- Inventory
is reported at the lower of cost, determined using the weighted average method,
or net realizable value.
Revenue
recognition -
The
Company applies the provisions of SEC Staff Accounting Bulletin (“SAB”)
No. 104, “Revenue Recognition.” SAB No. 104, which supersedes SAB
No. 101, “Revenue Recognition in Financial Statements”, provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements. SAB No. 104 outlines the basic criteria that must be met to
recognize revenue and provides guidance for the disclosure of revenue
recognition policies. The Company recognizes revenue related to product sales
when (i) persuasive evidence of an arrangement exists, (ii) shipment
has occurred, (iii) the fee is fixed or determinable, and
(iv) collectibility is reasonably assured.
Revenue
for the three and six months ended December 31, 2005 was derived solely from
sales of the 131Cs
brachytherapy seed, which is used in the treatment of cancer. The Company
generally recognizes revenue once an order has been received and shipped to
the
customer. Prepayments, if any, received from customers prior to the time that
products are shipped are recorded as deferred revenue. In these cases, when
the
related products are shipped, the amount recorded as deferred revenue is
recognized as revenue. The Company accrues for sales returns and other
allowances at the time of shipment.
Stock-based
compensation - The
Company currently provides stock-based compensation under two equity incentive
plans approved by the Board of Directors on July 28, 2005: the Amended And
Restated 2005 Employee Stock Option Plan, and the Amended and Restated 2005
Stock Option Plan. As of December 31, 2005, there were 2,817,774 options to
purchase common stock outstanding, and 982,226 options remaining available
for
issuance under the Company’s equity incentive plans. Under the terms of the two
plans, stock option grants are required to be granted with an exercise price
equal to the market value of the underlying Company common stock at the date
of
grant. Options granted expire ten years after the grant date, and have various
vesting periods.
In
December 2002, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure (“FAS
148”),
which
amends Statement No. 123, Accounting
for Stock-Based Compensation
(“FAS
123”). FAS 148 requires companies to provide expanded footnote disclosures
regarding stock-based expense, but still allows companies to retain the 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. As of December 31,
2005, the Company had not yet adopted the fair value method of accounting for
stock-based compensation under SFAS No. 123, and accounts for stock-based
compensation for employees under APB 25. No compensation expense was recognized
in net earnings, as all options had an exercise price equal to, or above, the
market value of the common stock on the date of grant. In accordance with SFAS
No. 148, the following table presents the effect on net earnings and net
earnings per share had compensation cost of the Company’s stock plans been
determined consistent with fair valuation rather than intrinsic
valuation:
|
|
For
the three months ended
|
|
For
the six months ended
|
|
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
loss, as reported
|
|
$
|
(1,979,224
|
)
|
$
|
(978,233
|
)
|
$
|
(3,938,914
|
)
|
$
|
(1,623,385
|
)
|
Less:
Stock-based compensation expense determined under fair value method
for
all stock options, net of related tax benefit
|
|
$
|
(3,254
|
)
|
$
|
-
|
|
|
(159,254
|
)
|
$
|
-
|
|
Profoma
net loss
|
|
$
|
(1,982,478
|
)
|
$
|
(978,233
|
)
|
$
|
(4,098,168
|
)
|
$
|
(1,623,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.17
|
)
|
$
|
(0.15
|
)
|
$
|
(0.36
|
)
|
$
|
(0.26
|
)
|
Proforma
|
|
$
|
(0.17
|
)
|
$
|
(0.15
|
)
|
$
|
(0.38
|
)
|
$
|
(0.26
|
)
|
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 loss 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 December 31, 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 December 31, 2005, the Company had 292,329 shares
of
preferred stock which are exchangeable, on a one-to-one basis, with common
stock; debentures which could be converted into 127,711 shares of common stock;
options and warrants to purchase 4,615,801 shares of common stock; and warrants
to purchase 77,138 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 5,112,979 shares of common stock that are issuable upon
conversion, exercise or exchange of the debentures, options, warrants, and
preferred 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 its 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 and six months ended December
31, 2005, IsoRay Medical paid Keller Rohrback, PLC approximately $97,800, and
$238,400 for legal services, respectively.
NOTE
3 - INCOME TAX:
As
of
December 31, 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 substantial doubt that the
Company will continue as a going concern. These conditions include the Company’s
cash balance of $648,684 at December 31, 2005, coupled with its cash expenditure
rate of approximately $620,000 per month, excluding capital items that have
recently been approximately $70,000 per month. Management has implemented plans
to obtain additional cash for the Company (see Notes 8 and 9). However, there is
no assurance these plans will be successful in providing the Company with 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 -AMENDMENT OF PRIOR FILINGS:
On
March
24, 2006 the Audit Committee of the Company, following discussions with
representatives of the Company’s independent registered public accounting firm
and in response to comments received from the Securities and Exchange Commission
(the “SEC”) determined that the previously filed consolidated financial
statements of the Company as of and for the nine months ended June 30, 2005
and
the years ended September 30, 2004 and 2003 need to be restated, and the
consolidated financial statements of the Company as of, and for the three months
ended December 31, 2003, the three and six months ended March 31, 2004, the
three and nine months ended June 30, 2004, the three months ended December
31,
2004, and the three and six months ended March 31, 2005 previously filed on
form
10-QSB will also need to be restated.
In
April
2002, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 1485 Rescission of FASB Statements No. 4,
44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“FAS
145”). FAS 145 amended APB Opinion No. 30, Reporting the Results of Operations
-
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions (“APB 30”), by
deleting the phrase, “(1) Classifications of gains or losses from extinguishment
of debt pursuant to paragraph 8 of FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt.” In deleting this phrase, the FASB obviated
the customary classification of material aggregations of extinguishment of
debt
as extraordinary items. However paragraph four of the FAS 145 Summary, leaves
open the possibility of classifying the extinguishment of debt as an
extraordinary item if these items meet the criteria in APB Option 30.
During
the three month period ended December, 2003 the Company was in the process
of
converting all outstanding debt into shares of the Company's common stock,
and
had continually attempted to contact specific noteholders. These specific
noteholders were unresponsive to the Company's inquiries related to the
conversion of the debts into common stock, as discussed in detail in the
Company's contemporaneously filed financial statements, and the Board, relying
on legal counsel, at the time, acted to create a “technical forgiveness” of the
notes and accrued interest. It was the then-management's position and
interpretation, after reviewing the requirements of both APB 30 and FAS 145
that
the failure to timely convert or post a timely claim for repayment by these
specific noteholders, with concurrence of the Company's then-legal counsel,
and
auditor, met both of the required criteria of “unusual nature” (it is
extraordinary that a note holder would not respond to numerous requests to
change the nature of an investment), and “infrequency of occurrence” (as no
similar event had occurred previously, and none has occurred subsequently)
and
should be stated as an “extraordinary item.”
The
SEC
staff has taken recent exception to former management's interpretation, and
requested reclassification of this item from “extraordinary item” to a component
of operating income, and the Company is complying with that request. The change
in treatment of the note cancellation has no impact on the Company's net income
as previously reported.
The
10-QSB report for the three month period ended March 31, 2005 contained an
overstatement of net income. The overstatement was caused by an expense
reversal of $304,500 of officer compensation, the actual amount forgiven by
the
Company’s CEO during the three month period ended March 31, 2005. Although
this amount was forgiven, the expense should not have been reversed.
Actual net loss for the three month period was ($6,034). This
expense reversal caused additional paid-in capital and accumulated deficit
to be
overstated by $304,500 for all financial periods, until the Company’s balance
sheet was recapitalized by the accounting adjustments made pursuant to the
merger with IsoRay Medical, Inc. This error was carried through the
Form 10-KSB filing for the transitional nine month period ended June 30, 2005,
but was corrected by an amended 10-KSB filing on May 9, 2006.
This
consolidated financial report as of, and for the three and six months ended
December 31, 2005 replaces the previous report filed on Form 10-QSB on February
17, 2006. The Company previously used the historical financial statements of
IsoRay, Inc. (formerly Century Park Pictures Corporation) to compare to the
current financial statements. The SEC requested these comparative historical
statements be replaced by historical statements of IsoRay Medical, Inc., the
accounting acquirer to the merger between IsoRay, Inc. and IsoRay Medical,
Inc.,
completed on July 28, 2005. No changes are made to the balance sheet of December
31, 2005 or the statements of operations and cash flows for the three and six
months then ended. Only the comparative historical information has changed,
and
as appropriate, changes were made in the Management’s Discussion and Analysis of
Financial Condition and Results of Operations as they make comparisons to the
newly replaced historical financial statements.
NOTE
6 - CONTINGENCIES:
On
December 14, 2005, the Company entered into an Economic Development Agreement
(“Agreement”) with the Pocatello Development Authority ("PDA"), an urban renewal
agency formed under the laws of the State of Idaho. Pursuant to the Agreement,
the PDA has provided the Company with $200,000 of funding, to be used for costs
associated with testing of production methods for Cesium-131 at Idaho's Advanced
Test Reactor. This agreement stipulates that, pending successful test outcomes,
and approval for reactor use, the Company will attempt to construct a
manufacturing facility within the city limits of Pocatello so that operations
begin no later than January 1, 2008. If the Company elects not to build the
manufacturing facility, it will be required to repay the $200,000 funding plus
5% interest from the date of disbursement, within 30 days demand from the
PDA.
NOTE
7 - INDUCEMENT TO CONVERT DEBENTURES:
On
December 13, 2005, the Board of Directors announced a short-term conversion
inducement to current holders of IsoRay Medical, Inc. convertible debentures,
originally issued in conjunction with the January 31, 2005 Private Placement
Offering. Holders were permitted two conversion options: 1) convert under the
original terms of the debenture to the Company’s common stock at a $4.15
conversion price, and register the newly issued shares in the Form SB-2
Registration Statement filed with the SEC on November 10, 2005, or 2) convert
under terms essentially identical to those offered to purchasers of Units in
the
Offering of October 17, 2005: a $4.00 conversion price and one callable warrant
to purchase one share of the Company's common stock at an exercise price of
$6.00 per share for each share issued upon conversion (waiving registration
rights for approximately one year). As of December 31, 2005, holders of
$2,562,876 of debentures had converted to common stock of the Company responding
to the inducement of the second exercise method described above. As of December
31, 2005, the Company had issued 640,719 shares of common stock (including
approximately 23,160 incremental shares not previously available to holders
of
debentures under the original terms), and 640,719 warrants to purchase shares
of
common, exercisable at $6.00 per share. The Company recognized $244,097 in
non-cash short-term inducement expense, in accordance with FASB Statement of
Financial Accounting Standards No. 84.
NOTE
8 -SUBSCRIPTIONS RECEIVABLE:
On
December 7, 2005, the Company entered into a SICAV ONE Securities Purchase
Agreement and a SICAV TWO Securities Purchase Agreement (collectively, the
"Purchase Agreements") with Mercatus & Partners, Limited, a United Kingdom
private limited company ("Mercatus"). Pursuant to the Purchase Agreements,
Mercatus has agreed, subject to receipt of sufficient funding, to purchase
1,778,146 shares of the Registrant's common stock at a purchase price of $3.502
per share. In the event sufficient funding is not received to enable Mercatus
to
purchase the shares within thirty days (which was extended through Friday,
February 17, 2006, and may be further extended by management) from the date
of
delivery of the share certificates to the custodial bank, the share certificates
will be returned to the Company and each party will have no further obligations
under the Purchase Agreements. As of May 10, 2006 no funding had been received
by the Company.
As
part
of the Purchase Agreements, the Company has agreed to amend, within sixty days
of the date of the Purchase Agreements (this date has also been extended),
its
Registration Statement on Form SB-2, filed with the Securities and Exchange
Commission on November 10, 2005, to provide for registration of the shares
being
purchased by Mercatus.
NOTE
9 - SUBSEQUENT EVENTS:
Closure
of October 17, 2005 Offering - On
January 30, 2006 the Company closed an offering of Investment Units (“Units”)
for sale, pursuant to a Private Placement Offering (the “Offering”) of October
17, 2005. The Offering consisted 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 was increased,
pursuant to the terms of the Offering, at the sole discretion of the Company,
to
a maximum of 300 Units. The Units were sold for $20,000 per Unit. The $6,000,000
maximum amount was fully subscribed as of January 30.
Commencement
of February 1, 2006 New Offering -
On
February 1, 2006 the Company commenced an offering of Investment Units (“Units”)
for sale, pursuant to a Private Placement Offering (the “New Offering”) of
February 1, 2006. The New Offering consists of a maximum of 89 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 $6.50 per share. This maximum
may
be increased at the sole discretion of the Company, to a maximum of 178 Units.
The Units are being sold for $22,500 per Unit. As of February 28, 2006,
approximately $1.21 Million had been raised under the New Offering.
Continuing
conversion of debentures -
As of
February 10, 2006, two additional convertible debenture holders converted under
the short-term inducement method provided by the Board of Directors on December
13, 2005. This brought the total debentures converted to $3,682,875, leaving
$455,000 of the original debentures. As of February 10, 2006, the Company had
issued 911,276 shares of common stock to all converting debenture holders,
including those who chose the short-term inducement method, and those electing
to convert under the original terms. As of February 10, 2006 the Company had
issued approximately 23,840 incremental shares under the short-term inducement
method not previously available to holders of debentures under the original
terms.
Temporary
ordering disruption by primary customer -
On
January 5, 2006, IsoRay Medical was notified by one of its primary customers,
Chicago Prostate Cancer Center (CPCC), that it would no longer accept
131Cs
products
from the radiopharmacy exclusively used by IsoRay Medical at that time due
to
quality control concerns. The role of the radiopharmacy is to provide third
party assay, preloading, and sterilization of the 131Cs
seeds
which are then shipped directly to customers for use in patient implants. IsoRay
immediately began negotiations with Advanced Care Medical, Inc. (“ACM”), an
approved CPCC supplier, and expects to execute a contract with ACM for
radiopharmacy services using our 131Cs
seed.
IsoRay anticipates CPCC will resume ordering and using our 131Cs
seed
product as soon as ACM receives an amendment to its radioactive materials
license to process products containing the 131Cs
isotope. Although this temporary suspension of seed orders by CPCC has had
a
negative impact on revenue in the near term, the Company’s management believes
any long-term impact will be non-material.
ITEM
2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
IsoRay,
Inc. (formerly known as Century Park Pictures Corporation; the “Company” or
“IsoRay”) is a medical technology company focusing on innovative treatments for
prostate cancer and other solid cancer tumors, with a goal of improved patient
outcomes. Our wholly-owned subsidiary, IsoRay Medical, Inc., a Delaware
corporation (“IsoRay Medical”), began selling its initial product, the Food and
Drug Administration approved IsoRay Cesium-131 brachytherapy seed (the “IsoRay
131Cs
seed”), in October 2004 for the treatment of prostate cancer. Our management
believes that the clinical benefits of using Cesium-131 will enable us to
capture market share within the existing brachytherapy market, which uses
Palladium-103 and Iodine-125. We are also in the process of developing a second
product, Yttrium-90, which is a radioisotope that is already in use for the
treatment of certain forms of metastasized, or “spread throughout the body,”
cancers.
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, including brachytherapy. 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
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 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.
IsoRay
was incorporated under Minnesota law in 1983 as Century Park Pictures
Corporation. Since 1998 and until our recent merger with IsoRay Medical, we
had
no significant operations. On July 28, 2005, our subsidiary, Century Park
Transitory Subsidiary, Inc. merged into IsoRay Medical, Inc., making IsoRay
Medical our wholly-owned subsidiary.
Results
of Operations.
Three
and six month periods ended December 31, 2005 and 2004.
Revenues.
During
the three month period ended December 31, 2005, the Company generated $486,247
in sales of its 131Cs
seed.
This represents an increase of $462,077 over sales in the three months ended
December 31, 2004 of $24,170. Sales for the six month period ended December
31,
2005 were $697,162 an increase of $672,992 over sales in the six month period
ended December 31, 2004. IsoRay Medical began sales of its 131Cs
seed
on October 26, 2004 with one medical center customer. By December 31, 2005
the
number of medical center customers who have ordered the 131Cs
seed
had grown to seventeen.
On
January 5, 2006, IsoRay Medical was notified by one of its primary customers,
Chicago Prostate Cancer Center (“CPCC”), that it would no longer accept
131Cs
products from the radiopharmacy exclusively used by IsoRay Medical at that
time
due to quality control concerns. The role of the radiopharmacy is to provide
third party assay, preloading, and sterilization of the 131Cs
seeds
which are then shipped directly to customers for use in patient implants. IsoRay
immediately began negotiations with Advanced Care Medical, Inc. (“ACM”), an
approved CPCC supplier, and expects to execute a contract with ACM for
radiopharmacy services using our 131Cs
seed.
IsoRay anticipates CPCC will resume ordering and using our 131Cs
seed
product as soon as ACM receives an amendment to its radioactive materials
license to process products containing the 131Cs
isotope. Although this temporary suspension of seed orders by CPCC has had
a
negative impact on revenue in the near term, the Company’s management believes
any long-term impact will be non-material.
Gross
loss. Gross
loss was $430,027 for the three month period ended December 31, 2005. This
represents an increased loss of $67,146 or 19% over the three month period
ended
December 31, 2004. Gross loss was $939,278 for the six month period ended
December 31, 2005 which represents an increased loss of $579,397 compared to
the
six month period ended December 31, 2004. Cost of products sold was $916,274
for
the three month period and $1,636,440 for the six month period ended December
31, 2005. During the three months ended December 31, 2005, approximately
$356,000 was paid to Pacific Northwest National Laboratory (PNNL) under our
contract with them for use of their facilities and personnel to support
production. In the three month period ended December 31, 2005, we spent in
excess of $109,000 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 were
needed to commence production in our independent production facility, the
PEcoS-IsoRay Radioisotope Laboratory (“PIRL”). Most are long-lived items,
and will not need replacing in the current fiscal year. According to plan,
during the quarter ended December 31, 2005 we moved essentially all Cs-131
production operations to PIRL. We will continue to use the PNNL facility only
for certain research and development and quality assurance activities, but
in
the next quarter, we expect to substantially reduce the PNNL
expense.
Research
and development. Research
and development expenses for the three month period ended December 31, 2005
were
$96,837. This represents an increased expenditure of $84,321, or a 674% increase
over the expense of $12,516 for the three month period ended December 31, 2004.
Research and development expenses for the six month period ended December 31,
2005 were $122,619, an increase of $94,588 or 337% over the six month period
ended December 31, 2004 expense of $28,031. Of these amounts, $82,500 was paid
in conjunction with the ongoing protocol study on the results of 100 patients
who have recently been implanted with the Company’s 131Cs
brachytherapy seed.
Sales
and marketing expenses. Sales
and
marketing expenses were $340,532 for the three month period ended December
31,
2005. This represents an increase of $164,229 or 93% compared to the three
months ended December 31, 2004’s expenditure of $176,303 for sales and
marketing. Of this amount, approximately $236,000 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. The balance was spent on
advertising, market research, and trade shows and conferences. Sales and
marketing expense for the six month period ended December 31, 2005 was $655,571,
which was an increase of $330,029 or 101% over the six month period ended
December 31, 2004. These increased expenses are generally due to marketing
the
Company’s 131Cs
seed
which was only introduced to the market in October 2004.
General
and administrative expenses.
General
and administrative expenses for the three month period ended December 31, 2005
amounted to $675,444. This represents an increase of $260,805 or 63% in
comparison to the three months ended December 31, 2004 expense of $414,639.
Approximately $199,040 was paid in wages and related benefits and taxes during
the period. Legal expenses were $104,110 for the period. General and
administrative expenses for the six month period ended December 31, 2005
amounted to $1,636,393 an increase of $802,275 or 96% over the six month period
ended December 31, 2004.
Operating
(loss).
Due to
our significant research and development expenditures, additional
responsibilities as a reporting company, rapid structural growth, and nominal
product revenues, we have not been profitable, and have generated operating
losses since our inception. In the three month period ended December 31, 2005,
the Company had an operating loss of $1,542,840. This represents an increased
loss of $576,501 or 60%, in comparison with the three months ended December
31,
2004 operating loss of $966,339. The operating loss for the six month period
ended December 31, 2005 was $3,353,861, which is an increased loss of $1,803,289
over the six month period ended December 31, 2004.
Non-operating
income (expense).
Total
non-operating income (expense) was $(436,384) for the three month period ended
December 31, 2005. This represents an increase in net expense of $424,490 over
the three month period ended December 31, 2004 non-operating income (expense)
of
$(11,894). Total non-operating income (expense) for the six month period ended
December 31, 2005 was $(585,053) which represents an increased expense of
$512,240 over the six month periods ended December 31, 2004. This increase
in
non-operating income (expense) was largely due to the one-time recognition
of
$244,097 expense in short-term inducement to convert debentures (see Note 7)
and
an increase in financing expense. The Company earned $3,193 interest income
on
funds held in certain near-liquid accounts. This was $3,123 greater than the
three month period ended December 31, 2004’s interest income of $70. During the
three months ended December 31, 2005, financing expense was $195,480, or an
increased expense of $183,516 over the three month period ended December 31,
2004 financing expense of $11,964. Of this amount, $143,706 was paid as interest
on loans, notes and convertible debentures outstanding. The balance of the
financing expense was amortization of prepaid financing expense, primarily
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.
At
December 31, 2005, cash and cash equivalents amounted to $648,684. During the
three months ended December 31, 2005, the Company issued 645,500 shares of
common stock and granted warrants to purchase 645,500 shares of common stock
pursuant to the October 17, 2005 Offering. This issuance of common stock
provided the Company $2,324,168, in cash, net of legal costs and commissions
paid pursuant to the October 17, 2005 Offering. Additionally, the Company issued
5,488 shares of common stock pursuant to the exercise of options to purchase
common stock, and options to purchase preferred stock, which were exchanged
for
common stock immediately upon exercise. This exercise of options provided the
Company with $5,009. Also during the three months ended December 31, 2005,
the
Company issued 10,000 shares of common stock in exchange for $40,000 of
production equipment repair and maintenance, certain capital production
equipment, and consulting, and 24,007 shares of common stock in exchange for
one
year’s lease of the PIRL facility.
On
January 30, 2006, IsoRay closed a round of private financing under its October
17, 2005 private placement memorandum, as amended, which was fully sold at
$6
million. In February 2006, IsoRay commenced a new round of private financing
under its February 1, 2006 private placement memorandum, and had raised
approximately $1.21 million under that offering as of February 10,
2006.
The
Company had approximately $3.7 million cash on hand as of February 10,
2006.
As of
that date the Company's monthly required cash operating expenditures were
approximately $620,000, and capital expenditures were approximately $70,000.
Equipment
installed at our facility includes a hot cell, a glove box, three fume-hoods,
laser welders and laser welding tooling, which complete the laser sealing of
the
seeds; sophisticated testing equipment that allows us to test materials used
at
several stages of the production process and assay the completed seeds prior
to
shipment; and sterilizing and packaging systems that allow the seeds to be
pre-loaded into delivery systems according to customer specifications. We
believe we will need to add to the capital production equipment installed at
this facility within the next six to twelve months to meet increasing demand
for
our product, and have adequate room at the facility to install equipment that
would approximately double the production capacity up to 60,000 seeds per month;
approximately 600 patient treatments. As of February 10, 2006, management
believes that assuming expenditures continue at approximately the same monthly
rate that the Company's cash on hand would fund operating expenditures through
the beginning of August 2006.
On
December 7, 2005, the Company entered into a SICAV ONE Securities Purchase
Agreement and a SICAV TWO Securities Purchase Agreement (collectively, the
“Purchase Agreements”) with Mercatus & Partners, Limited, a United Kingdom
private limited company (“Mercatus”). Pursuant to the Purchase Agreement,
Mercatus has agreed, subject to receipt of sufficient funding, to purchase
1,778,146 shares of the Company’s common stock at a purchase price of $3.502 per
share, or an aggregate payment of $6,227,067. In the event Mercatus does not
purchase the shares, the share certificates will be returned to the Company
and
each party will have no further obligations under the Purchase Agreements.
To
date no funding has been received by the Company and there can be no assurance
that any funding will be received as the funding is contingent upon factors
outside of the Company’s control.
Our
growth plan for 2006 includes expanding sales to existing customers, continuing
a trend that has improved in the second quarter of FY 2006; discontinuing
production efforts at Pacific Northwest National Laboratory, which should
decrease operating costs; enhancing efforts to reduce internal production costs;
and expanding the base of suppliers of direct materials and value added services
to direct materials.
On
February 2, 2006, IsoRay signed a definitive license agreement with
International Brachytherapy s.a. (“IBt”) covering North America and providing
IsoRay with access to IBt’s Ink Jet production process and its proprietary
polymer seed technology for use in brachytherapy procedures using Cesium-131.
IsoRay intends to apply for FDA approval for the use of IBt’s proprietary
technology in tandem with IsoRay’s Cesium-131 proprietary technology following
completion of initial milestones designed to determine whether the two
technologies are compatible. This agreement will require a cash outlay of
approximately $225,000 in March 2006.
IsoRay
Medical has four 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 December 31, 2005,
the principal balance owed was $212,893. This loan is secured by certain
equipment, materials and inventory of IsoRay Medical, and also required personal
guarantees, for which the guarantors were 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 were issued
approximately 107,401 shares of our common stock. As of December 31, 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 December 31, 2005, the principal balance owed
was
approximately $36,156.
The
BFEDD
has granted IsoRay Medical a waiver from enforcing violations of paying officers
in excess of $100,000 per year and maintaining a certain current asset
ratio. The
waiver, effective from March 31, 2005 through June 30, 2006, also excuses
non-compliance with covenants prohibiting fixed asset or lease obligations
in
excess of $24,000 per year, covenants prohibiting mergers, and covenants
requiring maintenance of a certain long-term debt to equity ratio. However,
IsoRay Medical is currently in default of a covenant requiring that it pay
no
greater than forty-five thousand dollars ($45,000) annually for lease payments
during the life of the loan. Management believes that if the BFEDD accelerates
repayment that is has sufficient cash resources to satisfy this obligation.
IsoRay
Medical also had $530,000 in principal amount of convertible debentures
outstanding as of December 31, 2005, which were issued between February and
July
2005. As of February 10, 2006, the amount of convertible debentures outstanding
had been reduced to $445,000, with holders of $75,000 in convertible debentures
converting subsequent to the end of the three month period ended December 31,
2005. These
debentures could be converted into 127,711 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.
IsoRay
Medical also had $316,364 in principal amount of notes payable outstanding
as of
December 31, 2005, which were issued in a private placement to a predecessor
IsoRay company between October 2003 and September 2004. Each note bears interest
at an annual rate of ten percent (not compounded), and has a thirty-six month
term with accrued interest paid quarterly. The Company intends to retire these
note payable obligations with part of the proceeds received from the New
Offering of February 1, 2006.
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
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.
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 $8,349. 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 granted
warrants to purchase 5,692 shares of its common stock at $4.15/share.
We
expect
to finance our future cash needs through the sale of equity securities,
solicitation to warrant holders to exercise their warrants, 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, as amended.
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.
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·
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Our
independent accountants have expressed uncertainty about our ability
to
continue as a going concern.
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·
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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.
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·
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We
have limited data on the clinical performance of the 131Cs
seed.
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We
will need to raise additional capital to fund our operations through
2006.
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·
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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.
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·
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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.
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·
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We
have limited specific experience with the sales and marketing of
the
131Cs
seed.
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·
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Our
quarterly operating results will be subject to significant
fluctuations.
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·
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We
rely heavily on a limited number of
suppliers.
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·
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We
are subject to uncertainties regarding reimbursement for use of our
product.
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·
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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.
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·
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Our
industry is intensely competitive, and many of our competitors are
larger
than we are and possess greater
resources.
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·
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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.
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·
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Failure
to comply with government regulations, which are quite complex, could
harm
our business.
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·
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Our
business exposes us to product liability claims and also involves
environmental risks.
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·
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We
rely heavily upon our executive officers and key scientific
personnel.
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·
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Our
ability to expand into foreign markets is
uncertain.
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·
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Our
ability to successfully commercialize our product is
uncertain.
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·
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Our
reporting obligations as a public company are
costly.
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There
is a limited market for our common stock, and our stock price is
likely to
be volatile.
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·
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Our
common stock may be subject to penny stock regulation.
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·
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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.
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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 December 31, 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. 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.
(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 additional of full
time
staff. We hired a controller effective May 1, 2006 to assist with segregation
of
duties and believe this internal control weakness will soon
be alleviated.
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
In
the
three month period ended December 31, 2005, the Company sold 645,500 shares
of
common stock pursuant to the October 17, 2005 Offering, in exchange for a cash
payment of 2,582,000 (less commissions of ten percent (10%) on securities placed
by broker/dealers). This common stock was sold as part of a unit offering
including one share of common stock and a callable warrant to purchase one
share
of common stock at $6.00 per share with a two-year term. These sales were made
between October 20 and December 31, 2005 and were effected pursuant to the
exemption from registration provided by Regulation D promulgated under the
Securities Act of 1933, as amended (the “Securities Act”), and Section 4(2) of
the Securities Act.
The
Company also issued 10,000 shares of common stock, on November 18, 2005, to
Intellegration LLC in
exchange for $40,000 of capital production equipment, consulting services,
and
repair and maintenance services on production equipment used in the PIRL
facilities pursuant
to the exemption from registration provided by Section 4(2) of the Securities
Act.
Additionally, on October 6, 2005, the Company issued 24,007 shares of common
stock to Nuvotec USA, Inc. as payment for one year’s lease of the PIRL
facilities pursuant to the exemption from registration provided by Section
4(2)
of the Securities Act.
On
December 7, 2005, the Company entered into a SICAV ONE Securities Purchase
Agreement and a SICAV TWO Securities Purchase Agreement (collectively, the
“Purchase Agreements”) with Mercatus & Partners, Limited, a United Kingdom
private limited company (“Mercatus”). Pursuant to the Purchase Agreements,
Mercatus has agreed, subject to receipt of sufficient funding, to purchase
1,778,146 shares of the Company’s common stock at a purchase price of $3.502 per
share. As of the date of this Report, no funding had been received by the
Company.
Pursuant
to the Purchase Agreements, Mercatus, a foreign entity, was issued 1,778,146
shares of the Company’s common stock in exchange for a future cash payment of
$6,227,067.29. If the future payment is not made then the shares will be
returned. This sale was effected pursuant to the exemption from registration
provided by Regulation D promulgated under the Securities Act, and Section
4(2)
of the Securities Act.
ITEM
6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
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
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.
On
December 12, 2005, the Company filed a Current Report on Form 8-K announcing
its
entry into two securities purchase agreements with Mercatus & Partners,
Limited.
On
December 14, 2005, the Company filed a Current Report on Form 8-K announcing
the
engagement of DeCoria, Maichel &Teague, P.S. as its new independent
auditor.
On
December 20, 2005, the Company filed a Current Report on Form 8-K announcing
its
entry into an Economic Development Agreement with the Pocatello Development
Authority.
On
December 29, 2005, the Company filed a Current Report on Form 8-K announcing
the
sale of 598,000 shares of its common stock (with accompanying warrants) under
its October 17, 2005 Private Placement Memorandum.
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:
May 11, 2006
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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 |
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