What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2020-09-25 compared with 2019-09-27 · 69 added, 49 removed, 158 unchanged (43% of the section changed)

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Revenue Recognition

Revenue is generally realized or realizable and earned when there is persuasive evidence an arrangement exists, delivery has occurred or services rendered, the price is fixed and determinable, and collection is reasonably assured.

The Company records revenue from its sales when the price is fixed and determinable at the date of sale, title and risk of ownership have been transferred to the customer, and returns can be reasonably estimated.

The Company recognizes revenue based on the five-step model for revenue recognition as prescribed by ASC 606, Revenue from Contracts with Customers, as follows:

(1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the prices to the performance obligations; and (5) recognize revenue.

The Company has some agreements that contain general commercial terms and product prices but do not contain an obligation to provide goods to the customer.

Our performance obligation, which is established when the customer submits a purchase order and the Company accepts the order, is to deliver the product based on the purchase order received.

The Company typically recognizes revenue at the time of shipment, at which time the title passes to the customer, and there are no further performance obligations.

Stock-Based Compensation

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Operating expenses:

Research and development

Proprietary research and development

Collaboration arrangement, net of reimbursement

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General and administrative

Change in estimate of asset retirement obligation (Note 9)

Change in estimate of asset retirement obligation

Gain on equipment disposal

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The Company’s sales personnel continued to bring on new accounts while also working with existing customers to increase their order volumes.

The Blu Build™ loader, while in a limited market release, also helped to increase revenues during fiscal 2019.

GammaTile™ and the Blu Build™ loader, while in a limited market release during part of the fiscal year, also helped to increase revenues during fiscal 2020.

In addition, part of the sales growth was due to moderate price increases that were implemented during the middle of fiscal year 2020.

Fiscal 2019 sales, net increased 23% compared to fiscal 2018.

Changes in sales personnel and implementation of a revitalized sales and marketing strategy has resulted in positive sales growth in fiscal 2018 when compared to the prior fiscal year.

Ongoing training and support of new sales personnel has led to not only new accounts but also reconnecting with and receiving orders from prior accounts.

The Company’s sales personnel continued to bring on new accounts while also working with existing customers to increase their order volumes.

The Blu Build™ loader, while in a limited market release, also helped to increase revenues during fiscal 2019.

For the years ended June 30,

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Prostate Brachytherapy.

Prostate sales growth of approximately 27% in fiscal 2019 was achieved due to a sustained focus on acquiring new accounts through physician training programs and marketing campaigns along with continued support of existing customers to help them grow their business.

While in a limited market release, the Blu Build™ loader also contributed to prostate revenue growth as it was sold to new customers that desired the intraoperative loader system.

Prostate sales growth of approximately 29% in fiscal 2020 was mainly achieved due to increased sales volumes due to sales and marketing’s sustained focus on acquiring new accounts through physician training programs and marketing campaigns along with continued support of existing customers to help them grow their business.

The moderate price increase that occurred in the middle of fiscal year 2020 also contributed to a small part of the increase.

While in a limited market release for most of the fiscal year, the Blu Build™ loader also contributed to prostate revenue growth as it was sold to new customers that desired the intraoperative loader system.

The Company continues to update its website and other marketing collateral as well as attending tradeshows to acquire new leads for our sales personnel.

Also, the website along with some social media campaigns have been used to educate patients about the availability of Cesium-131 as a treatment option.

Management believes continued growth in prostate brachytherapy revenues will be the result of physicians, payors, and patients increasingly considering overall treatment advantages including costs compared with non-brachytherapy treatments, better treatment outcomes and improvement in the quality of life for patients but there is no assurance as to the timing of a recovery in use of brachytherapy as a whole.

Management believes increased pressure to deliver effective healthcare in both terms of outcome and cost drove treatment options in fiscal 2020 with prostate brachytherapy receiving more consideration than in previous years.

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Other sales include but is not limited to brain, lung, head/neck, gynecological, pelvic treatments, and services.

Other sales remained flat in fiscal 2019.

Other sales grew by approximately 60% in fiscal 2020.

The main driver of this growth was increased treatments for brain cancer including GammaTile™.

Initial applications for these other brachytherapy treatments are primarily used in recurrent cancer treatments or salvage cases that are generally difficult to treat aggressive cancers where other treatment options are either ineffective or unavailable.

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For several years the Company has focused on many different applications of its Cesium-131 brachytherapy seeds in the cranial cavity to target many forms of brain cancer.

Most recently, the Company has focused on using braided strand configurations and on a potential collaboration with GammaTile, LLC, now known as GT Medical Technologies, Inc.

Most recently, the Company has focused on using braided strand configurations and on a collaboration with GammaTile, LLC, now known as GT Medical Technologies, Inc.

(GT Med Tech), which has a technology which use biodegradable “tiles” to deliver the Cesium-131 brachytherapy seeds into contact with cancerous tumors in the brain.

Since January 2019, GammaTile™ Therapy has been in a limited market release and total revenues from sales to GT Med Tech have been nominal.

GammaTile™ Therapy was in a limited market release beginning in January 2019 and in a full market release beginning in January 2020.

Total revenues from sales to GT Med Tech have been less than ten percent of total revenues.

While GT Med Tech continues to assure Isoray that its sales and marketing efforts will show steady improvements in sales there is no assurance this will occur.

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Labor expenses increased by $168,000 as the Company had more production volume due to higher sales.

Non-isotope materials also increased by $141,000 due to increased sales volume and an increase in the ratio of preloaded seeds (stranded, Blu Build™, etc.) compared to loose seeds sold.

Beginning in the first quarter of 2019, the Company reduced the amount of Cesium-131 provided by the MURR reactor by approximately thirty-five percent.

Non-isotope materials costs also increased by $270,000 due to increased sales volume and an increase in the ratio of preloaded seeds (stranded, Blu Build™, etc.) compared to loose seeds sold.

Beginning in the first fiscal quarter of 2019, the Company reduced the amount of Cesium-131 provided by the MURR reactor by approximately thirty-five percent.

After a thorough review of the capacity and quality of production at the MURR facility, the Company determined to terminate its supply agreement with MURR and the last shipment of isotope from MURR was received in January 2019.

These changes led to a $165,000 decrease in isotope cost during fiscal 2020 compared to fiscal 2019 despite increased sales volumes.

The fiscal 2019 increase was primarily due to higher sales volumes that led to increased labor expenses and non-isotope materials costs offset by decreased isotope costs.

Labor expenses increased by $103,000 as the Company had more production volume due to higher sales.

Non-isotope materials also increased by $141,000 due to increased sales volume and an increase in the ratio of preloaded seeds (stranded, Blu Build™, etc.) compared to loose seeds sold.

The reduction of the amount of Cesium-131 provided by the MURR reactor referred to above in January 2019 led to a $98,000 decrease in isotope cost during fiscal 2019 compared to fiscal 2018 despite increased sales volumes.

In addition, depreciation increased by $48,000 due to completed automation projects placed into service at the end of fiscal 2018 and for which depreciation expense was recognized throughout fiscal 2019.

The fiscal 2018 increase is primarily the result of increased isotope orders to meet production demand due to improved sales.

These cost increases were partially offset by decreases to payroll, benefits, and share-based compensation resulting from a reduction in the number of full time employees as well as a re-allocation of resources to assist in research and development activities.

During both fiscal 2019 and 2020, the Company purchased isotope in excess of known customer orders to provide enough isotope to fill anticipated orders which may or may not materialize.

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Research and development consisted primarily of the costs related to employee and third-party research and development activities.

The decrease in fiscal 2020 compared to fiscal 2019 was mainly due to reduced expenses related to developmental costs for the Blu Build™ loader and decrease in protocol expenses as existing protocols were completed and new ones had not yet started.

These factors led to a decrease of $415,000 in fiscal 2020.

This decrease was offset by an increase in payroll costs as the company shifted some internal resources to spend more time on research and development activities.

The decrease in fiscal 2019 compared to fiscal 2018 was mainly due to reduced expenses related to the Collaborative Development Agreement with GT Med Tech offset by increased spending on the Blu Build™ loader development.

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Sales and marketing expenses consist primarily of the costs related to the internal and external activities of the Company’s sales, marketing and customer service division.

The fiscal 2019 increase was due to increased payroll of $88,000 due to an increase in headcount offset by smaller increases in other categories such as postage and office supplies totaling $13,000.

This increase was offset by decreased tradeshow expenses of $43,000 as the Company limited its attendance to those tradeshows that it felt were most advantageous and decreased marketing expenses of $52,000 as the Company spent more in fiscal 2018 to revamp its brand image, website, and marketing materials.

The fiscal 2020 increase was due to increased payroll of $423,000 due to incentive compensation related to the increase in sales.

This increase was offset by a reduction of $130,000 in travel due to reduced travel as a result of the COVID-19 global health pandemic.

The fiscal 2019 increase is primarily due to increased payroll, benefits, and share-based compensation and travel for sales activities.

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General and administrative expenses consist primarily of the costs related to the executive, quality assurance and regulatory affairs (QA/RA), finance, human resources and information technology functions of the Company.

The increase in fiscal 2020 is primarily the result of higher payroll of $458,000 due to incentive compensation and promotions, increased insurance premiums of $68,000 primarily relating to D&O insurance (which increased industry-wide), other expense of $50,000 primarily related to employee relations and hiring expense, and public company expense of $50,000 mostly relating to the at the market offering, and overhead recovery of $38,000 due to no shared costs with GT Medical Technologies.

These were partially offset by decreased legal fees of $107,000, materials of $92,000, and travel of $64,000.

During fiscal 2019 general and administrative expenses increased only slightly over fiscal 2018.

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These increases were offset by decreases in public company expenses of approximately $274,000 (of which $204,000 was non-cash warrant expense) as a result of changing some investor and media relation vendors which lead to significant savings and lower board fees of almost $24,000 due to fewer meetings.

The fiscal 2018 increase is due primarily to investor relations expenses, severance, and payroll, benefits, and share-based compensation partially offset by decreased legal fees.

Impact of COVID-19

From the onset of the COVID-19 global health pandemic we have been proactive in implementing plans to ensure the health and well-being of our employees, while remaining focused on providing uninterrupted product flow to the physicians and patients who count on us.

We seamlessly transitioned many employees to work from home and made other adjustments to ensure the continuity of our business through this time.

At the beginning of the pandemic, we moved quickly to ensure that our inventory of non-isotope supplies were appropriate in case our supply chain was disrupted.

In addition, we set in motion our strategy to maintain a continuous and uninterrupted supply of isotope from our suppliers in Russia including the review of alternative freight services due to the cancellation of many international flights.

As COVID-19 began to spread, many states implemented new guidelines in an attempt to mitigate the spread of the virus and to conserve certain medical supplies.

Those guidelines led to the cancellation or postponement of elective and non-emergency surgical procedures, including prostate brachytherapy procedures.

Consequently, at the very end of March, we saw some procedures begin to be postponed in many markets we serve.

This resulted in a drop in revenue for the month of April as preliminary revenue declined about 20% compared to April of 2019.

As some markets began to open back up slowly beginning in May 2020, revenues in May and June increased above the revenues of May and June 2019, but they were still below the average monthly revenues attained in our third quarter of fiscal 2020.

As more states gradually lift restrictions on non-essential surgeries and other activities we have received customer feedback of anticipated increases in implant volumes as patients begin returning from quarantines for office visits and consultations but there is no assurance this will occur or be sustained.

In the meantime, we continue to tightly manage our expenses and make fluid adjustments to isotope orders to meet potential increased treatment demands.

Liquidity and capital resources

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The Company has historically financed its operations through selling equity to investors.

During fiscal 2019 the Company used cash raised in July 2018 by selling equity to investors along with existing cash reserves from prior capital raises to fund its operations and capital expenditures.

During fiscal 2018 and 2017 the Company used existing cash reserves from prior capital raises to fund its operations and capital expenditures.

During fiscal 2020, the Company raised approximately $880,000 from an at the market offering.

These funds were not used in fiscal 2020.

Funds raised in July 2018 by selling equity to investors as well as existing cash reserves from prior capital raises were used to fund the Company's operations and capital expenditures during fiscal 2020 and 2019 respectively.

Our cash flows for fiscal 2020, 2019, and 2018 respectively, are summarized as follows (in thousands):

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Net cash used by operating activities

Net cash provided by investing activities

Net cash provided by (used in) by investing activities

Net cash provided by financing activities

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Net cash used by operating activities in fiscal 2019 was primarily due to a net loss of $5.14 million net of approximately $613,000 in adjustments for non-cash activity such as depreciation and amortization expense, the accretion of asset retirement obligation, and share-based compensation.

Changes in operating assets and liabilities contributed approximately $221,000 in the cash used by operating activities.

Net cash used by operating activities in fiscal 2017 was primarily due to a net loss of $6.16 million net of approximately $433,000 in adjustments for non-cash activity such as depreciation and amortization expense, the change in estimate of asset retirement obligation, the change in fair value of the warrant derivative liability, and share-based compensation.

Changes in operating assets and liabilities contributed approximately $518,000 to the cash used by operating activities.

Net cash used by operating activities in fiscal 2018 was primarily due to a net loss of $6.7 million net of approximately $767,000 in adjustments for non-cash activity such as depreciation and amortization expense, the accretion of asset retirement obligation, and share-based compensation.

Changes in operating assets and liabilities contributed approximately $221,000 in the cash used by operating activities.

Also included in operating activities in fiscal 2017 is the one-time payment of $195,000 for settlement of litigation that was not covered by insurance.

Cash flows from investing activities

Investing activities for all years are presented by primary transaction category.

Investing activities consisted of transactions related to the purchase of fixed assets as well as the purchase and subsequent maturity of certificates of deposit.

Management will continue to invest in technology and machinery that improves and streamlines production processes and to invest and reinvest maturing certificates of deposit in low-risk investment opportunities that safeguard assets and provide greater assurance those resources will be liquid and available for business needs as they arise.

Included in investing activities in fiscal 2017 is a payment of $197,900 for the default of the development plan for the land purchased from the Port of Benton.

See Property Transaction between Medical and The Port of Benton of Note 15 to the consolidated financial statements contained in this Form 10-K.

Investing activities consisted of transactions related to the purchase of fixed assets as well as the purchase and subsequent maturity of certificates of deposit or US Treasury Bills.

Management will continue to invest in technology and machinery that improves and streamlines production processes and to invest and reinvest maturing certificates of deposit and US Treasury Bills in low-risk investment opportunities that safeguard assets and provide greater assurance those resources will be liquid and available for business needs as they arise.

Cash flows from financing activities

Financing activities for all years are presented by primary transaction category.

Financing activities in fiscal 2019, 2018, and 2017 were primarily due to sales of common stock through a registered direct offering, net, an at the market offering, net, and warrant and option exercises net of preferred dividends paid.

Financing activities in fiscal 2020, 2019, and 2018 were primarily due to sales of common stock through a registered direct offering, net, at the market offerings, net, and warrant and option exercises net of preferred dividends paid.

Financing activities were significantly increased in fiscal 2019 compared to 2020 and 2018 due to the registered direct offering, net.

Projected 2020 L iquidity and C apital R esources

Projected FY 2021 L iquidity and C apital R esources

Operating activities

Management forecasts that fiscal 2020 cash requirements will be similar to previous years and that current cash and cash equivalents will be sufficient to meet projected operating cash needs for the next eighteen months.

While monthly operating expenses are budgeted to increase for sales and marketing and decrease for general and administrative expenses, management believes the total monthly expense amount will not substantially change.

Assuming no extraordinary expenses occur (whether operating or capital), if management is successful at implementing its strategy to focus on renewed emphasis to drive the consumer to the prostate market and meets or exceeds its growth targets of twenty percent increase in revenue in fiscal 2020 and this annual growth continues, the Company anticipates reaching cashflow break-even in three to four years.

Management forecasts that fiscal 2021 cash requirements will be similar to previous years and that current cash and cash equivalents will be sufficient to meet projected operating cash needs for the next nine to twelve months .

While monthly operating expenses are budgeted to increase for sales and marketing, research and development and general and administrative expenses, management believes the total monthly expense amount will not substantially change.

Assuming no extraordinary expenses occur (whether operating or capital), if management is successful at implementing its strategy to focus on renewed emphasis to drive the consumer to the prostate market and meets or exceeds its growth targets of twenty-five percent increase in revenue in fiscal 2021 and this annual growth continues, the Company anticipates reaching cashflow break-even in three to four years.

These assumptions do assume that GammaTile™ will contribute to total revenue but do not incorporate any significant growth in the other non-prostate applications as they generate nominal revenues today but if they show significant improvement, cashflow break-even could occur sooner.

There is no assurance that the targeted sales growth will materialize but management is encouraged by the depth and experience of its sales team and its track record of growth during the last two fiscal years.

Capital expenditures

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Beginning in fiscal 2017 and continuing through fiscal 2020, the Company has invested approximately $1,061,000 in the automation of five production processes, four of which have been placed in service as of the end of fiscal 2020.

Management expects to invest approximately $100,000 more over the next six months on the remaining automation projects, but there is no assurance that this amount will not be revised.

Management expects to invest approximately $10,000 more over the next three months on the remaining automation projects, but there is no assurance that this amount will not be revised.

This investment is designed to allow the Company to significantly increase the output of Cesium-131 brachytherapy seeds, while allowing the Company to decrease the labor costs related to seed production and also improving the overall safety of our operations.

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The Form S-1 registration statement became effective on December 14, 2018.

When it does require capital in the future, the Company expects to finance its cash needs through sales of equity, possible strategic collaborations, debt financing or through other sources that may be dilutive to existing shareholders, Management anticipates that if it raises additional financing that it will be at a discount to the market price and it will be dilutive to shareholders.

On March 31, 2020, the Company entered into an Equity Distribution Agreement (the "Agreement") with Oppenheimer & Co., Inc.

(“Oppenheimer”).

The common stock sold pursuant to the Agreement will be distributed at the market prices prevailing at the time of sale.

The Agreement provides that Oppenheimer will be entitled to compensation for its services at a commission rate of 3.0% of the gross sales price per share of common stock sold plus reimbursement of certain expenses.

Net proceeds from the sale of the shares will be used for general corporate purposes.

As of June 30, 2020, the Company had sold an aggregate of 1,247,232 shares under the distribution agreement at an average price of approximately $0.738 per common share for gross proceeds of approximately $920,000 and net proceeds of approximately $874,000, pursuant to the registration statement on Form S-3 that became effective on January 23, 2020.

When it does require capital in the future, the Company expects to finance its cash needs through sales of equity, possible strategic collaborations, debt financing or through other sources that may be dilutive to existing stockholders, Management anticipates that if it raises additional financing that it will be at a discount to the market price and it will be dilutive to stockholders.

Other Commitments and Contingencies

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Contractual obligations

Operating lease obligations

Seed core purchase obligation

Asset retirement obligation

Off-Balance Sheet Arrangements

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Inflation had minimal impact on our net sales and revenues or on loss from continuing operations.

New Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2014-09 Revenue Recognition, replacing guidance currently codified in Subtopic 605-10 Revenue Recognition-Overall with various SEC Staff Accounting Bulletins providing interpretive guidance.

The guidance establishes a new five step principle-based framework in an effort to significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets.

The standard became effective for the Company in the first quarter of its fiscal year 2019.

The Company adopted the new standard in the first quarter of fiscal year 2019 and used the modified retrospective method.

The adoption of ASU 2014-09 did not have a material impact on the consolidated financial statements of the Company and did not significantly change the timing of revenue recognition compared to the previous methodology.

New Accoun ting Standards

In February 2016, the FASB issued ASU 2016-02 Leases (Subtopic 842), which will require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by most leases.

The update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

Early adoption is permitted.

The modified retrospective transition approach is required.

The ASU will be effective for the Company in the first quarter of fiscal year 2020 and the most significant effects of this ASU relate to the recognition of a new right-of-use asset and corresponding lease liability.

The Company adopted the new standard in the first quarter of fiscal year 2020 and the most significant effects of this ASU relate to the recognition of a new right-of-use asset and corresponding lease liability.

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808):

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis