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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission File No. 001-33407

ISORAY, INC.

(Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

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

Yes ☒ No ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

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

ISORAY, INC.

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The accompanying unaudited interim consolidated financial statements are those of IsoRay, Inc., and its wholly-owned subsidiaries, referred to herein as “IsoRay” or the “Company”. All significant intercompany accounts and transactions have been eliminated in the consolidation. In the opinion of management, all adjustments necessary for the fair presentation of the consolidated financial statements have been included. These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes as set forth in the Company’s annual report filed on Form 10-K10-K for the year ended June 30, 2017.2018.

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

Certain prior period amounts have been reclassified to conform to the current period’s presentation. The results of operations for the periods presented may not be indicative of those which may be expected for a full year.  The Company anticipates that as the result of continuing operating losses and the significant net operating losses available from prior fiscal years, its effective income tax rate for fiscal year 20182019 will be 0%.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.2014-09 2014-09   Revenue Recognition, replacing guidance currently codified in Subtopic 605-10605-10 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 will bebecame effective for the Company in the first quarter of its fiscal year 2019, but early adoption is permitted starting in the first quarter of fiscal year 2018.2019. The Company intends to adoptadopted the new standard in the first quarter of fiscal year 2019 and expects to useused the modified retrospective method. The Company has evaluated the impact of the future adoption of ASU 2014-092014-09 did not have a material impact on itsthe consolidated financial statements of the Company and does did not currently expect significant changes in significantly change the timing of revenue recognition compared to the existingprevious methodology. 

In July 2015, February 2016, the FASB issued ASU No.2015-11: Inventory. The guidance requires an entity’s management to measure inventory within the scope of this ASU at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early application is permitted. The ASU became effective for the Company on July 1, 2017. This update did not have a material impact on the Company’s consolidated financial statements upon adoption.

In November 2015, the FASB issued an ASU 2015-17 to simplify the balance sheet classification of deferred taxes. This update requires all deferred tax assets and liabilities to be reported as non-current in the consolidated balance sheets. The ASU became effective for the Company on July 1, 2017. This update did not to have a material impact on the Company’s consolidated financial statements upon adoption.

In February 2016, the FASB issued ASU 2016-022016-02 Leases (Subtopic 842)842), which will require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by most leases. The update is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. The ASU will be effective for the Company in the first quarter of fiscal year 2020. We are currently evaluating the impact of the guidance on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU No.2016-15 2016-15 Statement of Cash Flows (Topic 230)230): Classification of Certain Cash Receipts and Cash Payments. The update provides guidance on classification for cash receipts and payments related to eight specific issues. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2016-15 as of July 1, 2018. The adoption of ASU 2016-15 did not have a material effect on the Company’s consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. ASU 2016-18 is currently evaluatingintended to clarify how entities present restricted cash in the impactstatement of implementing thiscash flows. The guidance requires entities to show the changes in the total of cash and cash equivalents and restricted cash in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash in the statement of cash flows. When cash and cash equivalents and restricted cash are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and is to be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company adopted ASU 2016-18 in the first quarter of fiscal 2019. This update resulted in an increase of $181,000 in cash, cash equivalents, and restricted cash at the beginning of the first period presented on the consolidated financial statements.statement of cash flows.

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

The Company had short-term investments consisting of U.S. Treasury Securities and Certificate of Deposit Account Registry Service (CDARS) as of September 30, 2018 and June 30, 2018 respectively.

CDARS is a system that allows the Company to invest in certificates of deposit through a single financial institution that exceed the $250,000$250,000 limit to be fully insured by the Federal Deposit Insurance Corporation (FDIC). That institution utilizes the CDARS system to purchase certificates of deposit at other financial institutions while keeping the investment at each institution fully insured by the FDIC. CDARS

Short-term investments held by the Company as of March 31,September 30, 2018 and June 30, 2017 are2018 mature as follows (in thousands):

Basic and diluted earnings (loss) per share are calculated by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding, and does not include the impact of any potentially dilutive common stock equivalents. At March 31,September 30, 2018 and 2017, the calculation of diluted weighted average shares did not include convertible preferred stock, common stock warrants, or options that are potentially convertible into common stock, as those would be antidilutive due to the Company’s net loss position.

Securities not considered in the calculation of diluted weighted average shares, but that could be dilutive in the future as of March 31,September 30, 2018 and 2017, were as follows (in thousands):

Inventory consisted of the following at March 31,September 30, 2018 and June 30, 2017 (in2018 (in thousands):

Property and equipment consisted of the following at March 31,September 30, 2018 and June 30, 2017 (in2018 (in thousands):

The following table presents the share-based compensation expense recognized for stock-based options during the three months ended March 31,September 30, 2018 and 2017 (in thousands): 

The following table presents the share-based compensation expense recognized for stock-based options during the nine months ended March 31, 2018 and 2017 (in thousands): 

Isotope Purchase Agreement 

In December 2015, the Company completed negotiations with The Open Joint Stock Company (located in Russia) for the purchase of Cesium-131Cesium-131 manufactured by the Institute of Nuclear Materials. The purchase agreement provided the Company with one year’s supply of Cesium-131.Cesium-131. The original agreement was due to expire on March 31, 2017, but in December 2016 an addendum was signed extending it until December 31, 2017. On October 23, 2017, the Company, together with The Open Joint Stock Company signed an addendum to the contract to include Cesium-131Cesium-131 manufactured at the Research Institute of Atomic Reactors ("SSC RIAR") and extended it until December 31, 2018. On March 19, 2018, an addendum was signed increasing the amount of Cesium-131 to be provided to the Company through December 31, 2018.

Research and Development - Collaborative Arrangement

On March 13, 2017, IsoRay Medical, Inc. (Medical), a wholly owned subsidiary of the Company (“Medical”), entered into a Collaborative Development Agreement (CDA) with GammaTile, LLC to further develop a brachytherapy medical device for the treatment of cancerous tumors in the brain and to seek regulatory approval for the new product. As the project manager, Medical will incurincurs all costs in connection with the collaboration project which has beenwill be shared equally by both parties as of November 8, 2016, which is when they informally began the collaboration. As of March 31, 2018, the collaboration is ongoing and we expect it to continue through our fiscal 2018fourth quarter.  In accordance with ASC 808 “Collaborative Arrangements”, this activityThe arrangement is accounted for as a collaborative arrangement and related costs are incurred, shared, and separately stated in connection with a collaborative research and development project. These costs are reported on the financial statements under “Research and development: Collaboration arrangements, net of reimbursement.”  The Company collaborated with GammaTile LLC in filing applications to the U.S. Food and Drug Administration (FDA) to clear GammaTile™ for clinical use, and a New Technology Add-on Payment (NTAP) to the Center for Medicare and Medicaid Services (CMS) seeking re-imbursement for the GammaTile™ treatment in the in-patient setting.  The application with the FDA is ongoing, however, the NTAP was filed in October 2017. 

During the three months ended March 31,September 30, 2018 and 2017, costs incurred in connection with the CDAcollaboration agreement were $304,000$116,000 and $322,000, respectively.

During the nine months ended March 31, 2018 and 2017, costs incurred in connection with the CDA were $509,000 and $322,000,$147,000, respectively.

As of March 31,September 30, 2018 and June 30, 2017, 2018, the Company had outstanding receivables from GammaTile LLC of $73,000$82,000 and $66,000$22,000 respectively. These amounts are included in the Prepaid expenses and other current assets on the consolidated balance sheet.

Derivative Complaint related to Shareholder Value

On September 29, 2016, David M. Kitley, purportedly on behalf of IsoRay, filed a derivative lawsuit in the United States District Court for the District of Minnesota under the case caption Kitley v. IsoRay, Inc., Case No.0:16-cv-03297-DTS. The complaint named as defendants current and former IsoRay directors Dwight Babcock, Thomas LaVoy, Philip J. Vitale and Michael W. McCormick, alleging that they violated their fiduciary duties to IsoRay in connection with a press release allegedly containing false and misleading statements concerning the results from a peer reviewed study of its Cesium-131 isotope seeds for the treatment of non-small cell lung cancers, thereby artificially inflating the price of IsoRay stock. The complaint sought unspecified damages, in an amount not presently determinable, among other forms of relief.

On November 17, 2016, IsoRay moved to dismiss the complaint, arguing that plaintiff was not entitled to pursue his derivative claims due to his failure to serve a pre-suit demand on IsoRay’s board. Rather than respond to the motion to dismiss, plaintiff filed an amended complaint on January 23, 2017. The amended complaint alleged the same derivative claims as the original, and added IsoRay director Alan Hoffmann as a defendant. Plaintiff sought an award of damages and an order directing IsoRay to undertake reforms of its corporate governance and internal procedures. IsoRay moved to dismiss the amended complaint on March 9, 2017. Plaintiff responded on April 20, 2017, and IsoRay replied on May 17, 2017. The court heard oral argument on the motion on August 22, 2017, and took the matter under advisement at that time. On October 19, 2017, the court granted IsoRay’s motion to dismiss.  The matter is now resolved.

Media Advertising Agreement

On October 3, 2017, IsoRay entered into a Media Advertising Agreement (the “Agreement”) with Al & J Media Inc., a corporation incorporated in the State of New York (“Al & J”).

Pursuant to the Agreement, Al & J was to introduce IsoRay to potential sources of media, marketing agreements, and/or strategic alliances, including but not limited to radio and television media advertising, various media publications, and Internet podcasts. Al & J did not promote IsoRay as part of the Agreement; it acted only as a media agent for advertising.

On December 29, 2017, IsoRay notified Al&J of its decision to terminate the Agreement between the parties because Al & J's services were no longer needed.

As compensation for the services provided prior to termination, IsoRay paid Al & J $60,000 and issued Al & J 250,000 warrants upon execution of the Agreement, which vested immediately, entitling Al & J to purchase shares of IsoRay common stock, exercisable on or before October 3, 2020, at an exercise price of $0.54 per share. See Note 12.

The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement (in thousands):

The Company’s cash and cash equivalent instruments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.

DuringThere were no related party transactions during the quarter ended June 30, 2016, the Company engaged GO Intellectual Capital, LLC (GO) for marketing services in support of the Company’s rebranding effort. Michael McCormick, a member of the Company Board of Directors, is a 1/3 owner of GO. A statement of work was developed defining the scope of the effort and the deliverables to the Company which included a new logo with brand messaging and communication tools including a website, sales presentation tools and a public relations strategy. For the ninethree months ended March 31, 2017, the Company paid approximately $20,000 to GO for its performance of work related to the agreed upon statement of work. No such services were provided in the nine months ended March 31, 2018.September 30, 2018 and 2017.

One group of customers, facilities or physician practices hasaccounts for revenues that aggregate to greater than 10% of total Company product sales:

¹ –sales. This group of facilities individually each comprise lessdo not aggregate to more than 10% of total Company product sales. They are serviced by the same physician group, one of whom is our Medical Director.Director:

The Company routinely assesses the financial strength of its customers and provides an allowance for doubtful accounts as necessary.

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

On October 3, 2017,

In a concurrent private placement, the Company entered into a Media Advertising Agreement with Al & J Media Inc. (“Al & J”). As partsold to each Investor, at no additional consideration, unregistered warrants to purchase up to the number of shares of common stock of the compensation for the services, Al & J received 250,000Company equal to 50% of such Investor’s Shares or a total of 5,500,000 shares, with an exercise price of $0.75 per share, exercisable from January 11, 2019 until January 11, 2024 (the “Investor Warrants”). The Company also issued warrants upon executionto purchase up to 330,000 shares of common stock of the Agreement, which vested immediately, entitling Al & J to purchase shares of IsoRay common stock, exercisable on or before October 3, 2020, Company, at an exercise price of $0.54 each. These warrants, using$0.9375, to representatives of H.C. Wainwright & Co., LLC (“Wainwright”), the Black-Scholes model, resulted in approximately $72,000 of share based compensation duringplacement agent for the nine months ended March 31, 2018. On December 29, 2017, the Company notified Al & Jregistered direct offering, as part of its decision to terminatecompensation (the “Placement Agent Warrants” and together with the Media Advertising Agreement.Investor Warrants, the “Warrants”).

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

We have adopted ASC 606, Revenue from Contracts with Customers effective July 1, 2018 using the modified retrospective method applied to those contracts which were not substantially completed as of July 1, 2018. These standards provide guidance on recognizing revenue, including a five-step model to determine when revenue recognition is appropriate. The standard requires that an entity recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenues for fiscal year 2019 are reported under ASC 606, while prior period amounts are not adjusted and continue to be reported under ASC 605, Revenue Recognition.

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

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

Sources of Revenue

We have identified the following revenues disaggregated by revenue source:

For the three months ended September 30, 2018 and 2017 the Company had revenue from both sources. International revenues in both periods was immaterial.

Contract Balances

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

Warranty

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

Returns

Generally, we allow returns if not implanted and we are notified within a few weeks after satisfying our performance obligations of a return.

Significant Judgments in the Application of the Guidance in ASC 606

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

Commissions and Contract Costs

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

Practical Expedients

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

Shipping and Handling Charges

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

Taxes Collected from Customers

As our products are used in the Black-Scholes valuation modelanother service and are exempt, to calculatethis point we have not collected taxes. If we were to collect taxes they would be on the fair value of the warrants are as follows:transaction revenue and would be excluded from product revenues and cost of sales and would be accrued in current liabilities until remitted to governmental authorities.

Effective Date and Transition Disclosures

The following table summarizes all warrants outstanding asAdoption of the beginning of the fiscal year, all activitynew standards related to warrants issued, cancelled, exercised or expired during the periodrevenue recognition did not have a material impact on our consolidated financial statements, and weighted average prices by category.

The following table summarizes additional information about the Company’s common warrants outstanding as of March 31, 2018:

¹ – Exercise pricesis not expected to have been rounded to the nearest whole cent.a material impact in future periods.

On October 19, 2018, the Company filed a Form S-1 registration statement for the registration of 5,830,000 shares of common stock to be received by the investors and representatives of Wainwright on exercise of Warrants issued in connection with a registered direct offering completed on July 11, 2018 whereby the Company received gross proceeds of $8,250,000. The Company may receive up to $4,434,375 in gross proceeds solely to the extent the Warrants are exercised for cash, but they can't be exercised until January 11, 2019.

On November 7, 2018, the Company entered into an Amendment and Termination of Share Rights Agreement (the “Amendment”) with Computershare Trust Company, N.A. (the “Rights Agent”), which amended that certain Share Rights Agreement (the “Rights Agreement”), dated as of February 1, 2007, as amended, by and between the Company and the Rights Agent.  The Amendment accelerates the expiration date of the Rights Agreement to November 7, 2018, such that, as of 5:00 p.m. Richland, Washington time on November 7, 2018, the Series C Junior Participating Preferred Shares purchase rights expired and are no longer outstanding and the Rights Agreement terminated and is of no further force or effect.