As
filed with the Securities and Exchange Commission on February 16, 2006
Registration
Statement No. 333-129646
SECURITIES
AND EXCHANGE COMMISSION
POST-EFFECTIVE
AMENDMENT
NO. 5 TO
FORM
SB-2
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
ISORAY,
INC.
(Name
of Small Business Issuer in its Charter)
|
Minnesota
|
|
3841
|
|
41-1458152
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|
(State
of Incorporation)
|
|
(Primary
Standard Industrial Classification Code Number)
|
|
(IRS
Employer ID No.)
|
350
Hills Street, Suite 106
Richland,
WA 99354
(509)
375-1202
(Address
and Telephone Number of Principal Executive Offices and Principal Place of
Business)
Roger
Girard, CEO
350
Hills Street, Suite 106
Richland,
WA 99354
(509)
375-1202
(Name,
Address and Telephone Number of Agent for Service)
Copies
of communications to:
Stephen
R. Boatwright, Esq.
Alicia
M. Corbett, Esq.
Keller
Rohrback, PLC
3101
North Central Avenue, Suite 1400
Phoenix,
Arizona 85012
(602)
248-0088
Facsimile
Number: (602) 248-2822
Approximate
date of commencement of proposed sale to the public:
From
time to time.
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check
the
following box. x
If
this
Form is filed to register additional securities for an offering pursuant
to Rule
462(b) under the Securities Act of 1933, please check the following box and
list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. o
CALCULATION
OF REGISTRATION FEE
|
Title
Of Each Class Of Securities To Be Registered
|
Amount
To Be Registered (1)
|
Proposed
Maximum Offering Price Per Unit
|
Proposed
Maximum Aggregate Offering Price
|
Amount
Of Registration Fee
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|||||||||
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|
|
|
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|||||||||
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Common
stock, $0.001 par value, issuable upon conversion of preferred
stock
|
43,219
|
$
|
5.38(2)
|
$
|
232,518
|
$
|
24.88(3)
|
||||||
|
Common
stock, $0.001 par value, issuable upon exercise of stock
options
|
218,454
|
$
|
5.38(2)
|
$
|
1,175,283
|
$
|
125.76(3)
|
||||||
|
Common
stock, $0.001 par value
|
4,004,264
|
$
|
5.45(4)
|
$
|
21,823,238
|
$
|
2334.87(3)
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||||||
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Common
stock, $0.001 par value, issuable upon exercise of
warrants
|
371,163
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$
|
5.38(2)
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$
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1,996,857
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$
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213.66(3)
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||||||
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|||||||||||||
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Total
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4,637,100
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$
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25,227,896
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$
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2699.17(3)
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||||||||
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(1)
|
Includes
shares of our common stock, par value $0.001 per share, which
may be
offered pursuant to this registration statement, a portion of
which shares
are issuable upon conversion of preferred stock and convertible
debentures
and exercise of warrants and stock options held by the selling
shareholders. In addition to the shares set forth in the table,
the amount
to be registered includes an indeterminate number of shares,
including
those issuable upon conversion of the preferred stock and convertible
debentures and exercise of the warrants and stock options, as
such number
may be adjusted as a result of stock splits, stock dividends
and similar
transactions in accordance with Rule 416.
|
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(2)
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Estimated
solely for the purpose of calculating the amount of the registration
fee
pursuant to Rule 457(c) under the Securities Act of 1933, as
amended,
based upon the average of the bid and asked prices of the Registrant's
common stock on November 7, 2005.
|
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(3)
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Previously
paid.
|
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(4)
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Represents
a combination of (2) and (5).
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(5)
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Estimated
solely for the purpose of calculating the amount of the registration
fee
pursuant to Rule 457(c) under the Securities Act of 1933, as
amended,
based upon the average of the bid and asked prices of the Registrant's
common stock on March 20, 2006.
|
ISORAY,
INC.
4,637,100
Shares
Common
Stock
This
prospectus relates to the sale by the selling shareholders of up to 4,637,100
shares of our common stock, $0.001 par value. The 4,637,100 shares being
registered consist of the following: up to 4,004,264 shares of common stock,
up
to 43,219 shares of common stock underlying our convertible preferred stock
(including up to 6,967 shares of common stock issuable upon conversion of
preferred stock following the exercise of warrants to acquire our preferred
stock), up to 371,163 shares of common stock underlying warrants to purchase
common stock and up to 218,454 shares of common stock underlying options
to
purchase common stock, all currently held by the selling shareholders. The
preferred stock is convertible into our common stock at one (1) share of
common
stock for each preferred share converted, the warrants are exercisable at
prices
ranging from $0.70 to $4.15 (excluding a warrant issued at an exercise price
of
$10.00 for 12,500 shares of common stock) with expiration dates ranging from
March 26, 2007 to May 10, 2008 and the options are exercisable at prices
ranging
from $1.19 to $2.00 per share with expiration in July of 2015.
The
prices at which the selling shareholders may sell shares will be determined
by
the prevailing market price for the shares or in negotiated transactions.
We will not receive any proceeds from the sale of our shares by the selling
shareholders. The selling shareholders may be deemed underwriters of the
shares
of common stock which they are offering. We will pay the expenses of registering
these shares.
Our
common stock is listed on the OTC Bulletin Board under the symbol
"ISRY.OB." On February 13, 2007, the closing price of our common stock was
$4.90 per share.
No
underwriter or other person has been engaged to facilitate the sale of shares
of
common stock in this offering.
INVESTING
IN OUR SECURITIES INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING
ON PAGE 4.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The
date
of this prospectus is February 16, 2007.
350
Hills Street, Suite 106
Richland,
WA 99354
(509)
375-1202
______________________________________________________________________________
TABLE
OF CONTENTS
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PROSPECTUS
SUMMARY
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1
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RISK
FACTORS
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4
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USE
OF PROCEEDS
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13
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MANAGEMENT'S
DISCUSSION AND ANALYSIS
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13
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MARKET
FOR COMMON STOCK
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24
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DESCRIPTION
OF BUSINESS
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25
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DESCRIPTION
OF PROPERTY
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43
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LEGAL
PROCEEDINGS
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44
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DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
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44
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INDEMNIFICATION
OF DIRECTORS AND OFFICERS
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50
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SECURITIES
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
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50
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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52
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SELLING
SHAREHOLDERS
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54
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PLAN
OF DISTRIBUTION
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63
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DESCRIPTION
OF SECURITIES
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64
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LEGAL
MATTERS
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68
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EXPERTS
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68
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
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69
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FURTHER
INFORMATION
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69
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i
You
should rely only on the information contained in this prospectus. We have
not,
and the selling shareholders have not, authorized anyone to provide you with
information that is different from that contained in this prospectus. The
selling shareholders are offering to sell shares of common stock and seeking
offers to buy shares of common stock only in jurisdictions where offers and
sales are permitted. The information in this prospectus is accurate only
as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
Except
as
otherwise indicated, market data and industry statistics used throughout
this
prospectus are based on independent industry publications and other publicly
available information. Although we believe that these data and statistics
are
reasonable and sound, they have been prepared on the basis of underlying
data to
which we do not have access, and which we cannot independently verify.
For
definitions of many of the technical terms used throughout this prospectus,
see
page 2.
PROSPECTUS
SUMMARY
The
following summary highlights selected information contained in this prospectus.
This summary does not contain all the information you should consider before
investing in our common stock. Before making an investment decision, you
should
read the entire prospectus carefully, including the "RISK FACTORS" section,
the
financial statements and the notes to the financial statements. As used
throughout this prospectus, the terms "IsoRay," the "Company," "we," "us"
and
"our" refer to IsoRay, Inc.
Our
Business
We
are 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
("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. Cesium-131
or
131Cs
is an
isotope of the element Cesium that gives off low energy, “soft” x-rays as it
decays killing diseased tissue by irradiating it where it is placed.
Brachytherapy seeds allow physicians to place 131Cs
or
another radioactive isotope within the body to kill cancerous tissue. Our
management believes that the clinical benefits of Cesium-131 will enable
us to
capture market share within the existing brachytherapy market, which uses
the
radioactive isotopes Palladium-103 and Iodine-125.
Our
Corporate History
We
were
incorporated under Minnesota law in 1983. Since 1998 and until our merger
with
Medical, we had no significant operations. On July 28, 2005, our subsidiary,
Century Park Transitory Subsidiary, Inc. merged into IsoRay Medical, Inc.,
making Medical our wholly-owned subsidiary.
Medical
was formed under Delaware law on June 15, 2004 and merged with IsoRay Products
LLC and IsoRay, Inc., each formed under Washington law, on October 1, 2004.
The
first IsoRay company was originally organized in 1998 as a Washington limited
liability company, IsoRay, LLC, to develop a medical device using the Cesium-131
seed technology and later transferred its operations to IsoRay, Inc. on May
1,
2002. IsoRay Products LLC was formed in September 2003 to raise capital to
fund
the operations of IsoRay, Inc. Both IsoRay, Inc. and IsoRay Products LLC
merged
with IsoRay Medical, Inc. on October 1, 2004.
Our
independent auditors have expressed doubt about our ability to continue as
a
going concern due to ongoing operating losses, which our management expects
to
continue for the foreseeable future. Because our revenues from sales of our
131Cs
seed
are insufficient to find our operations at this time, we will need to obtain
financing or grow our revenues in the near future to continue our operations.
Management expects our independent auditors will continue to express doubt
about
our ability to continue as a going concern for the foreseeable future.
1
Our
principal office is located at 350 Hills Street, Suite 106, Richland, Washington
99354. Our general office phone number is (509) 375-1202. Our website is
www.isoray.com. Information on our website is not part of this prospectus.
The
Offering
|
Common
Stock Offered
|
|
4,637,100
shares by selling shareholders
|
|
Offering
Price
|
Market
price or negotiated price
|
|
|
Common
Stock Outstanding Before the Offering
|
16,815,360
shares as of February 7, 2007
|
|
|
Use
of Proceeds
|
|
We
will not receive any proceeds from the resale of the shares offered
hereby, all of which proceeds will be paid to the selling
shareholders.
|
|
Risk
Factors
|
|
The
purchase of our common stock involves a high degree of risk.
You should
carefully review and consider the "RISK FACTORS" section beginning
on page
4.
|
|
OTC
Bulletin Board Symbol
|
|
ISRY.OB
|
Certain
Defined Terms
The
technical terms defined below are important to understand as they are used
throughout this prospectus. When used in this prospectus, unless the context
requires otherwise:
“Brachytherapy”
refers
to the process of placing therapeutic radiation sources in, or near, diseased
tissue. Brachytherapy is derived from a Greek term meaning “short distance”
therapy.
“Cesium-131”, “131Cs”
or“Cs-131”
is an
isotope of the element Cesium that gives off low energy, “soft” x-rays as it
decays. Cesium-131 decays to 50% of its original activity every 9.7 days,
becoming essentially inert after 100 days.
“EBRT”
(external beam radiation therapy) is the external treatment of prostate cancer
using an x-ray-like machine that targets a beam of radiation at the cancer
site.
The treatment damages genetic material within the cancer cells, which prevents
the cells from growing and the affected cells eventually die. Treatments
are
generally performed at an outpatient center five days a week for seven or
eight
weeks.
“Half-life”
means
the time required for a radioisotope to decay to one-half of its previous
activity. The amount of radiation emitted thus decreases to 25% of original
activity in two half-lives, 12.5% in three half-lives, and so on.
“Isotope”
refers
to atoms of the same element that have different atomic masses. The word
“isotope” means “same place,” referring to the fact that isotopes of a given
element have the same atomic number and hence occupy the same place in the
Periodic Table of the Elements. Thus, they are very similar in their chemical
behavior.
2
“131Cs
seed”
is the
name by which IsoRay’s first product, the Cesium-131-based brachytherapy seed,
is currently known.
“Pure-beta
particle emitter”
is a
radioisotope whose only emissions during radioactive decay are beta particles
(electrons). Beta particles can travel several millimeters in
tissue.
“RP”
(radical
prostatectomy or prostatectomy) is the complete surgical removal of the
prostate, under significant anesthesia. Two main types of surgery have evolved:
nerve-sparing and non nerve-sparing. The nerve-sparing surgery is designed
to
minimize damage to the nerves that control penile erection.
“Radiobiologic”
is
characteristic of the effects of radiation on organisms or tissues, most
commonly the effectiveness of therapeutic radiation in interrupting cell
growth
and replication.
“Radioisotope”
is a
natural or man-made isotope of an element that spontaneously decays while
emitting ionizing radiation.
“Seed”
is a
common term for small radiation sources consisting of a radioisotope sealed
within a biocompatible capsule such as gold or titanium, suitable for temporary
or permanent brachytherapy implantation.
“Therapeutic
radiation” refers
to
ionizing radiation with sufficient energy to disrupt basic biological processes
of cells.
3
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information in
this
prospectus and any other filings we may make with the United States Securities
and Exchange Commission in the future before investing in our common stock.
There may also be risks of which were are currently unaware, or that we
currently regard as immaterial based on the information available to us that
later prove to be material. If any of these risks occur, our business, operating
results and financial condition could be seriously harmed, the trading price
of
our common stock could decline, and you could lose some or all of your
investment.
Risks
Related To Our Business
Our
Independent Accountants Have Expressed Doubt About Our Ability To Continue
As A
Going Concern.
IsoRay,
Inc. (“IsoRay” or the “Company”) has generated material operating losses since
inception. We expect to continue to experience net operating losses. Our
ability
to continue as a going concern is subject to our ability to obtain necessary
funding from outside sources, including obtaining additional funding from
the
sale of our securities, the exercise of our warrants, or obtaining loans
and
grants from various financial institutions where possible. The substantial
doubt
expressed by our auditors about our ability to continue as a going concern
increases the difficulty in meeting such goals. We have limited historical,
operating or financial information upon which to evaluate our performance.
There
can be no assurance that the Company will attain profitability.
Our
Revenues Depend Upon One Product.
Until
such time as we develop additional products, our revenues depend upon the
successful production, marketing, and sales of the IsoRay 131Cs
seed.
The rate and level of market acceptance of this product may vary depending
on
the perception by physicians and other members of the healthcare community
of
its safety and efficacy as compared to that of competing products, if any;
the
clinical outcomes of the patients treated; the effectiveness of our sales
and
marketing efforts in the United States and Europe; any unfavorable publicity
concerning our product or similar products; our product’s price relative to
other products or competing treatments; any decrease in current reimbursement
rates from the Centers for Medicare and Medicaid Services or third-party
payers;
regulatory developments related to the manufacture or continued use of the
product; availability of sufficient supplies of enriched barium for 131Cs
seed
production; ability to produce sufficient quantities of this product; and
the
ability of physicians to properly utilize the device and avoid excessive
levels
of radiation to patients. Because of our reliance on this product as the
sole
source of our revenue, any material adverse developments with respect to
the
commercialization of this product may cause us to continue to incur losses
rather than profits in the future.
Although
Approved To Treat Any Malignant Tissue, Our Sole Product Is Currently Used
To
Treat One Type Of Cancer. As
of the
date of this Prospectus, the IsoRay 131Cs
seed
is used exclusively for the treatment of prostate cancer. We believe the
131Cs
seed
will be used to treat cancers of other sites as well, as is currently the
case
with our competitors’ 125I
and
103Pd
seeds.
However, we believe that clinical data gathered by select groups of physicians
under treatment protocols specific to other organs will be needed prior to
widespread acceptance of our product for treating other cancer sites. If
our
current and future products do not become accepted in treating cancers of
other
sites, our sales will depend solely on treatment of prostate cancer and we
will
require ever increasing market share to increase revenues.
The
Lease On Our Production Facility Ends In October 2007. The
Company’s current production facility lease ends in October 2007. While the
landlord has agreed to work with the Company to minimize production disruptions,
the landlord has indicated that it does not intend to enter into a long-term
leasing agreement with the Company. Management is in the final stages of
negotiation to lease space for a new production facility. Once the new
lease is
signed, the Company will begin to obtain the necessary permits and licenses
and
to make the necessary leasehold improvements. Management believes that
the
Company will be able to obtain the necessary permits for the new facility
in a
timely manner that will not cause delays in the leasehold improvements
construction schedule. This new facility is expected to be operational
at the
end of calendar year 2007. Management believes that the new production
facility
lease currently being negotiated will be able to accommodate the Company’s
anticipated future growth for several years. The Company continues to use
PNNL
to provide third-party assay of its products, but has otherwise vacated
PNNL
facilities. Management believes that if the Company is unable to obtain
the new
lease, the necessary permits, or finish the leasehold improvements before
having
to vacate the present manufacturing facility, that a temporary manufacturing
facility is available and could be used although production capacity and
scheduling flexibility would be limited.
4
We
Have Limited Data On The Clinical Performance Of 131Cs.
As of
February 15, 2007, the IsoRay 131Cs
seed
had been implanted in over 900 patients.
While this number of patients may prevent us from drawing statistically
significant conclusions, the side effects experienced by these patients
were
less severe than side effects observed in seed brachytherapy with 125I
and
103Pd
and in
other forms of treatment such as radical prostatectomy These early results
indicate that the onset of side effects generally occurs between one and
three
weeks post-implant, and the side effects are resolved between five and
eight
weeks post-implant, indicating that, at least for these initial patients,
side
effects resolved more quickly than the side effects that occur with competing
seeds or with other forms of treatment. These limited findings support
management’s belief that the 131Cs
seed
will result in less severe side effects than competing treatments, but
we may
have to gather data on outcomes from additional patients before we can
establish
statistically valid conclusions regarding the incidence of side effects
from our
seeds.
We
Will Need To Raise Additional Capital.
The
hiring of upper level executives and increasing production requirements
significantly increased IsoRay’s monthly cash requirements since August 2005.
Monthly operating cash requirements as of February 1, 2007 were approximately
$700,000, excluding capitalized items. Capital expenditures typically include
the purchase or capital lease of equipment, with a life-expectancy of more
than
12 months, costing in excess of $2,500, which would include among other
things:
analytical systems, improved packaging for final products and, new production
systems which increase manufacturing throughput. Ongoing requirements to
meet
greater payroll obligations coupled with legal and accounting fees associated
with our public reporting status have resulted in greater amounts of short-term
cash demands. We will need to continue to raise capital.
We
will
also need substantial funds to complete the development, manufacturing,
and
marketing of our current and future products. Consequently, we will seek
to
raise additional capital through not only warrant solicitation, public
and
private offerings of equity and debt securities, but also collaborative
arrangements, strategic alliances, or from other sources. Management is
now in
discussions to raise up to $20 million of equity financing through a Form
S-3
Registration Statement declared effective on February 15, 2007 but there is
no assurance that this funding will be closed and if closed, at prices
which do
not dilute existing investors.
We
may be
unable to raise additional capital on commercially acceptable terms, if at
all,
and if we raise capital through additional equity financing, existing
shareholders may have their ownership interests diluted. Our failure to be
able
to generate adequate funds from operations or from additional sources would
harm
our business.
The
Passage Of Initiative 297 In Washington May Result In The Relocation Of Our
Manufacturing Operations. Washington
voters approved Initiative 297 in late 2004, which may impose restrictions
on
sites at which mixed radioactive and hazardous wastes are generated and stored.
IsoRay has been assured by the Attorney General’s office of the State of
Washington that medical isotopes are not included in Initiative 297 and that
manufacturing in IsoRay’s new production facility would not be interrupted, but
there is no assurance that this interpretation of Initiative 297 by the Attorney
General’s Office will continue to exclude medical isotopes. In June 2006, a U.S.
District Court judge ruled that Initiative 297 was unconstitutional in its
entirety. However, the State of Washington has indicated that it may appeal
the
decision. If this decision is overturned and Initiative 297 is enforced it
could
impact our ability to manufacture our seeds in the State of
Washington.
Management
believes that we will be able to continue our manufacturing operations in
the
State of Washington for the foreseeable future. In the event Initiative 297
is
enforced against us, management may consider establishing an alternate
manufacturing facility outside of Washington, and we may consider moving
all or
part of our operations to another state even if Initiative 297 is not enforced
against us.
We
Have Limited Manufacturing Experience And May Not Be Able To Meet
Demand.
The
existing management team and staff of IsoRay have experience primarily
in
research and development of products and our experience in commercial-scale
manufacturing is limited. We began commercial production of the 131Cs
seed
in the fourth quarter of 2004. Although our management team has significant
radiochemistry experience, there is a possibility that production demands
may
result in challenges that may be too difficult or expensive to overcome.
We have
developed and deployed semi-automated laser welding equipment that can
produce
seeds faster than fully-automated equipment the Company has reviewed that
would
cost several million dollars to design and fabricate. We believe we will
continually find more efficient means of welding the titanium seeds; however,
there is a possibility that future demand will outstrip our ability to
produce
seeds using the semi-automated process. Management believes that the new
production facility lease currently being negotiated will be able to accommodate
the Company’s anticipated future growth for several years. The Company continues
to use PNNL to provide third-party assay of its products, but has otherwise
vacated PNNL facilities.
5
We
Are Subject To The Risk That Certain Third Parties May Mishandle Our Product.
We
rely
on third parties, such as Federal Express, to deliver our 131Cs
seed,
and on other third parties, including various radiopharmacies, to package
our
131Cs
seed
in certain specialized packaging forms that, as of the date of this Prospectus,
we do not provide at our own facilities. We are subject to the risk that
these
third parties may mishandle our product, which could result in adverse effects,
particularly given the radioactive nature of our product. As an example,
on
January 5, 2006, we were notified by one of our primary customers, Chicago
Prostate Cancer Center (“CPCC”), that it would no longer accept 131Cs
products from the radiopharmacy exclusively used by us 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.
We
immediately began working to bring these functions in house. On March 28,
2006,
CPCC resumed ordering from us.
Our
Operating Results Will Be Subject To Significant Fluctuations. Our
quarterly revenues, expenses, and operating results are likely to fluctuate
significantly in the future. Fluctuation may result from a variety of factors,
which are discussed in detail throughout this “RISK FACTORS” section,
including:
|
§
|
our
achievement of product development objectives and
milestones;
|
|
§
|
demand
and pricing for the Company’s
products;
|
|
§
|
effects
of aggressive competitors;
|
|
§
|
hospital,
clinic and physician buying
decisions;
|
|
§
|
research
and development and manufacturing
expenses;
|
|
§
|
patient
outcomes from our therapy;
|
|
§
|
physician
acceptance of our products;
|
|
§
|
government
or private healthcare reimbursement
policies;
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§
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our
manufacturing performance and
capacity;
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§
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incidents,
if any, that could cause temporary shutdown of our manufacturing
facilities;
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§
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the
amount and timing of sales orders;
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§
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rate
and success of future product
approvals;
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§
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timing
of FDA clearance, if any, of competitive products and the rate
of market
penetration of competing products;
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§
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seasonality
of purchasing behavior in our
market;
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§
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overall
economic conditions; and
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the
successful introduction or market penetration of alternative
therapies.
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We
Rely Heavily On A Limited Number Of Suppliers. Some
materials used in our products are currently available only from a limited
number of suppliers. For example, virtually all titanium tubing used in
brachytherapy seed manufacture comes from a single source, Accellent
Corporation. We currently obtain a key component of our seed core from
a single
supplier. We do not have formal written agreements with either this key
supplier
or with Accellent Corporation. Any interruption or delay in the supply
of
materials required to produce our products could harm our business if we
were
unable to obtain an alternative supplier or substitute equivalent materials
in a
cost-effective and timely manner. Over sixty percent (60%) of our cesium
is now
supplied through the Institute of Nuclear Materials (“INM”) located in the
former Soviet Union. This percentage will continue to increase as demand
for our
products increases. Management expects that we will be able to supplement
our
supply of cesium with deliveries under our recent contract with the Russian
Research Institute of Atomic Reactors (“RIAR”), although deliveries have not yet
begun under this contract and are now not expected until October 2007.
Failure
to obtain deliveries of cesium from these sources would have a material
adverse
effect on seed production and there may be a delay before we could locate
alternative suppliers. Additional factors that could cause interruptions
or
delays in our source of materials include limitations on the availability
of raw
materials or manufacturing performance experienced by our suppliers and
a
breakdown in our commercial relations with one or more suppliers. Some
of these
factors may be completely out of our and our suppliers’
control.
6
Future
Production Increases Will Depend on Our Ability to Acquire Larger Quantities
of
131Cs
and Hire More Employees. IsoRay
currently obtains 131Cs
through its contract with INM and through reactor irradiation of natural
barium
and subsequent separation of cesium from the irradiated barium targets. The
amount of 131Cs
that
can be produced from a given reactor source is limited by the power level
and
volume available within the reactor for irradiating targets. This limitation
can
be overcome by utilizing barium feedstock that is enriched in the stable
isotope
130Ba.
However, the number of suppliers of enriched barium is limited and they may
be
unable to produce this material in sufficient quantities at a reasonable
price.
IsoRay
has entered into exclusive agreements with the Institute of Nuclear Materials
and the Russian Research Institute of Atomic Reactors in Russia to provide
131Cs
in
quantities sufficient to supply a significant percentage of future demand
for
this isotope. Delivery of the isotope from the Institute of Nuclear Materials
began in January 2006 and delivery of initial quantities of the isotope
from
RIAR are expected to begin during October 2007. IsoRay believes these suppliers
may also provide access to sufficient quantities of enriched barium that
may be
recycled for use in other reactors to increase the production of 131Cs.
Although the agreements provide for supplying 131Cs
in
significant quantities, there is no assurance that this will result in
IsoRay
gaining access to a sufficient supply of enriched barium feedstock and
if
sufficient supplies are attained we will need to increase our manufacturing
staff. If we were unable to obtain supplies of isotopes from Russia in
the
future, our overall supply of cesium and barium would be reduced significantly.
We
Are Subject To Uncertainties Regarding Reimbursement For Use Of Our Products.
Hospitals
and freestanding clinics may be less likely to purchase our products if they
cannot be assured of receiving favorable reimbursement for treatments using
our
products from third-party payers, such as Medicare, Medicaid and private
health
insurance plans. Currently, Medicare reimburses hospitals, clinics and
physicians for the cost of seeds used in brachytherapy procedures on a per
seed
basis. Historically, private insurers have followed Medicare guidelines in
establishing reimbursement rates. However, third-party payers are increasingly
challenging the pricing of certain medical services or devices, and we cannot
be
sure that they will reimburse our customers at levels sufficient for us to
maintain favorable sales and price levels for our products. There is no uniform
policy on reimbursement among third-party payers, and we can provide no
assurance that our products will continue to qualify for reimbursement from
all
third-party payers or that reimbursement rates will not be reduced. A reduction
in or elimination of third-party reimbursement for treatments using our products
would likely have a material adverse effect on our revenues.
In
2003,
we applied to the Centers for Medicare and Medicaid Services (CMS) and received
reimbursement codes for use of our 131Cs
seed
(HCPCS code C2633 and APC code 2633). Reimbursement amounts are reviewed
and
revised periodically on an ad hoc basis. Adjustments could be made to these
reimbursement amounts or policies, which could result in reduced reimbursement
for brachytherapy services, which could negatively affect market demand for
our
products.
Furthermore,
any federal and state efforts to reform government and private healthcare
insurance programs could significantly affect the purchase of healthcare
services and products in general and demand for our products in particular.
We
are unable to predict whether potential healthcare reforms will be enacted,
whether other healthcare legislation or regulations affecting the business
may
be proposed or enacted in the future or what effect any such legislation
or
regulations would have on our business, financial condition or results of
operations.
It
Is
Possible That Other Treatments May Be Deemed Superior To Brachytherapy.
Our
131Cs
seed
faces competition not only from companies that sell other radiation therapy
products, but also from companies that are developing alternative therapies
for
the treatment of cancers. It is possible that advances in the pharmaceutical,
biomedical, or gene therapy fields could render some or all radiation therapies,
whether conventional or brachytherapy, obsolete. If alternative therapies
are
proven or even perceived to offer treatment options that are superior to
brachytherapy, physician adoption of our product could be negatively affected
and our revenues from our product could decline.
Our
Industry Is Intensely Competitive. The
medical products industry is intensely competitive. We compete with both
public
and private medical device, biotechnology and pharmaceutical companies that
have
been established longer than we have, have a greater number of products on
the
market, have greater financial and other resources, and have other technological
or competitive advantages. In addition, centers that wish to offer the
131Cs
seed
must comply with licensing requirements specific to the state in which they
do
business and these licensing requirements may take a considerable amount
of time
to comply with. Certain centers may choose to not offer our 131Cs seed
due
to the time required to obtain necessary license amendments. We also compete
with academic institutions, government agencies, and private research
organizations in the development of technologies and processes and in acquiring
key personnel. Although we have patents granted and patents applied for to
protect our isotope separation processes and 131Cs
seed
manufacturing technology, we cannot be certain that one or more of our
competitors will not attempt to obtain patent protection that blocks or
adversely affects our product development efforts. To minimize this potential,
we have entered into exclusive agreements with key suppliers of isotopes
and
isotope precursors.
7
We
May Be Unable To Adequately Protect Or Enforce Our Intellectual Property
Rights
Or Secure Rights To Third-Party Patents. Our
ability and the abilities of our partners to obtain and maintain patent and
other protection for our products will affect our success. We are assigned,
have
rights to, or have exclusive licenses to patents and patents pending in the
U.S.
and numerous foreign countries. The patent positions of medical device companies
can be highly uncertain and involve complex legal and factual questions.
Our
patent rights may not be upheld in a court of law if challenged. Our patent
rights may not provide competitive advantages for our products and may be
challenged, infringed upon or circumvented by our competitors. We cannot
patent
our products in all countries or afford to litigate every potential violation
worldwide.
Because
of the large number of patent filings in the medical device and biotechnology
field, our competitors may have filed applications or been issued patents
and
may obtain additional patents and proprietary rights relating to products
or
processes competitive with or similar to ours. We cannot be certain that
U.S. or
foreign patents do not exist or will not be issued that would harm our ability
to commercialize our products and product candidates.
One
Of Our Licensed Patents May Be Terminated Under Certain
Conditions.
Our
131Cs
separation patent is essential for the production of Cesium-131. The owner
of
the patent, Lane Bray, a shareholder of the Company and Chief Chemist of
Medical, has the right to terminate the license agreement that allows the
Company to use this patent if we discontinue production for any consecutive
18
month period. The Company has no plans to discontinue production, and management
considers it highly unlikely that production will be discontinued for any
significant period at any time in the future.
Failure
To Comply With Government Regulations Could Harm Our Business.
As a
medical device and medical isotope manufacturer, we are subject to extensive,
complex, costly, and evolving governmental rules, regulations and restrictions
administered by the FDA, by other federal and state agencies, and by
governmental authorities in other countries. Compliance with these laws and
regulations is expensive and time-consuming, and changes to or failure to
comply
with these laws and regulations, or adoption of new laws and regulations,
could
adversely affect our business.
In
the
United States, as a manufacturer of medical devices and devices utilizing
radioactive by-product material, we are subject to extensive regulation by
federal, state, and local governmental authorities, such as the FDA and the
Washington State Department of Health, to
ensure
such devices are safe and effective. Regulations promulgated by the FDA under
the U.S. Food, Drug and Cosmetic Act, or the FDC Act, govern the design,
development, testing, manufacturing, packaging, labeling, distribution,
marketing and sale, post-market surveillance, repairs, replacements, and
recalls
of medical devices. In Washington State, the Department of Health, by agreement
with the federal Nuclear Regulatory Commission ("NRC"), regulates the
possession, use, and disposal of radioactive byproduct material as well as
the
manufacture of radioactive sealed sources to ensure compliance with state
and
federal laws and regulations. Our 131Cs
brachytherapy seeds constitute both medical devices and radioactive sealed
sources and are subject to these regulations.
Under
the
FDC Act, medical devices are classified into three different categories,
over
which the FDA applies increasing levels of regulation: Class I,
Class II, and Class III. Our 131Cs
seed
has been classified as a Class II device and has received clearance from
the FDA
through the 510(k) pre-market notification process. Although not anticipated,
any modifications to the device that would significantly affect safety or
effectiveness, or constitute a major change in intended use, would require
a new
510(k) submission. As with any submittal to the FDA, there is no assurance
that
a 510(k) clearance would be granted to the Company.
8
In
addition to FDA-required market clearances and approvals for our products,
our
manufacturing operations are required to comply with the FDA's Quality System
Regulation, or QSR, which addresses requirements for a company's quality
program
such as management responsibility, good manufacturing practices, product
and
process design controls, and quality controls used in manufacturing. Compliance
with applicable regulatory requirements is monitored through periodic
inspections by the FDA Office of Regulatory Affairs ("ORA"). We anticipate
both
announced and unannounced inspections by the FDA. Such inspections could
result
in non-compliance reports (Form 483) which, if not adequately responded to,
could lead to enforcement actions. The FDA can institute a wide variety of
enforcement actions, ranging from public warning letters to more severe
sanctions such as fines, injunctions, civil penalties, recall of our products,
operating restrictions, suspension of production, non-approval or withdrawal
of
pre-market clearances for new products or existing products, and criminal
prosecution. There can be no assurance that we will not incur significant
costs
to comply with these regulations in the future or that the regulations will not
have a material adverse effect on our business, financial condition and results
of operations.
The
marketing of our products in foreign countries will, in general, be regulated
by
foreign governmental agencies similar to the FDA. Foreign regulatory
requirements vary from country to country. The time and cost required to
obtain
regulatory approvals could be longer than that required for FDA clearance
in the
United States and the requirements for licensing a product in another country
may differ significantly from FDA requirements. We will rely, in part, on
foreign distributors to assist us in complying with foreign regulatory
requirements. We may not be able to obtain these approvals without incurring
significant expenses or at all, and the failure to obtain these approvals
would
prevent us from selling our products in the applicable countries. This could
limit our sales and growth.
Our
Business Exposes Us To Product Liability Claims. Our
design, testing, development, manufacture, and marketing of products involve
an
inherent risk of exposure to product liability claims and related adverse
publicity. Insurance coverage is expensive and difficult to obtain, and,
although we currently have a five million dollar policy, in the future we
may be
unable to obtain or renew coverage on acceptable terms, if at all. If we
are
unable to obtain or renew sufficient insurance at an acceptable cost or if
a
successful product liability claim is made against us, whether fully covered
by
insurance or not, our business could be harmed.
Our
Business Involves Environmental Risks. Our
business involves the controlled use of hazardous materials, chemicals,
biologics, and radioactive compounds. Manufacturing is extremely susceptible
to
product loss due to radioactive, microbial, or viral contamination; material
or
equipment failure; vendor or operator error; or due to the very nature of
the
product’s short half-life. Although we believe that our safety procedures for
handling and disposing of such materials comply with state and federal standards
there will always be the risk of accidental contamination or injury. In
addition, radioactive, microbial, or viral contamination may cause the closure
of the respective manufacturing facility for an extended period of time.
By law,
radioactive materials may only be disposed of at state-approved facilities.
At
our leased facility we use commercial disposal contractors. We may incur
substantial costs related to the disposal of these materials. If we were
to
become liable for an accident, or if we were to suffer an extended facility
shutdown, we could incur significant costs, damages, and penalties that could
harm our business.
We
Rely Upon Key Personnel. Our
success will depend, to a great extent, upon the experience, abilities
and
continued services of our executive officers and key scientific personnel.
IsoRay has an employment agreement with Roger Girard, its Chief Executive
Officer, and Lori Woods, its Vice President, and its subsidiary has employment
agreements with most of its executive officers and key scientific personnel.
If
we lose the services of several of these officers or key scientific personnel,
our business could be harmed. Our success also will depend upon our ability
to
attract and retain other highly qualified scientific, managerial, sales,
and
manufacturing personnel and their ability to develop and maintain relationships
with key individuals in the industry. Competition for these personnel and
relationships is intense and we compete with numerous pharmaceutical and
biotechnology companies as well as with universities and non-profit research
organizations. We may not be able to continue to attract and retain qualified
personnel.
The
Value Of Our Granted Patent, and Our Patents Pending, Is Uncertain.
Although
our management strongly believes that our patent on the process for producing
131Cs,
our
patent pending on the manufacture of the brachytherapy seed, our patent
applications on additional methods for producing 131Cs
and
other isotopes which have been filed, and anticipated future patent
applications, which have not yet been filed, have significant value, we cannot
be certain that other like-kind processes may not exist or be discovered,
that
any of these patents is enforceable, or that any of our patent applications
will
result in issued patents.
9
Our
Ability To Expand Into Foreign Markets Is Uncertain. Our
future growth will depend in part on our ability to establish, grow and
maintain
product sales in foreign markets, particularly in Europe and Asia. However,
we
have limited experience in marketing and distributing products in other
countries. Any foreign operations would subject us to additional risks
and
uncertainties, including our customers’ ability to obtain reimbursement for
procedures using our products in foreign markets; the burden of complying
with
complex and changing foreign regulatory requirements; language barriers
and
other difficulties in providing long-range customer service; potentially
longer
accounts receivable collection times; significant currency fluctuations,
which
could cause third-party distributors to reduce the number of products they
purchase from us because the cost of our products to them could fluctuate
relative to the price they can charge their customers; reduced protection
of
intellectual property rights in some foreign countries; and the possibility
that
contractual provisions governed by foreign laws would be interpreted differently
than intended in the event of a contract dispute. Any future foreign sales
of
our products could also be adversely affected by export license requirements,
the imposition of governmental controls, political and economic instability,
trade restrictions, changes in tariffs and difficulties in staffing and
managing
foreign operations. Many of these factors may also affect our ability to
import
enriched barium from Russia under our contracts with the INM and
RIAR.
Our
Ability To Initiate Operations And Manage Growth Is Uncertain. Our
efforts to commercialize our medical products will result in new and increased
responsibilities for management personnel and will place a strain upon the
entire company. To compete effectively and to accommodate growth, if any,
we may
be required to continue to implement and to improve our management,
manufacturing, sales and marketing, operating and financial systems, procedures
and controls on a timely basis and to expand, train, motivate and manage
our
employees. There can be no assurance that our personnel, systems, procedures,
and controls will be adequate to support our future operations. If the IsoRay
131Cs
seed
were to rapidly become the “seed of choice,” it is unlikely that we could meet
demand. We could experience significant cash flow difficulties and may have
difficulty obtaining the working capital required to manufacture our products
and meet demand. This would cause customer discontent and invite competition.
Our
Reporting Obligations As A Public Company Are Costly. Operating
a public company involves substantial costs to comply with reporting obligations
under federal securities laws that are continuing to increase as provisions
of
the Sarbanes Oxley Act of 2002 are implemented. These reporting obligations
increase our operating costs. We may not reach sufficient business volume
to
justify our public reporting status.
Risks
Related To This Offering
There
Is A Limited Market For Our Common Stock. Currently
only a limited trading market exists for our common stock. Our common stock
currently trades on the Over-The-Counter Bulletin Board, a market with limited
liquidity and minimal listing standards, under the symbol “ISRY.OB.” While
management has applied for listing on the American Stock Exchange, the Company
is uncertain as to when its application will be approved assuming it continues
to meet the applicable listing requirements. Any broker/dealer that makes
a
market in our stock or other person that buys or sells our stock could have
a
significant influence over its price at any given time. Shareholders may
experience more difficulty in attempting to sell their shares than if the
shares
were listed on a national stock exchange or quoted on the NASDAQ Stock Market.
We cannot assure our shareholders that a market of our stock will be sustained.
There is no assurance that our shares will have any greater liquidity than
shares that do not trade on a public market.
Our
Stock Price Is Likely To Be Volatile. There
is
generally significant volatility in the market prices and limited liquidity
of
securities of early stage companies, and particularly of early stage medical
product companies. Contributing to this volatility are various events that
can
affect our stock price in a positive or negative manner. These events include,
but are not limited to: governmental approvals, refusals to approve, regulations
or actions; market acceptance and sales growth of our products; litigation
involving the Company or our industry; developments or disputes concerning
our
patents or other proprietary rights; changes in the structure of healthcare
payment systems; departure of key personnel; future sales of our securities;
fluctuations in our financial results or those of companies that are perceived
to be similar to us; investors’ general perception of us; and general economic,
industry and market conditions. If any of these events occur, it could cause
our
stock price to fall.
10
Our
Common Stock May be Subject To Penny Stock Regulation. So
long
as our shares’ market price is below $5.00 per share, our shares are subject to
the provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange
Act of
1934, as amended, commonly referred to as the “penny stock” rule. Section 15(g)
sets forth certain requirements for transactions in penny stocks and Rule
15g-9(d)(1) incorporates the definition of penny stock as that used in
Rule
3a51-1 of the Exchange Act. The SEC generally defines penny stock to be
any
equity security that has a market price less than $5.00 per share, subject
to
certain exceptions. Rule 3a51-1 provides that any equity security is considered
to be penny stock unless that security is: registered and traded on a national
securities exchange meeting specified criteria set by the SEC; authorized
for
quotation on The NASDAQ Stock Market; issued by a registered investment
company;
excluded from the definition on the basis of price (at least $5.00 per
share) or
the Company’s net tangible assets; or exempted from the definition by the SEC.
As our shares may be deemed to be “penny stocks”, trading in the shares may be
subject to additional sales practice requirements on broker-dealers who
sell
penny stocks to persons other than established customers and accredited
investors. This classification also could make our shares ineligible for
market
coverage by many established brokerage firms.
Future
Sales By Shareholders, Or The Perception That Such Sales May Occur, May
Depress
The Price Of Our Common Stock. The
sale
or availability for sale of substantial amounts of our shares in the public
market, including shares covered by this prospectus and shares issuable
upon
exercise or conversion of outstanding preferred stock and derivative securities,
or the perception that such sales could occur, could adversely affect the
market
price of our common stock and also could impair our ability to raise capital
through future offerings of our shares. As of February 7, 2007, we had
16,815,360 outstanding shares of common stock, and the following additional
shares were reserved for issuance: 3,089,639 shares upon exercise of outstanding
options, 4,300,831 shares upon exercise of outstanding warrants, 59,065
shares
upon conversion of preferred stock, 28,614 shares upon conversion of warrants
to
purchase preferred stock, and 109,639 shares upon conversion of convertible
debentures. On the effective date of this prospectus, a total of 8,910,367
shares of common stock (including 632,836 shares issuable upon conversion
or
exercise of preferred stock and derivative securities and including not
only
shares registered through this prospectus but also the 3,418,498 shares
registered through our Form S-8 registration statement filed on August
19, 2005,
the 250,000 shares registered through our Form S-8 registration statement
filed
on August 18, 2006 and 604,769 shares eligible for resale under Rule 144(k))
to
be offered and sold by selling shareholders will be eligible for sale in
the
public market, collectively constituting approximately 37% of our shares
of
common stock on a fully diluted basis.
In
addition, we granted registration rights to purchasers of units pursuant
to the
October 17, 2005 private placement memorandum, as amended, which closed
in
January 2006 (the “October 17, 2005 Offering”), pursuant to the February 1, 2006
private placement memorandum, which closed on February 28, 2006, and to
debenture holders that elected to remove the shares into which their debentures
are convertible from this Prospectus and convert their debentures instead
into
units, consisting of 5,000 shares of common stock and warrants to purchase
5,000
shares of common stock per unit at a price of $20,000 per unit. We have
also
granted registration rights to purchasers of shares of common stock and
warrants
pursuant to our August 17, 2006 private offering. The Company filed a
registration statement covering the shares described in this paragraph
on
October 16, 2006, and this registration statement was declared effective
on
December 5, 2006. As a result, there are an additional 9,064,890 shares
of
common stock held by shareholders eligible for sale in the public market,
which
together with the shares eligible for sale in the public market described
in the
prior paragraph would collectively constitute approximately 74% of our
shares of
common stock on a fully diluted basis.
In
addition to the shares available for resale by selling shareholders, the
Company
has filed a Form S-3 registration statement on January 26, 2007 (declared
effective on February 15, 2007) providing for the shelf registration of
a
primary offering of up to $20,000,000 of common stock, warrants to purchase
common stock, or a combination of the two. The terms of this future primary
offering have not been determined and will be provided in supplements to
the
prospectus.
As
additional shares of our common stock become available for resale in the
public
market, the price of our common stock may decrease due to the additional
shares
in the market. Any decline in the price of our common stock may encourage
short
sales, which could place further downward pressure on the price of our common
stock and may impair our ability to raise additional capital through the
sale of
equity securities.
11
The
Issuance Of Shares Upon Conversion Or Exercise Of The Preferred Stock And
Derivative Securities May Cause Immediate And Substantial Dilution To Our
Existing Shareholders. The
issuance of shares upon conversion of the preferred stock and convertible
debentures and the exercise of warrants and options may result in substantial
dilution to the interests of other shareholders since the selling shareholders
may ultimately convert or exercise and sell all or a portion of the full
amount
issuable upon conversion or exercise. If all derivative securities being
registered through this prospectus and through our other currently effective
registration statements were converted or exercised into shares of common
stock,
there would be an additional 8,335,284 shares of common stock outstanding
as a
result. The issuance of these shares will have the effect of further diluting
the proportionate equity interest and voting power of holders of our common
stock, including investors in this offering.
We
Do
Not Expect To Pay Any Dividends For The Foreseeable Future. We
do not
anticipate paying any dividends to our shareholders for the foreseeable future.
The terms of certain of our and Medical's outstanding indebtedness substantially
restrict the ability of either company to pay dividends. Accordingly, investors
must be prepared to rely on sales of their common stock after price appreciation
to earn an investment return, which may never occur. Investors seeking cash
dividends should not purchase our common stock. Any determination to pay
dividends in the future will be made at the discretion of our Board of Directors
and will depend on our results of operations, financial conditions, contractual
restrictions, restrictions imposed by applicable law and other factors our
Board
deems relevant.
Certain
Provisions Of Minnesota Law And Our Charter Documents Have An Anti-Takeover
Effect. There
exist certain mechanisms under Minnesota law and our charter documents
that may
delay, defer or prevent a change of control. Anti-takeover provisions of
our
articles of incorporation, bylaws and Minnesota law could diminish the
opportunity for shareholders to participate in acquisition proposals at
a price
above the then-current market price of our common stock. For example, while
we
have no present plans to issue any preferred stock, our Board of Directors,
without further shareholder approval, may issue shares of undesignated
preferred
stock and fix the powers, preferences, rights and limitations of such class
or
series, which could adversely affect the voting power of your shares. In
addition, our bylaws provide for an advance notice procedure for nomination
of
candidates to our Board of Directors that could have the effect of delaying,
deterring or preventing a change in control. Further, as a Minnesota
corporation, we are subject to provisions of the Minnesota Business Corporation
Act, or MBCA, regarding “business combinations,” which can deter attempted
takeovers in certain situations. Pursuant to the terms of a shareholder
rights
plan adopted in February 2007, each outstanding share of common stock has
one
attached right. The rights will cause substantial dilution of the ownership
of a
person or group that attempts to acquire the Company on terms not approved
by
the Board of Directors and may have the effect of deterring hostile takeover
attempts. The effect of these anti-takeover provisions may be to deter
business
combination transactions not approved by our Board of Directors, including
acquisitions that may offer a premium over the market price to some or
all
stockholders. We may, in the future, consider adopting additional anti-takeover
measures. The authority of our Board to issue undesignated preferred or
other
capital stock and the anti-takeover provisions of the MBCA, as well as
other
current and any future anti-takeover measures adopted by us, may, in certain
circumstances, delay, deter or prevent takeover attempts and other changes
in
control of the company not approved by our Board of
Directors.
Cautionary
Note Regarding Forward-looking Statements and Risk
Factors
This
prospectus, 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", 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; any statements regarding the validity of our intellectual property
and patent protection; 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
include, among others, the Risk Factors set forth above.
12
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.
You
should read the following discussion in conjunction with our financial
statements, including the notes thereto, at the end of this prospectus. Some
of
the information contained in this discussion, or set forth elsewhere in this
prospectus contains forward-looking statements that involve risks, uncertainties
and assumptions. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of a variety of certain factors,
including those set forth under "Risk Factors" and elsewhere in this prospectus.
Critical
Accounting Policies and Estimates
The
discussion and analysis of the Company’s financial condition and results of
operations are based upon its consolidated financial statements, which
have been
prepared in accordance with accounting principles generally accepted in
the
United States of America. The preparation of these financial statements
requires
management to make estimates and judgments that affect the reported amounts
of
assets, liabilities, revenues and expenses, and related disclosure of contingent
liabilities. On an on-going basis, management evaluates past judgments
and
estimates, including those related to bad debts, inventories, accrued
liabilities, and contingencies. Management bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are
not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The accounting policies
and
related risks described in the Company’s annual report on Form 10-KSB as filed
with the Securities and Exchange Commission on September 28, 2006 are those
that
depend most heavily on these judgments and estimates. As of December 31,
2006, there have been no material changes to any of the critical accounting
policies contained therein except for the adoption of SFAS No. 123R as
noted
below.
Share-Based
Compensation
As
part
of our adoption of SFAS No. 123R as of July 1, 2006, we were required
to recognize the fair value of share-based compensation awards as an expense.
We
apply the Black-Scholes option-pricing model in order to determine the
fair
value of stock options on the date of grant, and we apply judgment in estimating
key assumptions that are important elements in the model such as the expected
stock-price volatility, expected stock option life and expected forfeiture
ratios. Our estimates of these important assumptions are based on historical
data and judgment regarding market trends and factors. If actual results
are not
consistent with our assumptions and judgments used in estimating these
factors,
we may be required to record additional share-based compensation expense,
which
could be material to our results of operations.
13
Adoption
of SFAS No. 123R
During
December 2004, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 123R, which requires companies to measure and recognize compensation
expense for all share-based payments at fair value. Share-based payments
include
stock option and nonvested share grants. We grant options to purchase common
stock to some of our employees and directors under various plans at prices
equal
to the market value of the stock on the dates the options were granted.
We
historically have accounted for stock options using the method prescribed
in APB
25 whereby if stock options are granted at market price then no compensation
cost is recognized, and disclosed the pro forma effect on net earnings
assuming
compensation cost had been recognized in accordance with SFAS No. 123.
SFAS No.
123R, which was effective for us beginning on July 1, 2006, eliminates
the
ability to account for share-based compensation transactions using APB
25, and
generally requires that such transactions be accounted for using prescribed
fair-value-based methods. SFAS No. 123R permits public companies to adopt
its
requirements using one of two methods: (a) a “modified prospective” method
in which compensation costs are recognized beginning with the effective
date
based on the requirements of SFAS No. 123R for all share-based payments
granted
or modified after the effective date, and based on the requirements of
SFAS No.
123 for all awards granted to employees prior to the effective date of
SFAS No.
123R that remain unvested on the effective date or (b) a “modified
retrospective” method which includes the requirements of the modified
prospective method described above, but also permits companies to restate
based
on the amounts previously recognized under SFAS No. 123 for purposes of
pro
forma disclosures either for all periods presented or for prior interim
periods
of the year of adoption. We have decided to adopt SFAS No. 123R using the
modified prospective method.
The
following table presents the share-based compensation expense recognized
in
accordance with SFAS No. 123R during the three and six months ended December
31,
2006 and in accordance with APB 25 during the three and six months ended
December 31, 2005:
|
Three
months
ended
December 31,
|
Six
months
ended
December 31,
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Cost
of product sales
|
$
|
20,492
|
$
|
--
|
$
|
71,325
|
$
|
--
|
|||||
|
Research
and development
|
7,879
|
--
|
19,714
|
--
|
|||||||||
|
Sales
and marketing
|
52,456
|
--
|
99,237
|
--
|
|||||||||
|
General
and administrative
|
35,617
|
--
|
707,611
|
--
|
|||||||||
|
Total
share-based compensation
|
$
|
116,444
|
$
|
--
|
$
|
897,887
|
$
|
--
|
|||||
As
of
December 31, 2006, total unrecognized compensation cost related to stock-based
options and awards was $1,041,962 and the related weighted-average period
over
which it is expected to be recognized is approximately
1.16 years.
Results
of Operations
Three
months ended December 31, 2006 and 2005
Revenues. The
Company generated sales of $1,414,155 during the three months ended December
31,
2006, compared to sales of $486,247 during the three months ended December
31,
2005. The increase of $927,908 or 191% is due to increased sales volume
of the
Company’s 131Cs
seed.
During the three months ended December 31, 2006, the Company sold its
131Cs
seed
to 33 different medical centers as compared to 15 centers during the
corresponding period of 2005.
Cost
of product sales.
Cost of
product sales was $1,387,394 for the three months ended December 31, 2006
compared to cost of product sales of $916,274 during the three months ended
December 31, 2005. The increase of $471,120 or 51% was due to the higher
production levels during the three months ended December 31, 2006 which
were
related to the increase in sales volume over the corresponding period from
2005.
The major components of the increase were wages, benefits and related taxes,
materials, depreciation, preload expenses, and share-based compensation.
Wages,
benefits, and related taxes increased about $211,000 to approximately $412,000
for the three months ended December 31, 2006 due to the hiring of additional
production employees to support the higher production levels. Materials
costs
increased about $137,000 to approximately $478,000 in 2006, due to increased
sales volumes. Material costs in 2005 included payments to Pacific Northwest
National Laboratory (“PNNL”) for facilities and personnel to manufacture the
seeds. The Company no longer uses PNNL to produce the seeds but continues
to use
PNNL for certain analytical support functions. During the three months
ended
December 31, 2006, the Company expensed payments of about $55,000 to PNNL
for
these support functions. Depreciation expense increased about $69,000 to
approximately $87,000 in 2006 due to the addition of equipment that was
placed
in service during the second half of the fiscal year ended June 30, 2006.
Preload expenses also increased by about $52,000 to approximately $98,000
for
the three months ended December 31, 2006 due to the higher volume of sales.
Share-based compensation expense was approximately $20,000 and $0 for the
three
months ended December 31, 2006 and 2005, respectively, as the Company
implemented SFAS No. 123R on July 1, 2006. These increases were offset
by a
decrease in small tools expense of about $90,000 to approximately $16,000
as the
prior year expense included start-up costs of the Company’s production
facility.
14
Gross
margin / loss. Gross
margin was $26,761 for the three month period ended December 31, 2006.
This
represents an improvement of $456,788 or 106% over the corresponding period
of
2005’s gross loss of $430,027. The improvement in gross margin is due to higher
revenues and greater production efficiency.
Research
and development. Research
and development expenses for the three month period ended December 31,
2006 were
$216,254 which represents an increase of $119,417 or 123% over the research
and
development expenses of $96,837 for the corresponding period of 2005. The
major
components of the increase were wages, benefits and related taxes, patent
legal
expenses, consulting, and share-based compensation. Wages, benefits and
related
taxes were approximately $79,000 and $0 for the three months ended December
31,
2006 and 2005, respectively, as the Company hired research scientists.
During
the three months ended December 31, 2006, the Company incurred about $19,000
of
legal expenses related to patents and trademarks that were expensed. Consulting
expenses increased about $65,000 to approximately $80,000 as the Company
continues to increase the efficiency of production. Share-based compensation
expense was approximately $8,000 and $0 for the three months ended December
31,
2006 and 2005, respectively, as the Company implemented SFAS No. 123R on
July 1,
2006. Clinical study protocol expenses decreased about $69,000 to approximately
$14,000 for the three months ended December 31, 2006 as the Company is
near the
end of its initial protocol study.
Sales
and marketing expenses. Sales
and
marketing expenses were $890,018 for the three months ended December 31,
2006.
This represents an increase of $549,486 or 161% compared to the three months
ended December 31, 2005’s expenditures of $340,532 for sales and marketing.
Wages, including payroll-related taxes, travel, office and other support
expenses on behalf of our sales and marketing and customer service staff
increased by approximately $270,000 to approximately $509,000 for the three
months ended December 31, 2006 due to hiring additional sales and marketing
personnel as the Company continues to expand market share. Conventions
and
tradeshows increased by approximately $169,000 to approximately $254,000
due to
the Company’s continued efforts to expand its market share. Consulting expenses
increased by $34,000 to approximately $38,000 for consultants hired to
increase
brand and market awareness. Also included in sales and marketing expenses
is
share-based compensation expense of approximately $52,000 due to the Company’s
implementation of SFAS No. 123R on July 1, 2006.
General
and administrative expenses.
General
and administrative expenses for the three months ended December 31, 2006
were
$821,529 compared to general and administrative expenses of $675,444 for
the
corresponding period of 2005. The increase of $146,085 or 22% is primarily
due
to approximately $36,000 of share-based compensation expense related to
the
implementation of SFAS No. 123R on July 1, 2006, approximately $145,000
of
increased payroll costs due to a higher headcount, and approximately $64,000
relating to investor relations and other public company expenses. These
increased expenses were partially offset by a reduction in consulting fees
of
approximately $19,000 as the Company has hired more internal staff, a decrease
in audit related fees of $24,000 as the Company had more regulatory and
other
filings in 2005 following the merger, and a reduction in the bad debt expense
of
$14,000 as the Company reduced its allowance for doubtful accounts during
the
three months ended December 31, 2006.
Operating
loss.
Due to
our rapid structural growth, significant research and development expenditures,
and additional responsibilities as a reporting company, we have not been
profitable, and have generated operating losses since our inception. In
the
three months ended December 31, 2006, the Company had an operating loss
of
$1,901,040 which is an increase of $358,200 or 23% over the operating loss
of
$1,542,840 for the three months ended December 31, 2005. Included in the
operating loss for the three months ended December 31, 2006 is share-based
compensation expense of $116,444 due to the implementation of SFAS No.
123R on
July 1, 2006.
15
Interest
income.
Interest
income increased by $46,811 or 1,466% to $50,004 for the three months ended
December 31, 2006. Interest income is mainly derived from excess funds
held in
certain near-liquid accounts.
Financing
expense.
Financing expense for the three months ended December 31, 2006 was $67,413
or a
decrease of $128,067 or 66% from financing expense of $195,480 for the
corresponding period in 2005. Included in financing expense is interest
expense
of approximately $46,000 and $144,000 for the three months ended December
31,
2006 and 2005, respectively. The decrease in interest expense is due to
the
conversion of debentures to common stock during the fiscal year ended June
30,
2006 partially offset by interest expense related to the Hanford Area Economic
Investment Fund Committee (HAEIFC) loan that was entered into in June 2006.
The
remaining balance of financing expense represents the amortization of deferred
financing costs which decreased due to the write-off in fiscal year 2006
of the
deferred financing costs relating to the debentures that were converted
to
common stock partially offset by the amortization of the HAEIFC deferred
financing costs.
Debt
conversion expense.
Debt
conversion expense for the three months ended December 31, 2005 relates
to the
one-time recognition of $244,097 expense in short-term inducement to convert
debentures.
Six
months ended December 31, 2006 and 2005
Revenues. Sales
for
the six months ended December 31, 2006 were $2,439,599 compared to sales
of
$697,162 for the six months ended December 31, 2005. The increase of $1,742,437
or 250% is due to increased sales volume of the Company’s 131Cs
seed.
During the six months ended December 31, 2006 the Company sold its 131Cs
seed
to 35 different medical centers as compared to 15 centers during the
corresponding period of 2005.
Cost
of product sales.
Cost of
product sales was $2,675,539 for the six months ended December 31, 2006
compared
to cost of product sales of $1,636,440 during the six months ended December
31,
2005. The increase of $1,039,099 or 63% was due to the higher production
levels
during the six months ended December 31, 2006 which were related to the
increase
in sales volume over the corresponding period from 2005. The major components
of
the increase were wages, benefits and related taxes, materials, depreciation,
preload expenses, share-based compensation, and rent and occupancy
expenses. Wages, benefits, and related taxes increased about $412,000 to
approximately $786,000 for the six months ended December 31, 2006 due to
the
hiring of additional production employees to support the higher production
levels. Materials costs increased about $263,000 to approximately $879,000
in
2006, due to increased sales volumes. Material costs in 2005 included payments
to Pacific Northwest National Laboratory (“PNNL”) for facilities and personnel
to manufacture the seeds. The Company no longer uses PNNL to produce the
seeds
but continues to use PNNL for certain analytical support functions. During
the
six months ended December 31, 2006, the Company expensed payments of about
$135,000 to PNNL for these support functions. Depreciation and amortization
expense increased about $110,000 to approximately $169,000 in 2006 due
to the
addition of equipment that was placed in service during the second half
of the
fiscal year ended June 30, 2006. Preload expenses also increased by about
$129,000 to approximately $192,000 for the six months ended December 31,
2006
due to the higher volume of sales. Share-based compensation expense was
approximately $71,000 and $0 for the six months ended December 31, 2006
and
2005, respectively, as the Company implemented SFAS No. 123R on July 1,
2006.
Rent and occupancy expenses were approximately $73,000 and $40,000 for
the six
months ended December 31, 2006 and 2005, respectively, as the Company moved
into
its independent production facility during the second quarter of fiscal
year
2005. These increases were offset by a decrease in small tools expense
of
$172,000 to approximately $48,000 as the prior year expense included start-up
costs of the Company’s production facility.
Gross
margin / loss. Gross
loss was $235,940 for the six month period ended December 31, 2006. This
represents an improvement of $703,338 or 75% over the corresponding period
of
2005’s gross loss of $939,278. The improvement in gross loss is due to higher
revenues and greater production efficiency.
16
Research
and development. Research
and development expenses for the six months ended December 31, 2006 were
$461,852 which represents an increase of $339,233 or 277% over the research
and
development expenses of $122,619 for the corresponding period of 2005.
The major
components of the increase were wages, benefits and related taxes, consulting,
and share-based compensation. Wages, benefits and related taxes were
approximately $143,000 and $0 for the six months ended December 31, 2006
and
2005, respectively, as the Company hired research scientists. Consulting
expenses increased about $130,000 to approximately $168,000 as the Company
continues to increase the efficiency of production. Share-based compensation
expense was approximately $20,000 and $0 for the six months ended December
31,
2006 and 2005, respectively, as the Company implemented SFAS No. 123R on
July 1,
2006.
Sales
and marketing expenses. Sales
and
marketing expenses were $1,562,948 for the six months ended December 31,
2006.
This represents an increase of $907,377 or 138% compared to the six months
ended
December 31, 2005’s expenditures of $655,571 for sales and marketing. Wages,
including payroll-related taxes, travel, office and other support expenses
on
behalf of our sales and marketing and customer service staff increased
about
$268,000 to approximately $353,000 due to the hiring of additional sales
and
marketing personnel as the Company continues to expand market share. Conventions
and tradeshows increased by about $254,000 to approximately $441,000 due
to the
Company’s continued efforts to expand its market share. Consulting expenses
increased by $54,000 to approximately $58,000 related to consultants hired
to
increase brand and market awareness. Also included in sales and marketing
expenses is share-based compensation expense of about $99,000 due to the
implementation of SFAS No. 123R on July 1, 2006.
General
and administrative expenses.
General
and administrative expenses for the six months ended December 31, 2006
were
$2,554,661 compared to general and administrative expenses of $1,636,393
for the
corresponding period of 2005. The increase of $918,268 or 56% is primarily
due
to approximately $708,000 of share-based compensation expense related to
the
implementation of SFAS No. 123R on July 1, 2006, a one-time severance accrual
of
$288,000, approximately $238,000 of increased payroll costs due to a higher
headcount, and approximately $97,000 relating to investor relations and
other
public company expenses. These increased expenses were partially offset
by a
reduction in consulting fees of approximately $330,000 which represents
merger
consulting fees incurred in the three months ended September 30, 2005.
Other
consulting expenses also decreased approximately $25,000 as the Company
hired
more internal resources. In addition, audit related fees decreased approximately
$24,000 as the Company had more regulatory and other filings in 2005 following
the merger and bad debt expense was reduced by approximately $36,000 as
the
Company reduced its allowance for doubtful accounts during the six months
ended
December 31, 2006.
Operating
loss.
Due to
our rapid structural growth, product revenues not covering production costs,
significant research and development expenditures, and additional
responsibilities as a reporting company, we have not been profitable, and
have
generated operating losses since our inception. In the six months ended
December
31, 2006, the Company had an operating loss of $4,815,401 which is an increase
of $1,461,540 or 44% over the operating loss of $3,353,861 for the six
months
ended December 31, 2005. Included in the operating loss for the six months
ended
December 31, 2006 is share-based compensation expense of $897,887 due to
the
implementation of SFAS No. 123R during the period and a one-time severance
accrual of $288,000. Without these two expense items, our operating loss
would
have only increased by $275,653 or 8%.
Interest
income.
Interest
income increased by $80,035 or 788% to $90,187 for the six months ended
December
31, 2006. Interest income is mainly derived from excess funds held in certain
near-liquid accounts.
Financing
expense.
Financing expense for the six months ended December 31, 2006 was $120,670
or a
decrease of $230,438 or 66% from financing expense of $351,108 for the
corresponding period in 2005. Included in financing expense is interest
expense
of approximately $77,000 and $248,000 for the six months ended December
31, 2006
and 2005, respectively. The decrease in interest expense is due to the
conversion of debentures to common stock during the fiscal year ended June
30,
2006 partially offset by interest expense related to the Hanford Area Economic
Investment Fund Committee (HAEIFC) loan that was entered into in June 2006. The
remaining balance of financing expense represents the amortization of deferred
financing costs which decreased due to the write-off in fiscal year 2006
of the
deferred financing costs relating to the debentures that were converted
to
common stock partially offset by the amortization of the HAEIFC deferred
financing costs.
17
Debt
conversion expense.
Debt
conversion expense for the six months ended December 31, 2005 relates to
the
one-time recognition of $244,097 expense in short-term inducement to convert
debentures.
Liquidity
and capital resources.
At
December 31, 2006, cash and cash equivalents amounted to $3,700,108. During
the
six months ended December 31, 2006, the Company issued 2,063,000 shares
of
common stock at a price of $2.50 per share and 2,269,300 common stock warrants
(including broker warrant commissions) with an exercise price of $3.00
per share
pursuant to a round of institutional funding. This funding provided
approximately $4.7 million, net of offering costs. Additionally, the Company
issued 755,829 shares of common stock pursuant to the exercise of common
stock
options and warrants and preferred stock warrants, which were exchanged
for
common stock immediately upon exercise. The Company received approximately
$1.2
million in cash pursuant to these exercises.
During
January 2007, two warrant holders exercised warrants issued in connection
with
the August 2006 Stock Purchase Agreement. The Company received $1,218,900
in
cash and issued 406,300 common shares pursuant to these exercises. The
Company
had approximately $3.7 million cash on hand as of February 2, 2007.
As of
that date management believes that the Company’s monthly required cash operating
expenditures were approximately $630,000. Management believes that assuming
expenditures continue at approximately the same monthly rate and that it
is able
to fund a portion of its equipment purchases with the HAEIFC loan, that
the
Company’s cash on hand will fund operating expenditures through the beginning of
June 2007. This is based on the Company attaining its current revenue targets
and the ability to continue to efficiently manufacture our product. If
we should
experience disruptions in our revenues then our monthly cash requirements
would
increase and necessitate that we obtain additional funding prior to May
2007.
Our
growth plans for fiscal 2007 include expanding sales to new customers,
growing
sales volume with existing customers, and developing additional therapies.
Additional production capability, including new equipment and additional
employees, will be needed to meet our anticipated growth. The Company has
also
begun a review of its current facilities and future needs based on current
forecasts. The Company’s current production facility lease ends in October 2007.
While the landlord has agreed to work with the Company to minimize production
disruptions, the landlord has indicated that it does not intend to enter
into a
long-term leasing agreement with the Company. Management is in the final
stages
of negotiation to lease space for a new production facility. Once the new
lease
is signed, the Company will begin to obtain the necessary permits and licenses
and to make the necessary leasehold improvements. Management believes that
the
Company will be able to obtain the necessary permits for the new facility
in a
timely manner that will not cause delays in the leasehold improvements
construction schedule. This new facility is expected to be operational
at the
end of calendar year 2007. Management believes that the new production
facility
lease currently being negotiated will be able to accommodate the Company’s
anticipated future growth for several years. The Company continues to use
PNNL
to provide third-party assay of its products, but has otherwise vacated
PNNL
facilities. Management believes that if the Company is unable to obtain
the new
lease, the necessary permits, or finish the leasehold improvements before
having
to vacate the present manufacturing facility, that a temporary manufacturing
facility is available and could be used although production capacity and
scheduling flexibility would be limited.
IsoRay
has three loan facilities in place as of December 31, 2006. The first loan
is
from the Benton-Franklin Economic Development District (“BFEDD”) 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, 2006, the principal balance owed was $193,720. This loan is
secured
by certain equipment, materials and inventory of IsoRay, and also required
personal guarantees, for which the guarantors were issued approximately
70,455
shares of common stock. The second loan is a line of credit from Columbia
River
Bank, which provides credit in the amount of $375,000. 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 common stock. As of December 31,
2006, no
balance was outstanding on the line of credit. The line of credit expires
on
March 1, 2007. Management believes the line of credit will be renewed.
The third
loan is from the Hanford Area Economic Investment Fund Committee and was
originated in June 2006. The loan has a total facility of $1,400,000 and
bears
interest at nine percent. As of December 31, 2006, the Company has taken
only a
partial draw of $418,670 on the facility and the remaining facility of
$981,330
is available to use to purchase equipment. The principal balance owed on
the
loan as of December 31, 2006 was $405,443. This loan is secured by receivables,
equipment, materials and inventory of IsoRay, and certain life insurance
policies.
18
The
Company has certain capital leases for production and office equipment
that
expire at various times from March 2008 to April 2009. These leases currently
call for total monthly payments of $19,361. The total of all capital lease
obligations at December 31, 2006 was $315,485.
At
December 31, 2006, the Company had outstanding $455,000 of convertible
debentures. These debentures could be converted into 109,639 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) with accrued interest
paid
quarterly. The debentures mature at various times from February 2007 to
June
2007.
In
February 2006, the Company signed a license agreement with International
Brachytherapy s.a. (“IBt”) covering North America and providing the Company with
access to IBt’s Ink Jet production process and its proprietary polymer seed
technology for use in brachytherapy procedures using Cesium-131. The Company
paid license fees of $275,000 during 2006 and another payment of $225,000
was to
be made in August 2006 pursuant to the license agreement. Royalty payments
based
on net sales revenue are also required, with minimum quarterly royalties
ranging
from $100,000 to $200,000 and minimum annual royalties ranging from $400,000
to
$800,000 over the term of the agreement. Management is engaged in further
negotiations with IBt and may ultimately terminate this agreement, although
management has not yet decided on a course of action.
As
of the
date of this report, the payment due in August 2006 has not been made as
the
Company has been in continued negotiations with IBt concerning the amount
and
timing of future royalty payments due to the low market acceptance of the
polymer seed technology.
In
September 2006, the Company entered into a settlement agreement with a
former
executive. As part of the settlement the Company agreed to pay the former
executive $100,000 in September 2006 and $215,000 in January
2007.
The
Company finalized the settlement agreement with its former Chief Financial
Officer in December 2006. An initial payment of $50,000 and the cashless
exercise of 50,000 options at $1.00 per share in lieu of another cash payment
of
$50,000 were recorded in December 2006. A final payment of $93,000 and
a
cashless exercise of 95,000 options at $1.00 per share in lieu of an additional
cash payment of $95,000 were recorded in January 2007.
The
industry that the Company operates in is subject to product liability
litigation. Through its production and quality assurance procedures, the
Company
works to mitigate the risk of any lawsuits concerning its product. The Company
also carries product liability insurance to help protect it from this
risk.
The
Company expects to finance its 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 the Company needs to raise
additional money to fund its operations, funding may not be available to
it on
acceptable terms, or at all. If the Company is unable to raise additional
funds
when needed, it may not be able to market its products as planned or continue
development and regulatory approval of its future products. If the Company
raises additional funds through equity sales, these sales may be dilutive
to
existing investors.
The
Company has no off-balance sheet arrangements.
Going
Concern Issues
Our
financial statements have been prepared assuming we will continue as a
going
concern. We had net losses of $8,218,130 and $4,269,188 for the years ended
June
30, 2006 and 2005 and an accumulated deficit of $13,546,261 at June 30,
2006.
Our accumulated deficit at December 31, 2006 was $18,392,145. These factors,
among others, raise substantial doubt about our ability to continue as
a going
concern. Our financial statements do not include any adjustment that might
result from the outcome of this uncertainty. Management plans to obtain
the
necessary financing and to continue to grow revenues in order to achieve
profitability but no assurances can be given that management will be able
to
obtain additional financing or grow revenues to a profitable
level.
19
If
we are
unable to generate profits and unable to obtain additional financing to meet
our
working capital requirements, we may have to curtail our business or cease
operations. Our continuation as a going concern is dependent upon our ability
to
generate sufficient cash flow to meet our obligations on a timely basis,
to
obtain additional financing, and, ultimately, to attain profitability. Should
any of these events not occur, the accompanying financial statements will
be
adversely effected and we may have to cease operations.
Critical
Accounting Policies and Estimates
The
discussion and analysis of the Company’s financial condition and results of
operations are based upon its consolidated financial statements, which have
been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts
of
assets, liabilities, revenues and expenses, and related disclosure of contingent
liabilities. On an on-going basis, management evaluates past judgments and
estimates, including those related to bad debts, inventories, accrued
liabilities, and contingencies. Management bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Accounts
Receivable
Accounts
receivable are stated at the amount that management of the Company expects
to
collect from outstanding balances. Management provides for probable
uncollectible amounts through an allowance for doubtful accounts. Additions
to
the allowance for doubtful accounts are based on management’s judgment,
considering historical write-offs, collections and current credit conditions.
Balances which remain outstanding after management has used reasonable
collection efforts are written off through a charge to the allowance for
doubtful accounts and a credit to the applicable accounts receivable. Payments
received subsequent to the time that an account is written off are considered
bad debt recoveries.
Inventory
Inventory
is reported at the lower of cost, determined using the weighted average method,
or net realizable value.
Asset
Retirement Obligation
SFAS
No.
143, Asset
Retirement Obligations,
establishes standards for the recognition, measurement and disclosure of
legal
obligations associated with the costs to retire long-lived assets. Accordingly,
under SFAS No. 143, the fair value of the future retirement costs of the
Company’s leased assets are recorded as a liability on a discounted basis when
it is incurred and an equivalent amount is capitalized to property and
equipment. The initial recorded obligation, which has been discounted using
the
Company’s credit-adjusted risk free-rate, will be reviewed periodically to
reflect the passage of time and changes in the estimated future costs underlying
the obligation. The Company amortizes the initial amount capitalized to property
and equipment and recognizes accretion expense in connection with the discounted
liability over the estimated remaining useful life of the leased
assets.
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.
20
Revenue
for the fiscal years ended June 30, 2006 and 2005 was derived solely from
sales
of the 131Cs
brachytherapy seed, which is used in the treatment of cancer. The Company
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.
Legal
Contingencies
In
the
ordinary course of business, the Company is involved in legal proceedings
involving contractual and employment relationships, product liability claims,
patent rights, and a variety of other matters. The Company records contingent
liabilities resulting from asserted and unasserted claims against it, when
it is
probable that a liability has been incurred and the amount of the loss is
reasonably estimable. The Company discloses contingent liabilities when there
is
a reasonable possibility that the ultimate loss will exceed the recorded
liability. Estimating probable losses requires analysis of multiple factors,
in
some cases including judgments about the potential actions of third-party
claimants and courts. Therefore, actual losses in any future period are
inherently uncertain. Currently, the Company does not believe any of its
pending
legal proceedings or claims will have a material impact on its financial
position or results of operations. However, if actual or estimated probable
future losses exceed the Company’s recorded liability for such claims, it would
record additional charges as other expense during the period in which the
actual
loss or change in estimate occurred.
Results
of Operations
Financial
Presentation
Statement
of Financial Accounting Standards (SFAS) No. 141, Business
Combinations,
requires that following a merger the accounting acquirer’s financial statements
should be used for historical comparisons. Although the legal acquirer was
Century Park Pictures Corporation (“Century”), for accounting purposes Medical
was the acquirer and as such Medical’s historical financial statements are shown
for comparative purposes. Also for accounting purposes, the merger was accounted
for as though it happened on July 1, 2005.
The
following sets forth a discussion and analysis of the Company’s financial
condition and results of operations for the two years ended June 30, 2006.
This
discussion and analysis should be read in conjunction with our consolidated
financial statements appearing elsewhere in this Prospectus. The following
discussion contains forward-looking statements. Our actual results may differ
significantly from the results discussed in such forward-looking statements.
Factors that could cause or contribute to such differences include, but are
not
limited to, those discussed in “Risk Factors” of this Prospectus.
Year
ended June 30, 2006 compared to year ended June 30, 2005
Product
sales.
Revenues
for the year ended June 30, 2006 were $1,994,306, an increase of $1,792,575
over
sales for the year ended June 30, 2005 of $201,731. All of the Company’s
revenues were generated through sales of its 131Cs
seeds.
IsoRay began sales of its 131Cs
seed
on October 26, 2004 with one medical center customer. By June 30, 2006 the
number of medical center customers who had ordered the 131Cs
seed
had grown to 26.
Gross
loss.
Gross
loss was $1,820,816 for the year ended June 30, 2006 or an increase of $548,296
as compared to a gross loss of $1,272,520 for the year ended June 30,
2005. Cost of products sold was $3,815,122 for the year ended June 30,
2006 or an increase of $2,340,871 over the $1,474,251 incurred for the year
ended June 30, 2005. During the year ended June 30, 2006, the Company paid
$868,650 to Pacific Northwest National Laboratory (PNNL) under our contract
with
them for use of their facilities and personnel to support production. During
the
fourth quarter of fiscal year 2006, we paid approximately $110,000 for quality
assurance support and as a deposit to extend our contract through December
31,
2007. The Company is currently using PNNL for certain research and development
and quality assurance activities. Also during fiscal 2006, the Company paid
approximately $1 million in wages, benefits, and related taxes for production
personnel and approximately $1.6 million in direct and indirect material
costs.
These costs increased due to a larger staff and material and supply costs
related to an increase in sales during fiscal year 2006.
21
Also
included in cost of products sold during 2006 were over $109,000 for production
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 next fiscal year. The Company has
moved
essentially all of its Cs-131 production operations to PIRL.
Research
and development.
Research
and development expenses for the year ended June 30, 2006 were $450,425,
an
increase of $312,893 over research and development expenses of $137,532 for
the
year ended June 30, 2005. During 2006, $116,200 was spent on protocol studies
of
patients that have been implanted with the Company’s 131Cs
brachytherapy seeds. Also during 2006, $144,588 was spent on research to
improve
Cs-131 production.
Sales
and marketing expenses.
Sales
and marketing expenses were $1,420,500 for the year ended June 30, 2006.
This
represents an increase of $718,678 over the expense of $701,822 for the year
ended June 30, 2005. During fiscal 2006, approximately $994,000 was spent
on
wages, travel, office, and other support expenses on behalf of the sales
and
marketing and customer service staff. The balance was spent on advertising,
market research and trade shows and conferences. The increases are due to
increased marketing of the Company’s 131Cs
seed
since introduction of our product to the market in October 2004.
General
and administrative expenses.
General
and administrative expenses were $3,503,522 for the year ended June 30, 2006
or
an increase of $1,632,197 as compared to $1,871,325 for the year ended June
30,
2005. Included in general and administrative expenses in 2006 is $330,000
relating to consulting fees for the reverse acquisition that was paid with
the
issuance of common stock (see “Description of Business”). The
increases over the prior periods are due to supporting the Company’s increased
manufacturing and sales activities. These activities have increased as the
Company has only been manufacturing and selling its product since October
2004.
Additionally, increased expenses in the 2006 fiscal year were due to compliance
with SEC regulations following the July 28, 2005 merger. Significant components
of general and administrative expenses include $838,797 in consulting expense,
payroll and related expenses of $866,863 and professional fees, including
accounting and legal fees of $522,318.
Consulting services increased in connection with the establishment of the
independent PIRL production facilities, which commenced production in the
late
Fall of 2005, and associated equipment installation, customization and
validation; review and advice on business and capital strategies, and the
addition of a medical director who serves as a consultant. Professional
fees increased due to the Company’s July 28, 2005 merger, SEC compliance
activities including the Company’s registration statement on Form SB-2 filed
that was effective in June 2006, and other general business activities.
Operating
loss.
Due to
the Company’s significant research and develop expenditures, additional
responsibilities as a reporting company, rapid structural growth, and nominal
product revenues, the Company has not been profitable, and has generated
operating losses since inception. For the year ended June 30, 2006, the Company
had an operating loss of $7,195,263. This represents an increased loss of
$3,212,064 in comparison with the year ended June 30, 2005 operating loss
of
$3,983,199.
Interest
income.
Interest
income increased by $49,350 to $51,744 for the year ended June 30, 2006.
Interest income is mainly derived from excess funds held in certain near-liquid
accounts.
Financing
expense.
Financing expense for the year ended June 30, 2006 includes $332,493 of interest
expense incurred on long-term debt and convertible debentures outstanding.
The
interest expense increased over the prior year due to interest payments on
the
convertible debentures that were sold as part of the January 1, 2005 PPM,
computed interest expense on the capital leases entered into during fiscal
2006,
and interest expense on other loans that were initiated in January 2005.
The
remaining balance of financing expense represents amortization of deferred
financing costs primarily related to the January 2005 issuance of common
stock
to guarantors of certain loans made to the Company, commissions and legal
costs
paid in conjunction with the issuance of convertible debentures, issuance
of
warrants as an inducement for a note payable, and costs associated with the
initiation of the Hanford Area Economic Investment Fund Committee (HAEIFC)
note
payable. During 2006, $89,516 of deferred financing costs were expensed relating
to debentures that were converted to common stock.
22
Debt
conversion expense.
This
amount of approximately $385,000 relates to the one-time, non-cash expense
resulting from the short-term inducement offered to debenture holders to
their
convert debentures to common stock (see Note 11). This expense was recognized
in
accordance with Statement of Financial Accounting Standard No. 84, Induced
Conversions of Convertible Debt.
Year
ended June 30, 2005 compared to year ended June 30, 2004
Product
sales.
Revenues
for the year ended June 30, 2005 were $201,731. The Company did not have
any
revenues for the year ended June 30, 2004. IsoRay began sales of its
131Cs
seed
on October 26, 2004 with one medical center customer. All of the Company’s sales
in 2005 were generated through sales of its 131Cs
seeds.
Gross
loss.
Gross
loss was $1,272,520 and cost of products sold was $1,474,251 for the year
ended
June 30, 2005. The Company did not have any gross loss or cost of products
sold
for the year ended June 30, 2004. During the year ended June 30, 2005, the
Company paid $574,225 to Pacific Northwest National Laboratory (PNNL) under
our
contract with them for use of their facilities and personnel to support
production. The Company was using PNNL for production of its seeds and other
activities.
Research
and development.
Research
and development expenses for the year ended June 30, 2005 were $137,532 an
increase of $95,206 over research and development expenses of $42,326 for
the
year ended June 30, 2004. The change is due to research to improve production
of
Cs-131 and other isotopes.
Sales
and marketing expenses.
Sales
and marketing expenses were $701,822 for the year ended June 30, 2005. This
represents an increase of $620,336 over the expense of $81,486 for the year
ended June 30, 2004. Most of the 2005 expenses were spent on wages, travel,
office, and other support expenses on behalf of the sales and marketing and
customer service staff. The increases are due to hiring sales personnel during
2005 to market the Company’s 131Cs
seed
which was only introduced to the market in October 2004.
General
and administrative expenses.
General
and administrative expenses were $1,871,325 for the year ended June 30, 2005
as
compared to $650,161 for the year ended June 30, 2004. The increase is due
to
increased salaries for officers who were foregoing salaries or were paid
under
market and the hiring of additional staff as the Company began manufacturing
and
selling its product. Approximately $870,000 was spent on payroll, benefits,
and
related employment costs during fiscal year 2005. Other significant components
of general and administrative expenses included about $178,000 in consulting
services and $269,000 of professional fees. Consulting expenses increased
as the
Company hired advisors for operations, business and capital strategies.
Professional fees increased due to the merger of the two predecessor companies
into IsoRay Medical, Inc. as well as the Company’s private placements and other
general business matters.
Operating
loss.
Due to
the Company’s significant research and development expenditures, large general
and administrative expenses and payroll related to properly staffing the
Company
for anticipated further growth coupled with nominal product revenues, the
Company generated operating losses. For the year ended June 30, 2005, the
Company had an operating loss of $3,983,199. This represents an increased
loss
of $3,209,226 in comparison with the year ended June 30, 2004 operating loss
of
$773,973.
Interest
income.
Interest
income was $2,394 for the year ended June 30, 2005 which was an increase
of $496
over interest income of $1,898 for the year ended June 30, 2004.
Financing
expense.
Financing expense for the year ended June 30, 2005 includes amortization
of
deferred financing costs and interest expense incurred on long-term debt
and
convertible debentures outstanding. The deferred financing costs relate
primarily to 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. Amortization of these costs
amounted to $76,746 during 2005. The remaining balance relates to interest
expense which increased due to the issuance of the convertible debentures
in
2005.
23
Loss
on disposal of fixed assets.
This
loss in 2005 relates to the write-off of certain rudimentary production
equipment that was replaced by complex production equipment that improves
the
manufacturing process.
Our
common stock is quoted on the OTC Bulletin Board under the symbol "ISRY.OB"
and
on the Pink Sheets under the symbol "ISRY.PK." There is limited trading
activity
in our securities, and there can be no assurance a regular trading market
for
our common stock will be sustained. We resumed trading on the Pink Sheets
on
August 18, 2005, after a period of no trading activity from February 18,
2005
until August 18, 2005. We also had a period of no trading activity from
July
2003 until February 7, 2005. On November 2, 2005, we began trading on the
OTC
Bulletin Board. The following table sets forth, for the calendar periods
indicated, the range of the high and low last reported bid prices of our
common
stock from October 1, 2004 through December 31, 2006, as reported by the
Pink
Sheets and the OTC Bulletin Board. The quotations represent inter-dealer
prices without retail mark-ups, mark-downs or commissions, and may not
necessarily represent actual transactions. The quotations may be rounded
for presentation. There is an absence of an established trading market
for the
Company's common stock, as the market is limited, sporadic and highly volatile,
which may affect the prices listed below.
The
following table sets forth, for the fiscal quarters indicated, the high and
low
sales prices for our common stock as reported on the OTC Bulletin Board and
the
Pink Sheets.
|
Year
ended June 30, 2007
|
High
|
Low
|
|||||
|
First
quarter
|
$
|
3.50
|
$
|
2.50
|
|||
|
Second
quarter
|
$
|
6.00
|
$
|
3.00
|
|||
|
Year
ended June 30, 2006
|
High
|
Low
|
|||||
|
First
quarter
|
$
|
5.95
|
$
|
1.00
|
|||
|
Second
quarter
|
8.25
|
4.50
|
|||||
|
Third
quarter
|
7.25
|
6.20
|
|||||
|
Fourth
quarter
|
6.40
|
3.25
|
|||||
|
Year
ended June 30, 2005
|
High
|
Low
|
|||||
|
First
quarter
|
$
|
N/A
|
$
|
N/A
|
|||
|
Second
quarter
|
*
|
*
|
|||||
|
Third
quarter(1)
|
N/A
|
N/A
|
|||||
* Less
than
$0.01.
(1)
Due
to
our change of fiscal year end from September 30 to June 30, our 2005 fiscal
year
was only nine months long.
The
Company has never paid any cash dividends on its Common Stock and does not
plan
to pay any cash dividends in the foreseeable future.
As
of
February 13, 2007, we had approximately 902 shareholders of record, exclusive
of
shares held in street name.
Equity
Compensation Plans
On
May
27, 2005, the Company adopted the 2005 Stock Option Plan, as subsequently
amended and restated (the “Option Plan”), and the 2005 Employee Stock Option
Plan, as
subsequently amended and restated
(the
“Employee Plan”), pursuant to which it may grant equity awards to eligible
persons. On August 15, 2006, the Company adopted the 2006 Director Stock
Option
Plan, as subsequently amended and restated (the “Director Plan”), pursuant to
which it may grant equity awards to eligible persons. The Option Plan allows
the
Board of Directors to grant options to purchase up to 1,800,000 shares of
common
stock to directors, officers, key employees and service providers of the
Company, and the Employee Plan allows the Board of Directors to grant options
to
purchase up to 2,000,000 shares of common stock to officers and key employees
of
the Company. The Director Plan allows the Board of Directors to grant options
to
purchase up to 1,000,000 shares of common stock to directors of the Company.
Options granted under all of the Plans have a ten year maximum term, an exercise
price equal to at least the fair market value of the Company’s common stock
(based on the trading price on the OTC Bulletin Board) on the date of the
grant,
and with varying vesting periods as determined by the Board.
24
As
of
June 30, 2006, the following options had been granted under the option
plans.
|
Plan
Category
|
Number
of securities to be issued on exercise of outstanding options, warrants
and rights
#
|
Weighted-average
exercise price of outstanding options, warrants, and rights
$
|
Number
of securities remaining available for future issuance under equity
compensation plans
|
|||||||
|
Equity
compensation plans approved by shareholders
|
N/A
|
N/A
|
N/A
|
|||||||
|
Equity
compensation plans not approved by shareholders
|
3,257,592
|
$
|
2.11
|
333,982
|
||||||
|
Total
|
3,257,592
|
$
|
2.11
|
333,982
|
||||||
DESCRIPTION
OF BUSINESS
General
Century
was organized under Minnesota law in 1983. Century had no operations since
its
fiscal year ended September 30, 1999 through June 30, 2005.
On
July
28, 2005, IsoRay Medical, Inc. became a wholly-owned subsidiary of Century
pursuant to a merger. Century changed its name to IsoRay, Inc. In the merger,
the Medical stockholders received approximately 82% of the then outstanding
securities of the Company.
Medical,
a Delaware corporation, was incorporated effective June 15, 2004 to develop,
manufacture and sell isotope-based medical products and devices for the
treatment of cancer and other diseases. Medical is headquartered in Richland,
Washington.
Medical
was formed for the purpose of combining the operations of IsoRay, Inc. (a former
Washington corporation) (“IsoRay (WA)”) and its subsidiary, IsoRay Products LLC,
two companies that shared common ownership and management with Medical.
Medical’s management initiated a merger transaction effective October 1, 2004,
to combine operations.
Business
Operations
Overview
IsoRay
is
utilizing its patented radioisotope technology, experienced chemists and
engineers, and management team to create a major therapeutic medical isotope
and
medical device company with a goal of providing improved patient outcomes in
the
treatment of prostate cancer and other solid tumor cancers. IsoRay began
production and sales of its Food and Drug Administration (“FDA”) cleared
product, the IsoRay 131Cs
brachytherapy seed, in October 2004 for the treatment of prostate cancer.
Management believes its technology will allow it to capture a leadership
position in an expanded brachytherapy market. The more clinically beneficial
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.
25
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 dose of radiation
at
one time than is possible with external beam radiation. Each seed contains
a
radioisotope sealed within a welded titanium capsule. Approximately 85 to 135
seeds are permanently implanted in the prostate in a 45-minute outpatient
procedure. The isotope decays over time and the seeds become inert. The seeds
may be used as a primary treatment or, in conjunction with other treatment
modalities such as external beam radiation therapy, chemotherapy, or as
treatment for residual disease after excision of primary tumors.
Management
believes that the IsoRay 131Cs
seed
represents the
first
major advancement in brachytherapy technology in over 18 years with attributes
that could make it the long term “seed of choice” for internal radiation
procedures. The 131Cs
seed
has FDA clearance 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.
The
131Cs
isotope appears to have specific advantages for treating cancer over Iodine-125
(I-125 or 125I)
and
Palladium-103 (Pd-103 or 103Pd),
the
other isotopes commonly used in brachytherapy procedures. IsoRay believes that
the short half-life and higher dose rate characteristics of 131Cs
will
expand industry applications and facilitate meaningful penetration into the
treatment of other forms of cancer such as breast cancer. The shorter half-life
of 9.7 days for 131Cs
(versus 17 days for 103Pd
and 60
days for 125I)
mitigates negative effects of long radiation periods on healthy tissue and
is
believed to reduce the duration of certain side effects. The higher initial
dose
rate is believed to be more effective on fast growing cancers by aggressively
attacking cancer cells and disrupting cancer cell re-population cycles. The
characteristics of 131Cs may
result in the use of 10-30% fewer seeds per procedure compared to Pd-103,
thereby reducing the total physical radiation dose to the patient and reducing
the costs of the procedure for both third-party payers and the patient.
IsoRay
and its predecessor companies have accomplished the following key milestones:
|
§
|
Treated
900th
patient (February 2007);
|
|
§
|
Raised
over $25.0 M in debt and equity funding (September 2003 - January
2007);
|
|
§
|
Opened
a new manufacturing and production facility (October
2005);
|
|
§
|
Deployed
a direct sales force to the market (July 2004 - July
2005);
|
|
§
|
Developed
a treatment protocol for prostate cancer with a leading oncologist
(January 2005);
|
|
§
|
Treated
the first patient (October 2004);
|
|
§
|
Commenced
production of the 131Cs
seed (August 2004);
|
|
§
|
Filed
five additional patent applications for the 131Cs
process (November 2003 - August
2004);
|
|
§
|
Obtained
a Nuclear Regulatory Commission Sealed Source and Device Registration
required by the Washington State Department of Health and the FDA
(September 2004);
|
|
§
|
Received
a Radioactive Materials License from the Washington State Department
of
Health (July 2004);
|
|
§
|
Implemented
an ISO-9000 Quality Management System and production operating procedures
(under continuing development);
|
|
§
|
Signed
a Commercial Work for Others Agreement between Battelle (manager
of the
Pacific Northwest National Laboratory or PNNL) and IsoRay, allowing
initial production of seeds through 2006 at
PNNL (April 2004);
|
|
§
|
Obtained
favorable Medicare reimbursement codes for the Cs-131 brachytherapy
seed
(November 2003);
|
|
§
|
Obtained
FDA 510(k) clearance to market the first product: the 131Cs
brachytherapy seed (March 2003);
|
26
|
§
|
Completed
initial radioactive seed production, design verification, computer
modeling of the radiation profile, and actual dosimetric data compiled
by
the National Institute of Standards and Technology and PNNL (October
2002); and
|
|
§
|
Obtained
initial patent for 131Cs
isotope separation and purification (May
2000).
|
Industry
Information
Incidence
of Prostate Cancer
Excluding
skin cancer, prostate cancer is the most common form of cancer, and the second
leading cause of cancer deaths in men. The American Cancer Society estimated
there would be about 234,460 new cases of prostate cancer diagnosed and an
estimated 27,350 deaths associated with the disease in the United States
during
2006. Because of early detection techniques (e.g., screening for prostate
specific antigen, or PSA) approximately 70% (164,100) of these cases are
potentially treatable with monotherapy seed brachytherapy, when the cancers
are
still locally confined within the prostate. A substantial majority of these
cases are potentially treatable with dual therapy using seed brachytherapy
in
combination with different variations of external beam
radiation.
The
prostate is a walnut-sized gland surrounding the male urethra, located below
the
bladder and adjacent to the rectum. The two most prevalent prostate diseases
are
benign prostatic hyperplasia (BPH) and prostate cancer. BPH is a non-cancerous
enlargement of the innermost part of the prostate. Prostate cancer is a
malignant tumor that begins most often in the periphery of the gland and, like
other forms of cancer, may spread beyond the prostate to other parts of the
body.
Prostate
cancer incidence and mortality increase with age. Prostate cancer is found
most
often in men who are over the age of 50. More than seven out of ten men
diagnosed with prostate cancer are over the age of 65. According to the American
Cancer Society, approximately one man in six will be diagnosed with prostate
cancer during his lifetime.
In
addition to age, other risk factors are linked to prostate cancer, such as
genetics. Men who have relatives that have been affected, especially if the
relatives were young at the time of diagnosis, have an even higher risk of
contracting the disease. Researchers have discovered that changes in certain
genes, influenced by DNA mutations inherited from a parent, may cause some
men
to be more inclined to develop prostate cancer. It has also been suggested
that
environmental factors such as exposure to cancer-causing chemicals or radiation
may cause DNA mutations in many organs. Another factor that may contribute
to
prostate cancer is diet, with diets high in fat and high in calcium possibly
increasing the risk of prostate cancer.
The
American Cancer Society recommends that men without symptoms, risk factors
and
who have a life expectancy of at least ten years, should begin regular annual
medical exams at the age of 50, and believes that health care providers should
offer as part of the exam the prostate-specific antigen (PSA) blood test and
a
digital rectal examination. The PSA blood test determines the amount of prostate
specific antigen present in the blood. PSA is found in a protein secreted by
the
prostate, and elevated levels of PSA can be associated with either prostatitis
(a noncancerous inflammatory condition) or a proliferation of cancer cells
in
the prostate. Transrectal ultrasound tests and biopsies are typically performed
on patients with elevated PSA readings to confirm the existence of cancer.
A
tumor
found by a prostate biopsy is usually assigned a grade by a pathologist. The
most common prostate cancer grading system is called the Gleason grading system.
A Gleason score, which ranges from 2 to 10, usually is used to estimate the
tumor’s growth rate. Typically, the lower the score, the slower the cancer
grows. Most localized cancers of the prostate gland are associated with an
intermediate score ranging from Gleason scores 4 through 6.
Staging
is the process of determining how far the cancer has spread. The treatment
and
recovery outlook depend on the stage of the cancer. The TNM system is the
staging process used most often. The TNM system describes the extent of the
primary tumor (T stage), whether the cancer has spread to nearby lymph nodes
(N
stage), and the absence or presence of distant metastasis (M stage). The TNM
descriptions can be grouped together with stages labeled 0 through IV (0-4).
The
higher the number, the further the cancer has spread. The following table
summarizes the various stages of prostate cancer.
27
|
Stages
|
Characteristics
of Prostate Cancer
|
|
|
T1
or T2
|
Localized
in the prostate
|
|
|
T3
or T4
|
Locally
advanced
|
|
|
N+
or M+
|
Spread
to pelvic lymph nodes (N+) or distant organs
(M+)
|
Treatment
Options and Protocol
In
addition to brachytherapy, localized prostate cancer is commonly treated with
radical prostatectomy (RP) and external beam radiation therapy (EBRT). Recently,
intensity modulated radiation therapy (IMRT) has seen increased application,
particularly in combination with brachytherapy for cancers that have begun
to
spread beyond the prostate. Other treatments include cryosurgery, hormone
therapy, watchful waiting, and finasteride, a drug commonly prescribed to treat
benign enlargement of the prostate and male baldness. Some of these therapies
may be combined in special cases to address a specific cancer stage or patient
need. When the cancerous tissue is not completely eliminated, the cancer
typically returns to the primary site, often with metastases to other areas.
Radical
Prostatectomy. Historically
the most common treatment option for prostate cancer, radical prostatectomy
is
an invasive surgical procedure in which the entire prostate gland is removed.
RP
is performed under general anesthesia and typically involves a hospital stay
of
several days for patient observation and recovery. This procedure is often
associated with relatively high rates of impotence and incontinence. For
instance, a study published in the Journal
of the American
Medical Association
in
January 2000 reported that approximately 60% of men who had received RP
reported erectile dysfunction as a result of surgery. The same report found
that
approximately 40% of the patients studied reported at least occasional
incontinence. New bilateral nerve-sparing techniques are currently being used
more frequently in order to address these side effects, but these techniques
require a high degree of surgical skill. RP is typically more expensive than
other common treatment modalities.
External
Beam Radiation Therapy. EBRT
allows patients to receive treatment on an outpatient basis and at a lower
cost
than RP. EBRT involves directing a beam of radiation from outside the body
at
the prostate gland in order to destroy cancerous tissue. The course of treatment
usually takes seven to eight weeks to deliver the total dose of radiation
prescribed to kill the tumor. Studies have shown, however, that the ten-year
disease free survival rates with treatment through EBRT are less than the
disease free survival rates after RP or brachytherapy treatment. In addition,
because the radiation beam travels through the body to reach the prostate,
normal tissue lying in the path of the radiation beam is also damaged. Other
side effects are associated with EBRT. For instance, rectal wall damage caused
by the radiation beam is a noted negative side effect. Data suggests that
between 30% and 40% of the patients who undergo EBRT suffer problems with
erectile dysfunction after treatment.
Intensity
Modulated Radiation Therapy. IMRT
is a
newer, more advanced form of EBRT in which sophisticated computer control is
used to aim the beam at the target volume from multiple different angles and
to
vary the intensity of the beam. Thus, damage to normal tissue and critical
structures is minimized by distributing the unwanted radiation over a larger
geometric area. The course of treatment is similar to EBRT and requires daily
doses over a period of seven to eight weeks to deliver the total dose of
radiation prescribed to kill the tumor. IMRT is relatively new and thus not
widely available for use as a treatment modality. As a result fewer clinical
data regarding treatment effectiveness and the incidence of side effects are
available. One advantage of IMRT, and to some extent EBRT, is the ability to
treat cancers that have begun to spread from the tumor site. An increasingly
popular therapy for patients with more advanced prostate cancer is a combination
of IMRT with seed implant brachytherapy.
Cryosurgery.
Cryosurgery,
a procedure in which tissue is frozen to destroy tumors, is another treatment
option for prostate cancer. Currently, this procedure is less widely used,
although promising treatment outcomes have been reported. Cryosurgery typically
requires a one to two day hospital stay and is associated with higher rates
of
impotence and other side effects than seed implant brachytherapy.
Other
Treatments. Other
treatments include hormone therapy and chemotherapy, which may be used to reduce
the size of cancerous tumors. However, these treatments are not intended to
ultimately cure a patient of prostate cancer. Instead, such treatment choices
are made by physicians in an attempt to extend patients’ lives if the cancer has
reached an advanced stage or as ancillary treatment methods used in conjunction
with other treatment modalities. Common side effects of hormone therapy are
impotence, decreased libido and breast enlargement. Common side effects of
chemotherapy are nausea, hair loss and fatigue.
28
“Watchful
waiting” or “active surveillance”, while not a treatment, is recommended by some
physicians in extreme circumstances based on the severity and growth rate of
the
disease, as well as the age and life expectancy of the patient. Physicians
and
patients who choose watchful waiting are frequently seeking to avoid the
negative side effects associated with RP or other treatment modalities. Through
careful monitoring of PSA levels and close examination for advancing symptoms
of
prostate cancer, physicians may choose active treatments at a later
date.
Treatment
Protocol. Prostate
cancer patients electing seed therapy first undergo an ultrasound test or CT
scan, which generates a two-dimensional image of the prostate. With the
assistance of a computer program, a three-dimensional treatment plan is created
that calculates the number and placement of the seeds required for the best
possible distribution of radiation to the prostate. Once the implant model
has
been constructed, the procedure is scheduled and the seeds are ordered. The
number of seeds implanted normally ranges from 85 to 135, with the number of
seeds varying with the size of the prostate. The procedure is usually performed
under local anesthesia in an outpatient setting. The seeds are implanted using
needles inserted into the prostate. When all seeds have been inserted, seed
placement is verified through an ultrasound image, CT scan, fluoroscope or
MRI.
An experienced practitioner typically performs the procedure in approximately
45
minutes, with the patient normally returning home the same day. Most patients
are able to return to their normal activities within one or two days following
the procedure.
Origin
of Brachytherapy seeds
One
of
the first reports in the medical literature regarding brachytherapy seeds that
deliver “soft x-ray” radiation directly to tumors by permanent implantation
appeared in 1965, authored by Donald C. Lawrence and Dr. Ulrich K.
Henschke. Don Lawrence later developed and patented the titanium-encapsulated
I-125 brachytherapy seed. His company, Lawrence Soft Ray Inc., provided the
world’s supply of seeds from 1967 to 1978 until the 3M Corporation purchased the
technology. Eventually 3M sold the business to Amersham PLC, which spun off
this
business to its division ONCURA, today the market leader in Iodine-125 seeds.
All commercially available seeds trace their origin to Mr. Lawrence’s
invention. Don Lawrence was a founder of IsoRay, LLC, the first predecessor
company to IsoRay.
Brachytherapy
has been used as a treatment for prostate cancer for more than 30 years.
Formerly, seeds containing the radioactive isotope Iodine-125 were implanted
in
prostate tumors through open surgery. However, this technique fell into disfavor
because the seeds were often haphazardly arranged resulting in radiation not
reaching all of the targeted cancerous tissue. Compounding this was the fact
that often an unintended radiation dose was delivered to healthy surrounding
tissues, particularly the urethra and rectum. Originally, brachytherapy earned
an unfavorable reputation because the early adopters did not have the imaging
technologies needed for accurate placement of the seeds. This resulted in poor
tumor control and greater damage to surrounding healthy tissue. Since the
introduction of the ultrasound-guided, transperineal implantation technique
in
the late 1980s, brachytherapy has become a treatment that not only provides
excellent therapeutic value but is very convenient and economical for the
patient. The benefits of the advancements in imaging, computer dose planning,
and the actual implant procedure have been validated by the improved clinical
results achieved using modern brachytherapy techniques.
The
introduction of Palladium-103 in the mid-1980s represented a major technology
advancement in brachytherapy and played a significant role in the dramatic
increase in the number of brachytherapy procedures performed. Within a
relatively short period of time, 103Pd
captured 40% of the growing brachytherapy market.
Cesium-131 represents the
first
major advancement in brachytherapy technology in over 18 years with attributes
that management believes could make it the long term “seed of choice” for
internal radiation procedures. Management believes that the 131Cs
seed
has specific clinical advantages for treating cancer over 125I
and
103Pd.
There
is
a large and growing potential market for the Company’s products. Several
significant clinical and market factors are contributing to the increasing
popularity of the brachytherapy procedure. In Europe brachytherapy is growing
in
excess of 25% per year and it is expected that market growth in the U.S. will
also increase dramatically. In 1996 only 4% of prostate cancer cases were
treated with brachytherapy, or about 8,000 procedures. In 2005, it was estimated
that over 60,000 brachytherapy procedures were performed for prostate cancer.
Brachytherapy as a treatment is now more common than radical prostatectomy
and
has become the treatment of choice for early-stage prostate cancer. Considerable
attention is now being given to high risk and faster growing prostate cancers
as
well. Brachytherapy has significant advantages over competing treatments
including lower cost, better survival data, fewer side effects, a faster
recovery time and the convenience of a single outpatient procedure that
generally lasts 45 minutes (Merrick, et al., Techniques
in Urology,
Vol. 7,
2001; Potters, et al., Journal
of Urology,
May
2005; Sharkey, et al., Current
Urology Reports,
2002).
29
Clinical
Results
Long
term
survival data are now available for brachytherapy with 103Pd
and
125I,
which
support the efficacy of brachytherapy. Clinical data indicate that brachytherapy
offers success rates for early-stage prostate cancer treatment that are equal
to
or better than those of RP or EBRT. While clinical studies of brachytherapy
to
date have focused on results from brachytherapy with Pd-103 and I-125,
management believes that this data will be relevant for brachytherapy with
Cs-131, and Cs-131 may offer improved clinical outcomes over Pd-103 and I-125,
given its shorter half-life and higher energy.
Improved
patient outcomes.
A number
of published studies on the use of 103Pd
and
125I
brachytherapy in the treatment of early-stage prostate cancer have been very
positive (we have not obtained consent to cite the studies listed
below).
|
§
|
In
September 2006 a 5 year prospective study to assess the impact of
interstitial brachytherapy on the quality of life of patients with
localized prostate cancer was published. The results of the present
study
confirm that the impact of interstitial brachytherapy on the patients’
quality of life is low despite its transient negative effects on
some
function, and extend existing knowledge concerning quality of life
after
interstitial brachytherapy. International
Journal of Radiation Oncology; Volume 66;
1;31-37.
|
|
§
|
A
twelve-year clinical study published in the 2004 Supplement of the
International
Journal of Radiation Oncology, Biology and Physics,
reported relative survival rate of 84% for low risk cancer patients,
78%
for intermediate risk cancer patients and 68% for high risk cancer
patients. The study was conducted by Dr. Lou Potters, et al. of the
New York Prostate Institute and included 1,504 patients treated with
brachytherapy between 1992 and
2000.
|
|
§
|
A
study published in the January 2004 issue of the International
Journal of Radiation Oncology, Biology and Physics,
reported that brachytherapy, radical prostatectomy, high-dose external
beam radiation therapy and combined therapies produced similar cure
rates.
The study was conducted by Dr. Patrick Kupelian, Dr. Louis
Potters, et al. and included 2,991 patients with Stage T1 or T2
prostate cancer. Of these patients, 35% of patients underwent surgery,
16%
received low-dose EBRT, 10% received high-dose EBRT, 7% received
combination therapy and 32% received brachytherapy. After five years,
the
biochemical relapse-free survival rate was 83% for brachytherapy,
81% for
radical prostatectomy, 81% for high-dose EBRT, 77% for combination
therapy
and 51% for low-dose EBRT.
|
|
§
|
A
nine-year clinical study published in the March 2000 issue of the
International
Journal of Radiation Oncology, Biology and Physics,
reported that 83.5% of patients treated with Pd-103 seeds were cancer-free
at nine years. The study was conducted by Dr. John Blasko of the
Seattle Prostate Institute and included 230 patients with clinical
stage
T1 and T2 prostate cancer. Only 3% experienced cancer recurrence
in the
prostate.
|
|
§
|
Results
from a 10-year study conducted by Dr. Datolli and Dr. Wallner
published in the International
Journal of Radiation Oncology, Biology and Physics
in
September 2002, were presented at the October 2002 American Society
for
Therapeutic Radiology and Oncology (ASTRO) conference confirming
the
effectiveness of the Pd-103 seed in patients with aggressive cancer
who
previously were considered poor candidates for brachytherapy. The
10-year
study was comprised of 175 patients with Stage T2-T3 prostate cancer
treated from 1991 through 1995. Of these patients, 79 percent remained
completely free of cancer without the use of hormonal therapy or
chemotherapy.
|
|
§
|
A
study by the Northwest Prostate Institute in Seattle, Washington
reported
79% disease-free survival at 12 years for brachytherapy in combination
with external beam radiation (Ragde, et
al.,
Cancer,
July 2000). The chance of cure from brachytherapy is nearly 50%
higher than for other therapies for men with large cancers (PSA 10-20)
and
over twice as high as other therapies for men with the largest cancers
(PSA 20+) (K. Wallner, Prostate
Cancer: A Non-Surgical Perspective,
Smart Medicine Press, 2000).
|
30
Reduced
Incidence of Side Effects.
Sexual
potency and urinary incontinence are two major concerns men face when choosing
among various forms of treatment for prostate cancer. Because the IsoRay
131Cs
seed
delivers a highly concentrated and confined dose of radiation directly to the
prostate, healthy surrounding tissues and organs typically experience less
radiation exposure. Management believes, and initial results appear to support,
that this should result in lower incidence of side effects and complications
than may be incurred with other conventional therapies, and when side effects
do
occur, they should resolve more rapidly than those experienced with I-125 and
Pd-103 isotopes.
Favorable
Market Factors
Lower
Treatment Cost.
The
total one-time cost of brachytherapy ranges from $10,000 to $17,000 per
procedure. This is less than the cost of a radical prostatectomy or RP, which
ranges from $17,000 to $20,000, excluding treatment for side effects and
post-operative complications. Brachytherapy cost is comparable to the cost
of
EBRT (external beam radiation), which is approximately $14,000 to $35,000 for
a
seven to nine week course of treatment.
Favorable
Demographics.
Prostate cancer incidence and mortality increase with age. Prostate cancer
is
found most often in men who are over the age of 50. The National Cancer
Institute has reported that the incidence of prostate cancer increases
dramatically in men over the age of 55. Currently, one out of every six men
is
at lifetime risk of developing prostate cancer. More than seven out of ten
men
diagnosed with prostate cancer are over the age of 65. At the age of 70, the
chance of having prostate cancer is 12 times greater than at age 50. According
to the American Cancer Society, prostate cancer incidence rates increased
between 1988 and 1992 due to earlier diagnosis in men who otherwise had no
sign
of symptoms. Early screening has fostered a decline in the prostate cancer
death
rate since 1990.
The
number of prostate cancer cases in the U.S. is expected to increase due to
the
expanding population of men over the age of 55. The U.S. Census Bureau estimates
this segment of the population will increase from 25.9 million men in 2000
to 32
million men by 2008 - a 24% increase. Extrapolating that data, management
believes that the U.S. will provide over 180,000 candidates annually for
prostate brachytherapy by 2008.
Increased
PSA Screening.
Early
PSA screening and testing leads to early diagnosis. The American Cancer Society
recommends that men without symptoms or risk factors and who have a life
expectancy of at least ten years, should begin regular annual medical exams
at
the age of 50, and believes that health care providers should offer as part
of
the exam the prostate-specific antigen blood test. The PSA blood test determines
the amount of prostate specific antigen present in the blood. PSA is found
in a
protein secreted by the prostate, and elevated levels of PSA can be associated
with either prostatitis (a noncancerous inflammatory condition) or a
proliferation of cancer cells in the prostate. Industry studies have shown
that
the PSA test can detect prostate cancer up to five years earlier than the
digital rectal exam. Ultrasound tests and biopsies are typically performed
on
patients with elevated PSA readings to confirm the existence of cancer.
Our
Strategy
The
key
elements of IsoRay’s strategy include:
|
§
|
Continue
to introduce the IsoRay 131Cs
seed into the U.S. brachytherapy market.
Utilizing a direct sales organization and selected channel partners,
IsoRay intends to capture a leadership position by expanding overall
use
of the brachytherapy procedure for prostate cancer, capturing much
of the
incremental market growth and taking market share from existing
competitors.
|
|
§
|
Create
a state-of-the-art manufacturing process.
IsoRay has constructed a state-of-the-art manufacturing facility
in
Richland, Washington in its leased facility, to implement our proprietary
manufacturing process which is designed to improve profit margins
and
provide adequate manufacturing capacity to support future growth
and
ensure quality control. If Initiative 297 presents a strategic roadblock
to the Company, or if attractive financing alternatives are available
in
another state, IsoRay will construct a permanent manufacturing facility
in
another state. Working with leading scientists, IsoRay intends to
design
and create a proprietary separation process to manufacture enriched
barium, a key source material for 131Cs,
to ensure adequate supply and greater manufacturing efficiencies.
|
|
§
|
Introduce
Cesium-131 therapies for other cancers.
IsoRay intends to partner with other companies to develop the appropriate
delivery technology and therapeutic delivery systems for treatment
of
other solid tumors such as breast, lung, liver, pancreas, neck, and
brain
cancer. IsoRay’s management believes that the first major opportunities
may be for the use of Cesium-131 in adjunct therapy for the treatment
of
residual lung and breast cancers.
|
31
|
§
|
Support
clinical research and sustained product development.
The Company plans to structure and support clinical studies on the
therapeutic benefits of Cs-131 for the treatment of solid tumors
and other
patient benefits. We are and will continue to support clinical studies
with several leading radiation oncologists to clinically document
patient
outcomes, provide support for our product claims and compare the
performance of our seeds to competing seeds. IsoRay plans to sustain
long-term growth by implementing research and development programs
with
leading medical institutions in the U.S. to identify and develop
other
applications for IsoRay’s core radioisotope
technology.
|
Management
believes there is a large and growing addressable market for IsoRay’s products.
Several factors appear to contribute to the increasing popularity of the
brachytherapy procedure. Long-term survival data are now available for
brachytherapy (other than with respect to treatment from Cs-131 seeds).
Brachytherapy has become the treatment of choice for not only early-stage
prostate cancer but is now being considered for treatment of fast growing,
aggressive tumors. For the treatment of prostate cancer, seed brachytherapy
is
now more common than surgery (radical prostatectomy). Seed brachytherapy
has
significant advantages over competing treatments including lower cost, better
survival data, fewer side effects, a faster recovery time and the convenience
of
an outpatient procedure that generally lasts 45 minutes. Over 60,000 procedures
were forecasted to occur in the U.S. in 2005. At the February 1, 2007 Cs-131
seed price of $59, this represents a potential $350 million market for seeds
that is forecast to grow substantially by 2009 according to a recent market
survey performed by Frost & Sullivan, a nationally recognized market
research firm. IsoRay’s management believes that the 131Cs
seed
will add incremental growth to the existing brachytherapy seed market as
physicians who are currently reluctant to recommend brachytherapy for their
prostate patients due, in part, to side effects caused by longer-lived isotopes,
become comfortable with the shorter half-life of 131Cs,
and
the anticipated reduction of side effects.
Products
IsoRay
markets the Cesium-131 seed
and
intends to market other radioactive isotopes in the future. Additionally, it
will attempt to create a market, primarily in clinical trials, for the liquid
Cs-131 isotope, which is created in the production of IsoRay’s 131Cs
seed.
Cs-131
Seed Product Description and Use in Cancer Treatment
Brachytherapy
seeds are small devices that deliver therapeutic radiation directly to tumors.
Each seed contains a radioisotope sealed within a welded titanium capsule.
In
prostate cancer procedures, approximately 85 to 135 seeds are permanently
implanted 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.
Significant
advantages of brachytherapy over competing treatments include: fewer side
effects (the likelihood of impotence and incontinence is reduced when seeds
are
used to treat prostate cancer); short, convenient outpatient procedure
(typically 45 minutes); faster recovery time (days vs. weeks); lower cost than
other treatment modalities; higher cure rates for solid tumors; less pain;
and
overall considerably better quality of life. The primary disadvantage of
brachytherapy is subjecting the human body to radiation and the side effects
of
radiation. Physician errors in seed placement and the number of seeds implanted
may also result in the failure to eradicate the cancer or in negative side
effects from over-radiation of certain tissues in the body.
A
diagram
of the IsoRay seed appears in Figure 1. The seed contains an x-ray opaque marker
surrounded by a ceramic substrate to which the isotope is chemically attached.
The seed core is placed in a titanium tube and precision laser welded to form
a
hermetically sealed source of therapeutic radiation suitable for permanent
implantation. The x-ray marker allows the physician to accurately determine
seed
placement within the tumor.
32
Figure
1: Cross section of 131Cs
seed
Competitive
Advantages of Cs-131
Management
believes that 131Cs
has
specific clinical advantages for treating cancer over I-125 and Pd-103, the
other isotopes currently used in brachytherapy seeds. The table below highlights
the key differences of the three seeds. The Company believes that the short
half-life, high-energy characteristics of 131Cs
will
increase industry growth and facilitate meaningful penetration into the
treatment of other forms of cancer such as breast cancer.
Brachytherapy
Isotope Comparison
|
Cesium-131
|
Palladium-103
|
Iodine-125
|
|
|
Half
Life
|
9.7
Days
|
17.5
days
|
60
days
|
|
Avg.
Energy
|
30.4
KeV+
|
21
KeV+
|
28.5
KeV+
|
|
Dose
Delivery
|
90%
in 33 days
|
90%
in 58 days
|
90%
in 204 days
|
|
Total
Dose
|
115
Gy
|
125
Gy
|
145
Gy
|
|
Anisotropy
Factor*
|
.969
|
.877
(TheraSeed® 2000)
|
.930
(OncoSeed® 6711)
|
|
*Degree
of symmetry of therapeutic dose, a factor of 1.00 indicates symmetry.
+KeV
= kiloelectron volt, a standard unit of measurement for electrical
energy.
|
|||
Shorter
half-life. The
Company believes that Cesium-131’s shorter half-life of 9.7 days will prove to
have greater biological effectiveness, will mitigate the negative effects of
long radiation periods on healthy tissue and will reduce the duration of any
side effects. A shorter half-life produces more intense therapeutic radiation
over a shorter period of time and may reduce the potential for cancer cell
survival and tumor recurrence. Radiobiological studies indicate that
shorter-lived isotopes are more effective against faster growing tumors (Dicker,
et. al., Semin.
Urol. Onc.
18:2,
May 2000). Other researchers conclude that “half-lives in the approximate range
4-17 days are likely to be significantly better for a wide range of tumor types
for which the radiobiologic characteristics may not be precisely known in
advance.” (Armpilia CI, et. al., Int.
J. Rad. Oncol. Biol. Phys. 55:2,
February 2003).
Higher
energy.
The
Cs-131 isotope average decay energy of 30.4 KeV (versus 21 KeV for Pd-103 and
28.5 KeV for I-125) generates a therapeutic radiation field that extends beyond
the current dosimetry reference point of 1 cm. Pd-103 seeds emit radiation
that
does not penetrate as far in tissue (up to 40% lower than Cs-131). To compensate
for this more Pd-103 seeds are required to attain the equivalent dose as if
Cs-131 seeds were used. This increase in the number of seeds implanted increases
the time and cost required to perform Pd-103-based procedures. The lower energy
from 103Pd
seeds
may also result in greater non-uniformity of the implant dose as dose rates
near
the surface of each seed must be higher to compensate for lower doses at greater
distances from each seed. The high energy of Cs-131 can result in radiation
toxicity if the dosage is not properly calculated by the implanting physician
and staff but the higher energy of Cs-131 does make the isotope more “forgiving”
for treatment planning purposes.
Reduced
side effects. Because
the IsoRay 131Cs
seed
device delivers a highly concentrated and confined dose of radiation directly
to
the prostate, healthy surrounding tissues and organs are exposed to less
radiation than with other treatments. Management believes this should result
in
fewer and less severe side effects and complications than may be incurred with
other conventional therapies.
33
Figure
2: Cs-131 seed Autoradiograph
Shape
of radiation field. The
shape
of the radiation field generated by a 131Cs
seed
is more uniform than most brachytherapy seed designs, and this uniformity may
result in better radiation dose coverage and improved therapeutic effectiveness.
Figure 2 shows an autoradiograph (film exposed by radiation from the seed
itself) of an IsoRay seed, which shows this uniformity of the radiation field
that is expected to result in better radiation dose coverage. IsoRay has
conducted extensive computer modeling and testing of the seed design. The IsoRay
seed has passed all Nuclear Regulatory Commission (“NRC”) requirements for
sealed radioactive sources. Dose uniformity was tested and the results compared
well to those predicted by industry standard computer modeling techniques.
In
the third quarter of 2002, seeds were sent to the National Institute for
Standards and Technology for calibration, and have undergone dosimetry testing
according to American Association of Physicists in Medicine (“AAPM”) protocols.
The results of these tests were compiled in IsoRay’s 510(k) submission to the
FDA and were subsequently published in the June 2004 issue of Medical
Physics.
The
results of these tests showed superior dose characteristics relative to the
leading I-125 and Pd-103 seeds.
Reduced
costs.
The
characteristics of 131Cs
seeds
described above may result in the use of 10%-30% less seeds per procedure,
compared to other isotopes, thereby reducing the total physical radiation dose
to the patient and reducing the costs of the procedure for the third-party
payers and the patient.
Cs-131
Manufacturing Process
Cs-131
is
a radioactive isotope that can be produced by the neutron bombardment of
Barium-130. When Ba-130 is put into a nuclear reactor it becomes Ba-131, the
radioactive material that is the parent isotope of Cs-131. The overall process
includes the following:
|
§
|
Isotope
Generation. The
radioactive isotope Cs-131 is normally produced by placing a quantity
of
stable non-radioactive barium (ideally pure Ba-130) into the neutron
flux
of a nuclear reactor. The irradiation process converts a small
fraction of
this material into a radioactive form of barium (Ba-131). The Ba-131
decays by electron capture to the radioactive isotope of interest
(Cs-131). Due to the short half-life of both the Ba-131 and Cs-131
isotopes, potential suppliers must be capable of removing irradiated
materials from the reactor core on a routine basis for subsequent
processing to produce ultra-pure Cs-131. The Company has identified
more
than five reactors facilities in the U.S., Europe and the former
Soviet
Union that are capable of meeting these requirements. As of November
10,
2006, IsoRay had agreements in place with three suppliers of irradiated
Ba-131 or Cs-131. The Company’s agreement with Russia’s Institute of
Nuclear Materials (which commenced as of August 25, 2005 and ends
August
25, 2012) allows the Company to purchase irradiated Ba-131 for
$300.00 per
Curie of the isotope. The projected value of the agreement over
its term
is $30,000,000 with $300,000 worth of isotope projected to be delivered
in
the first full year of production, although neither of these amounts
are
obligations to purchase any given quantity of the isotopes in a
particular
time period. Through September 30, 2006, the Company had paid
approximately $202,000 to the Institute of Nuclear Materials. On
October
6, 2006, Medical entered into a Contract with FSUE “SSE - Research
Institute of Atomic Reactors (“RIAR”) in Russia. The Contract provides for
delivery to Medical of purified Cs-131 isotope, which is used by
Medical
to produce its proprietary Cs-131 brachytherapy seed used in the
treatment
of prostate cancer. The total value of the Contract over its term,
which
expires on May 1, 2014, is $6,300,000. Delivery of the isotope
is
scheduled to commence in October 2007 and continue through December
2013,
upon submission of written orders by Medical forty-five days in
advance of
the planned date of delivery. Medical also entered into an Agreement
for
Exclusive Rights to Buy on October 6, 2006 with RIAR. This Agreement
gives
Medical the exclusive right to purchase the Cs-131 isotope produced
by
RIAR for a period of seven years, or through October 6, 2013. In
addition,
the Company is engaged in the development of a barium enrichment
device
that, if successful, should reduce the cost of producing Cs-131
while
maintaining the purity and consistency required in the end
product.
|
34
|
§
|
Isotope
Separation and Purification. Upon
irradiation of the barium feedstock, the Ba-131 begins decaying to
Cs-131.
At pre-determined intervals the Cs-131 produced is separated from
the
barium feedstock and purified using a proprietary radiochemical
separations process (patent applied for). Due to the high-energy
decay of
Ba-131, this process is performed under stringent radiological controls
in
a highly shielded isolator or “hot cell” using remote manipulators. After
separating Cs-131 from the energetic Ba-131, subsequent seed processing
may be performed in locally shielded fume hoods or glove boxes. If
enriched barium feedstock is used, the residual barium remaining
after
subsequent Cs-131 separation cycles (“milkings”) will be recycled back to
the reactor facility for re-irradiation. This material will be recycled
as
many times as economically feasible, which should make the process
more
cost effective. As an alternative to performing the Cs-131 separation
in
our own facilities, IsoRay may enter into agreements with other entities
to supply “raw” Cs-131 by performing the initial barium/cesium separation
at their facilities, followed by final purification at IsoRay’s
facility.
|
|
§
|
Internal
Seed Core Technology. The
purified Cs-131 isotope is incorporated into an internal assembly
that
contains a binder, spacer and a gold X-ray marker. This internal
core
assembly is subsequently inserted into a titanium case. The dimensional
tolerance for each material is extremely important. Several carrier
materials and placement methods have been evaluated, and through
a process
of elimination, we have developed favored materials and methods during
our
laboratory testing. The equipment necessary to produce the internal
core
includes accurate cutting and gauging devices, isotope incorporation
vessels, reaction condition stabilization and monitoring systems,
and
tools for placing the core into the titanium tubing prior to seed
welding.
|
|
§
|
Seed
Welding. Following
production of the internal core and placement into the titanium capsule,
each seed is laser welded to produce a sealed radioactive source
and
biocompatible medical device. This manufacturing technology requires:
accurate placement of seed components with respect to the welding
head,
accurate control of welding parameters to ensure uniform temperature
and
depth control of the weld, quality control assessment of the weld
integrity, and removal of the finished product for downstream processing
or rejection of unacceptable materials to waste. Inspection systems
are
capable of identifying and classifying these variations for quality
control and to ensure low scrap rates. Finally, the rapid placement
and
removal of components from the welding zone affects overall product
throughput.
|
|
§
|
Quality
Control. We
have established procedures and controls to meet all FDA and ISO
9001:2000
Quality Standards. Product quality and reliability will be secured
by
utilizing multiple sources of irradiation services, feedstock material,
and other seed manufacturing components. An intensive production
line
preventive maintenance and spare parts program will be implemented.
Also,
an ongoing training program will be established for customer service
to
ensure that all regulatory requirements for the FDA, DOT and applicable
nuclear radiation and health authorities are
fulfilled.
|
The
Company has implemented a just-in-time production process that is keenly
responsive to customer input and orders to ensure that individual customers
receive a higher level of customer service from us than from existing seed
suppliers who have the luxury of longer lead times due to longer half-life
products. Time from order confirmation to completion of product manufacture
can
be reduced to several working days, including receipt of irradiated barium
(from
a supplier’s reactor), separation of Cs-131 (at our facilities), isotope
labeling of the core, and loading of cores into pre-welded titanium “cans” for
final welding, testing, quality assurance and shipping.
It
is up
to each physician to determine the dosage necessary for implants and acceptable
dosages vary among physicians. Many of the physicians who order our seeds order
more seeds than necessary but wish to assure themselves that they have a
sufficient amount. Upon receipt of an order, the Company either delivers the
seeds from its facility directly to the physician using Federal Express or
sends
the order to an independent preloading service which delivers the seeds
preloaded into needles just prior to implant. If the implant is postponed or
rescheduled, the short half-life of the seeds makes them unsuitable for use
and
therefore they must be re-ordered. In recent months the Company has experienced
losses of viable seeds that have increased the Company’s monthly expenditures.
The Company is seeking to implement methods to better forecast demand for seeds
and reduce unused inventory.
35
Automated
Manufacturing Process
IsoRay
has held discussions with leading designers and manufacturers of automated
seed
manufacturing equipment that have manufactured, installed and deployed automated
production lines in Europe and the United States. In addition, IsoRay engaged
in
preliminary discussions with another seed manufacturer regarding obtaining
an
existing automated seed production line. Based on technical evaluations and
on
site reviews of both options, IsoRay elected to automate its current
manufacturing process in phases. Current production rates with IsoRay’s semi
automated seed welding equipment exceed those attainable with fully automated
lines. Phased implementation of automation is expected to be less costly than
fully automated production lines and will benefit IsoRay by reducing labor
costs
and helping to ensure consistent manufacturing quality.
Manufacturing
Facility
The
initial production of the IsoRay Cs-131 brachytherapy seed commenced at PNNL
in
2004. IsoRay signed a lease agreement and completed construction (tenant
improvements) of an interim production facility in Richland, Washington that
received final regulatory approval on October 6, 2005 and began radioactive
production operations shortly thereafter. This lease will expire in October
2007
and the Company is negotiating to lease space for a new production facility.
Management believes that the new production facility lease currently being
negotiated will be able to accommodate the Company’s anticipated future growth
for several years. The Company continues to use PNNL to provide third-party
assay of its products, but has otherwise vacated PNNL facilities. The Company
is
also considering another state as a location for a future facility, either
as
the Company’s sole manufacturing facility or as a secondary production facility.
No agreements have been reached for any possible facilities outside of
Washington.
Isotope
Testing in Idaho
On
December 14, 2005, IsoRay and Idaho’s Advanced Test Reactor (“ATR”) entered into
a collaboration and partnership agreement for the design, analysis and
fabrication of a capsule containing barium carbonate, to be irradiated at the
ATR and then shipped to IsoRay for processing and analysis of the 131Cs
product. As an adjunct to this testing, IsoRay and the Pocatello
Development Authority entered into an Economic Development Agreement, dated
December 14, 2005, under which the Pocatello Development Authority provided
IsoRay with $200,000 (subject to repayment under certain conditions) to use
toward the cost of testing at the ATR. During July 2006, several capsules
were irradiated and shipped to IsoRay’s PIRL facility for analysis. The
results of the analyses indicate the capsule performed as designed and that
a
planned capsule shuttle system will provide adequate conditions for 131Cs
production that will enhance IsoRay’s overall production capacity.
Repackaging
Services
Most
brachytherapy manufacturers offer their seed product to the end user packaged
in
four principal configurations provided in a sterile or non-sterile package
depending on the customer’s preference. These include:
|
§
|
Loose
seeds
|
|
§
|
Pre-loaded
needles
(loaded with 3 to 5 seeds and
spacers)
|
|
§
|
Strands
of seeds
(consists of seeds and spacers in a biocompatible “shrink wrap”)
|
|
§
|
Pre-loaded
Mick cartridges
(fits the Mick applicator - seed manufacturers usually load and sterilize
Mick cartridges in their own manufacturing
facilities)
|
No
single
package configuration dominates the market at this point. Market share
estimates, based on internal management studies of the market, for each of
the
four packaging types are: loose seeds (negligible amount), Mick cartridges
(20%), pre-loaded needles (30%) and strands (50%). Market trends indicate
significant movement toward the stranded configuration, as there are some
clinical data suggesting less potential for post-implant seed migration when
a
stranded configuration is used.
The
role
of the preloading service is to package, assay and certify the contents of
the
final product configuration shipped to the customer. A commonly used method
of
providing this service is through independent radiopharmacies such as Anazao
Healthcare and Advanced Care Medical Inc. Manufacturers send loose seeds along
with the physician's instructions to the radiopharmacy who, in turn, loads
needles and/or strands the seeds according to the doctor's instructions. These
pharmacies then sterilize the product and certify the final packaging prior
to
shipping directly to the end user.
36
IsoRay
has held discussions with the major independent radiopharmacies and determined
the additional time required for delivery of loose seeds to an off-site
radiopharmacy for subsequent assay, preloading and sterilization creates
additional loss of our isotope due to decay and is prohibitive on a long-term
basis. However, to increase sales in the near-term we are using these services
to supplement our own custom preloading operation. On March 1, 2006, the
Company
entered into a Service Agreement with Advanced Care Medical, Inc. for preloading
services. The term of the Service Agreement is one year, with automatic one
year
extensions unless terminated, and prices vary from $6-18
per seed
depending on how the seeds are packaged. In late March 2006, the Company’s
stranding service became operational but
stranding activity was suspended pending FDA 510(k) clearance of preloaded
seed
configurations as devices rather than convenience kits for seeds. The 510(k)
clearance has been received. The Company is currently not performing the
stranding function due to space limitations in its current production facility
and is reviewing space configurations that would allow it to begin performing
this function.
The
Company currently loads Mick cartridges in our own facility which in recent
months accounted for more than 60% of
total
seed orders. The Company has retained a
consultant
to
assist with implementation of the custom preloading service and expects
to begin offering
its
seed
in all
four of the commonly used packaging configurations
to
the
rest of its customer base once space limitations are resolved. Providing
this
service in-house will reduce the current cycle time for any given customer
order
by three to four days by eliminating the need to ship loose seeds to a
third-party provider. This reduction in cycle time will eliminate approximately
25% loss in isotope activity due to radioactive decay. The cost of priority
overnight shipment of each order of seeds to a third-party provider is also
eliminated. However, we
will
continue to utilize the independent radiopharmacies in the future both as
a
backup to our own preloading operation and to handle periodic increases in
demand.
Independent
radiopharmacies usually provide the final packaging of the product delivered
to
the end user. This eliminates the opportunity for reinforcing the "branding"
of
our seed product. By providing its own repackaging service, the Company
preserves the product branding opportunity and eliminates any concerns related
to the handling of its product by a third party prior to delivery to the end
user.
Providing
different packaging configurations adds significant value to the product while
providing an additional revenue stream and incremental margins to the Company
through the pricing premiums that can be charged. The end users of these
packaging options are willing to pay a premium because of the
savings they
realize by eliminating the need for loose seed handling and loading capabilities
on site, eliminating the need for additional staffing to load and sterilize
seeds and needles, and eliminating the expense of additional assaying of the
seeds.
Management
estimates the cost of establishing the custom preloading service in its new,
leased facility to be approximately $250,000, most of which has already been
spent on capital equipment. The custom preloading area has been created in
the
facility and the necessary equipment has been delivered and installed. Operating
procedures are in place, staff members have been trained, and process validation
activities have been completed. Technicians have been added to the staff
to
handle the seed loading and stranding operations. As the Company is not
currently performing the stranding function due to space limitations, staff
members who will eventually perform the stranding process are currently utilized
in our seed production and Mick cartridge preloading processes. PNNL will
continue to provide independent third-party assay of the seeds for the
foreseeable future. Our customer service staff will provide assistance with
shipping, documentation and tracking of all orders from the repackaging service
to the end user.
Barium
Enrichment Device
Barium-130
is the original source material for Cs-131. When Ba-130 is put into a nuclear
reactor it becomes Ba-131, the radioactive material that is the parent isotope
of Cs-131. Barium metal found in nature contains only 0.1% of Ba-130 with six
other isotopes making up the other 99.9%. As part of its manufacturing process
the Company intends to develop a barium enrichment device that should create
“enriched barium” with a higher concentration of the Ba-130 isotope than is
found in naturally occurring barium. In addition to creating a higher purity
Ba-130, which translates into higher purity Cs-131, a successfully completed
barium enrichment device would result in higher yields of Cs-131. The Company
has identified sources of enriched barium, including in the former Soviet Union,
that we are using until the barium enrichment device is developed.
37
Marketing
and Sales
Marketing
Strategy
The
Company intends to position Cs-131 as the isotope of choice for prostate
brachytherapy. Based on preliminary clinical studies, management believes there
is no apparent clinical reason to use other isotopes when Cesium-131 is
available. The advantages associated with a higher energy and shorter half-life
isotope are generally accepted within the clinical community and the Company
intends to help educate potential patients about the clinical benefits a patient
would experience from the use of Cs-131 for their brachytherapy seed treatment.
The potential negative effects of the prolonged radiation times associated
with
the long half-life of Iodine-125 make this isotope less attractive than
Cesium-131.
We
target
competing isotopes as our principal competition rather than the various
manufacturers and distributors of these isotopes. In this way, the choice of
brachytherapy isotopes will be less dependent on the name and distribution
strengths of the various iodine and palladium manufacturers and distributors
and
more dependent on the therapeutic benefits of Cs-131. The Company focuses the
purchasing decision on the advantages and functionality of the Cs-131 isotope
while seeking to educate the cancer patient about these clinical
benefits.
The
professional and patient market segments each play a role in the ultimate
choice
of cancer treatment and the specific isotope chosen for seed brachytherapy
treatment. The Company is tailoring its marketing message to each audience.
IsoRay has retained an advertising agency in the Seattle area to assist with
its
marketing communication program. The agency is coordinating the creation
and
distribution of all advertising material and works with the print and visual
media.
We
are
seeking to promote the advantages of Cs-131’s unique combination of high energy
and short half-life within the clinical market. Because we believe there is
no
apparent clinical reason to choose other isotopes over cesium, we have and
will
continue to target those high volume users of other isotopes as our implant
sites. We also emphasize the prolonged radiation times and the high doses of
radiation given to the patient by the iodine isotope and the possible negative
effects of this prolonged radiation to the adjacent healthy tissues. We believe
that this is an important marketing message because clinicians generally agree
the radiation given by Iodine has little or no clinical benefit after 120 to
150
days, but Iodine continues to give off non-therapeutic radiation for
approximately 600 days.
To
promote our products to the clinical and professional audience, we are using
a
combination of marketing messages to appear in print and visual media. Past
and
planned marketing activities include: attendance at the major
brachytherapy-related clinical conferences to exhibit our products and provide
marketing information for annual meetings, conferences and other forums of
the
various professional societies; print advertising in brachytherapy clinical
journals; and promoting clinical presentations by experts in the field at major
conferences.
In
today’s U.S. health care market patients are more informed and involved in the
management of their health and any treatments required. Many physicians relate
incidents of their patients coming for consultations armed with articles
researched on the Internet and other sources describing new treatments and
medications. In many cases, these patients are demanding a certain therapy
or
drug and the physicians are complying when medically appropriate.
Because
of this market factor, we also promote our products directly to the general
population. The audience targeted will be the prostate cancer patient, his
spouse, family and care givers. The marketing message to this segment of the
market emphasizes the specific advantages of Cs-131, including fewer side
effects, less total radiation, and shorter period of radiation. The Company
is
targeting this market through its website, located at www.isoray.com,
advertising in magazines read by prostate cancer patients and their care givers,
and through patient advocacy efforts.
38
Another
key element of our strategy is to validate and support all product claims
with
well-designed and executed clinical studies that support the efficacy and
positive patient outcomes of our Cs-131 seed. We intend to sponsor
physician-directed studies that will compare the performance of our seeds
to
Pd-103 and I-125 seeds. During the remainder of 2007, IsoRay plans to continue
its collaboration with leading physicians to develop clinical data on the
efficacy of Cs-131 seeds. Noted contributors from the medical physics community
will be consulted regarding the benefits of brachytherapy using shorter
half-life, improved dosimetry, and higher decay energy seeds. Articles will
be
submitted to professional journals such as Medical
Physics
and the
International
Journal of Radiation Oncology,
Biology, and Physics.
Sales
and Distribution
According
to a recent industry survey, approximately 2,000 hospitals and free standing
clinics are currently offering radiation oncology services in the United States.
Not all of these facilities offer seed brachytherapy services. These
institutions are staffed with radiation oncologists and medical physicists
who
provide expertise in radiation therapy treatments and serve as consultants
for
urologists and prostate cancer patients. We target the radiation oncologists
and
the medical physicists as well as urologists as key clinical decision makers
in
the type of radiation therapy offered to prostate cancer patients.
IsoRay
has a direct sales organization to introduce Cs-131 to radiation oncologists
and
medical physicists. During 2006, IsoRay expanded its sales force to ten
experienced individuals. By hiring experienced and successful brachytherapy
sales people, the Company reduces the risk of delay in penetrating the market
due to a lack of knowledge of the industry or unfamiliarity with the key
members
of the brachytherapy community.
The
initial response to our new isotope from prominent radiation oncologists,
medical physicists and urologists in the US has been very positive. As of
February 1, 2007, the Company had supplied the 131Cs
seed
to 45 well-known implant centers strategically located throughout the
U.S.
The
Company will expand its U.S. sales force as it expands the customer base. If
the
Company implements its plans to expand outside the U.S. market, it plans to
use
established distributors in the key markets in these other countries. This
strategy should reduce the time and expense required to identify, train and
penetrate the key implant centers and establish relationships with the key
opinion leaders in these markets. Using established distributors also should
reduce the time spent acquiring the proper radiation handling licenses and
other
regulatory requirements of these markets.
Pricing
Payment
for IsoRay products comes from third-party payers including Medicare/Medicaid
and private insurance groups. These payers reimburse the hospitals and clinics
via well-established payment procedures. On October 31, 2003, as a result
of
IsoRay’s predecessor’s filing for an Additional Device Category, CMS (Centers
for Medicare and Medicaid Services) approved a HCPCS/CPT code (2633) for
Cs-131
brachytherapy seeds. Reimbursement amounts are periodically reviewed and
revised. Medicare
is the most significant U.S. payer for prostate brachytherapy services, and
is
the payer in approximately 70% of all U.S. prostate brachytherapy cases.
CMS
reviews and adjusts outpatient reimbursement on a periodic and ad hoc basis,
but
no changes are expected for 2006. As of February 1, 2007, the price for our
loose seeds was $59 per seed.
Prostate
brachytherapy is typically performed in a hospital outpatient setting, and
as
such, is covered by the CMS Outpatient Prospective Payment System. Currently
in
2007, Medicare is reimbursing hospital’s out patient departments, Ambulatory
Surgery Centers, and approved physician office settings based on patient
specific invoices sent from the manufacturer to the provider. The provider
then
sends the invoice to Medicare for reimbursement based on Medicare’s
reimbursement methodology for that place of service. Other insurance companies
typically have followed CMS’ Outpatient Prospective Payment Systems in
determining their reimbursement policies. When charges for the seeds are
correctly submitted in the appropriate format to CMS, 100% of the total cost
of
the seeds is reimbursed to the hospital or clinic by CMS.
39
Other
Information
Customers
Customers
representing ten percent or more of total Company sales for the twelve months
ended June 30, 2006 were:
|
Community
Hospital of Los Gatos
|
Los
Gatos, CA
|
20.1%
of revenue
|
|
Chicago
Prostate Cancer Center
|
Westmont,
IL
|
18.7%
of revenue
|
|
Mills
Peninsula Health Center
|
San
Mateo, CA
|
10.4%
of revenue
|
The
loss
of any of these significant customers would have a temporary adverse effect
on
the Company’s revenues, which would continue until the Company located new
customers to replace them.
Proprietary
Rights
The
Company relies on a combination of patent, copyright and trademark laws, trade
secrets, software security measures, license agreements and nondisclosure
agreements to protect its proprietary rights. Some of the Company’s proprietary
information may not be patentable.
The
Company intends to vigorously defend its proprietary technologies, trademarks,
and trade secrets. Members of management, employees, and certain equity holders
have previously signed non-disclosure, non-compete agreements, and future
employees, consultants, advisors, with whom the Company engages, and who are
privy to this information, will be required to do the same. A patent for the
Cesium separation and purification process was granted on May 23, 2000 by the
U.S. Patent and Trademark Office (USPTO) under Patent Number 6,066,302, with
an
expiration date of May 23, 2020. The process was developed by Lane Bray, a
shareholder of the Company, and has been assigned exclusively to IsoRay.
IsoRay’s predecessor also filed for patent protection in four European countries
under the Patent Cooperation Treaty. Those patents have been assigned to
IsoRay.
Our
management believes that certain aspects of the IsoRay seed design and
construction techniques are patentable innovations. These innovations have
been
documented in IsoRay laboratory records, and a patent application was filed
with
the USPTO on November 12, 2003. Certain methodologies regarding isotope
production, separation, and seed manufacture are retained as trade secrets
and
are embodied in IsoRay’s procedures and documentation. In June and July of 2004,
three patent applications were filed relating to methods of deriving Cs-131
developed by IsoRay employees. The Company is currently working on developing
and patenting additional methods of deriving Cs-131 and other isotopes.
There
are
specific conditions attached to the assignment of the Cs-131 patent from Lane
Bray. In particular, the associated Royalty Agreement provides for 1% of gross
profit payment from seed sales (gross seed sales price minus direct production
cost) to Lane Bray and 1% of gross profit from any use of the Cs-131 process
patent for non-seed products. If IsoRay reassigns the Royalty Agreement to
another company, these royalties increase to 2%. The Royalty Agreement has
an
anti-shelving clause which requires IsoRay to return the patent if IsoRay
permanently abandons sales of products using the invention.
Effective
August 1, 1998, Pacific Management Associates Corporation (PMAC) transferred
its
entire right, title and interest in an exclusive license agreement with Donald
Lawrence to IsoRay, LLC (a predecessor company) in exchange for a membership
interest. The license agreement was transferred to IsoRay through a series
of
mergers and the reverse acquisition.
The
terms
of the license agreement require the payment of a royalty based on the Net
Factory Sales Price, as defined in the agreement, of licensed product sales.
Because the licensor’s patent application was ultimately abandoned, only a 1%
“know-how” royalty based on Net Factory Sales Price, as defined, remains
applicable. To date, there have been no product sales incorporating the licensed
technology and there is no royalty due pursuant to the terms of the agreement.
Management believes that because this technology is not presently being used
and
believes it will not be used in the future that no royalties will be paid under
this agreement.
40
Research
And Development
From
inception (December 17, 2001) through June 30, 2006, IsoRay and its predecessor
companies incurred more than $2.25 million in costs related to research and
development activities. The Company expects to continue to have employees
working on activities that will be classified as research or development for
the
foreseeable future.
Government
Regulation
The
Company's present and future intended activities in the development, manufacture
and sale of cancer therapy products are subject to extensive laws, regulations,
regulatory approvals and guidelines. Within the United States, the Company's
therapeutic radiological devices must comply with the U.S. Federal Food, Drug
and Cosmetic Act, which is enforced by the FDA. The Company is also required
to
adhere to applicable FDA regulations for Good Manufacturing Practices, including
extensive record keeping and periodic inspections of manufacturing facilities.
IsoRay's predecessor obtained FDA 510(k) clearance in March 2003 to market
the
IsoRay 131Cs
seed
for the treatment of localized solid tumors.
Specifically,
in the United States, the FDA regulates, among other things, new product
clearances and approvals to establish the safety and efficacy of these products.
We are also subject to other federal and state laws and regulations, including
the Occupational Safety and Health Act and the Environmental Protection Act.
The
Federal Food, Drug, and Cosmetic Act and other federal statutes and regulations
govern or influence the research, testing, manufacture, safety, labeling,
storage, record keeping, approval, distribution, use, reporting, advertising
and
promotion of such products. Noncompliance with applicable requirements can
result in civil penalties, recall, injunction or seizure of products, refusal
of
the government to approve or clear product approval applications,
disqualification from sponsoring, or conducting clinical investigations, prevent
us from entering into government supply contracts, withdrawal of previously
approved applications and criminal prosecution.
Approval
of new medical devices is a lengthy procedure and can take a number of years
and
the expenditure of significant resources. There is a shorter FDA review and
clearance process, the premarket notification process, or the 510(k) process,
whereby a company can market certain medical devices that can be shown to be
substantially equivalent to other legally marketed devices. We have been able
to
achieve market clearance for our 131Cs
seed
using the 510(k) process.
In
the
United States, medical devices are classified into three different categories
over which FDA applies increasing levels of regulation: Class I,
Class II and Class III. Most Class I devices are exempt from
premarket notification (510(k)); most Class II devices require premarket
notification (510(k)) and most Class III devices require premarket
approval. Our 131Cs
seed
is a Class II device and has received 510(k) clearance.
As
a
registered medical device manufacturer with the FDA, we are subject to
inspection to ensure compliance with their current Good Manufacturing Practices,
or cGMP. These regulations require that we and any of our contract manufacturers
design, manufacture and service products and maintain documents in a prescribed
manner with respect to manufacturing, testing, distribution, storage, design
control and service activities. Modifications or enhancements that could
significantly affect the safety or effectiveness of a device or that constitute
a major change to the intended use of the device require a new 510(k) notice
for
any product modification. We may be prohibited from marketing the modified
product until the 510(k) notice is cleared by the FDA.
The
Medical Device Reporting regulation requires that we provide information to
the
FDA on deaths or serious injuries alleged to be associated with the use of
our
devices, as well as product malfunctions that are likely to cause or contribute
to death or serious injury if the malfunction were to recur. Labeling and
promotional activities are regulated by the FDA and, in some circumstances,
by
the Federal Trade Commission.
As
a
medical device manufacturer, we are also subject to laws and regulations
administered by governmental entities at the federal, state and local levels.
For example, our facility is licensed as a medical product manufacturing
facility in the State of Washington and is subject to periodic state regulatory
inspections. Our customers are also subject to a wide variety of laws and
regulations that could affect the nature and scope of their relationships with
us.
In
the
United States, as a manufacturer of medical devices and devices utilizing
radioactive byproduct material, we are subject to extensive regulation by not
only federal governmental authorities, such as the FDA, but also by state and
local governmental authorities, such as the Washington State Department of
Health, to
ensure
such devices are safe and effective. In Washington State, the Department of
Health, by agreement with the federal Nuclear Regulatory Commission ("NRC"),
regulates the possession, use, and disposal of radioactive byproduct material
as
well as the manufacture of radioactive sealed sources to ensure compliance
with
state and federal laws and regulations. Our 131Cs
brachytherapy seeds constitute both medical devices and radioactive sealed
sources and are subject to these regulations. Because Cesium is a new
radioactive isotope, centers which sell our 131Cs
seeds
must each amend their radioactive licenses and re-file these amended licenses
with each state in which they operate and this approval process may take between
four months to one year.
41
Moreover,
our use, management and disposal of certain radioactive substances and wastes
are subject to regulation by several federal and state agencies depending on
the
nature of the substance or waste material. We believe that we are in compliance
with all federal and state regulations for this purpose.
Washington
voters approved Initiative 297 in late 2004, which may impose additional
restrictions on sites at which mixed radioactive and hazardous wastes are
generated and stored, including PNNL, as it prohibits additional mixed
radioactive and hazardous waste from being brought to sites, such as PNNL,
until
the existing on-site waste conforms to all state and federal environment laws.
In June 2006, a U.S. District Court judge ruled that Initiative 297 was
unconstitutional in its entirety. However, the state of Washington has indicated
that it would appeal the decision. If this decision is overturned and Initiative
297 is enforced it could impact our ability to manufacture our seeds, whether
at
PNNL or elsewhere in the State of Washington.
Seasonality
The
Company is now aware of a seasonal influence on its business. During the months
of July and August, physicians take vacations and defer seed implantation
surgeries causing a momentary decline in revenue which management believes
is
ultimately realized later.
Employees
As
of
January 31, 2007, IsoRay employed 64 full-time individuals. The Company's
future
success will depend, in part, on its ability to attract, retain, and motivate
highly qualified technical and management personnel. From time to time, the
Company may employ independent consultants or contractors to support its
research and development, marketing, sales and support and administrative
organizations. None of the Company's employees are represented by any collective
bargaining unit. IsoRay estimates that successful implementation of its growth
plan would result in up to 60 additional employees by the end of calendar
year
2007.
Competition
The
Company competes in a market characterized by technological innovation,
extensive research efforts and significant competition. In general, the IsoRay
seed competes with conventional methods of treating localized cancer, including,
but not limited to, radical prostatectomy and external beam radiation therapy
which includes intensity modulated radiation therapy, as well as competing
permanent brachytherapy devices. RP has historically represented the most common
medical treatment for early-stage, localized prostate cancer. EBRT is also
a
well-established method of treatment and is widely accepted for patients who
represent a poor surgical risk or whose prostate cancer has advanced beyond
the
stage for which surgical treatment is indicated. Management believes that if
general conversion from these treatment options (or other established or
conventional procedures) to the IsoRay seed does occur, such conversion will
likely be the result of a combination of equivalent or better efficacy, reduced
incidence of side effects and complications, lower cost, quality of life issues
and pressure by health care providers and patients.
History
has shown the advantage of being the first to market a new brachytherapy
product. For example, Oncura currently claims nearly 30% of the market with
the
original I-125 seed. Theragenics Corp., which introduced the original Pd-103
seed, is second with a nearly 30% market share. The Company believes it may
obtain a similar and significant advantage by being the first to introduce
a
Cs-131 seed.
42
The
Company’s patented Cs-131 separation process is likely to provide us a
sustainable competitive advantage in this area. Production of Cs-131 also
requires specialized facilities (hot cells) that represent high cost and long
lead time if not readily available. In addition, a competitor would need to
develop a method for isotope attachment and seed assembly, would need to conduct
testing to meet NRC and FDA requirements, and would need to obtain regulatory
approvals before marketing a competing device.
Several
companies have obtained regulatory approval to produce and distribute
Palladium-103 and Iodine-125 seeds, which compete directly with our seed. Six
of
those companies represent nearly 100% of annual brachytherapy seed sales
worldwide: CR Bard, Inc., Oncura (part of Galil), Theragenics Corp., North
American Scientific, Inc., Mentor Corp., and Best Medical International, Inc.
The top three - CR Bard, Inc., Oncura and Theragenics - currently garner over
80% of annual sales.
Although
there is no assurance that the Company’s Cs-131 seed will retain its favorable
reimbursement amount when periodically reviewed and revised, presently the
Cs-131 seed has a higher reimbursement rate than either the Palladium-103 or
Iodine-125 seed.
It
is
possible that three or four of the current I-125 or Pd-103 seed manufacturers
(e.g., Oncura, Theragenics, North American Scientific, etc.) are capable of
producing and marketing a Cs-131 seed, but none have reported efforts to do
so.
Best Medical obtained a seed core patent in 1992 that named 10 different
isotopes, including Cs-131, for use in their seeds. Best Medical received FDA
510(k) clearance to market a Cs-131 seed on June 6, 1993 but has failed to
produce any products for sale.
Additional
Growth Opportunities
The
Cs-131 isotope has the performance characteristics to be a technological
platform for sustained long-term growth. The most immediate opportunities are
introducing Cs-131 to Canada, Europe and other international markets,
introducing Cs-131-based therapies for other forms of solid tumors focusing
first on breast tumors, and through the marketing of other radioactive isotopes.
These growth initiatives are in the early stages of planning and appear to
be
significant incremental opportunities.
The
Company plans to introduce Cs-131 initially
into Europe and later into other international markets through partnerships
and
strategic alliances with channel partners for manufacturing and distribution.
Another advantage of the Cs-131 isotope is its potential applicability to other
cancers and other diseases. Cs-131 has FDA clearance to be used for treatments
for a broad spectrum of cancers including breast, brain, lung, and liver cancer,
and the Company believes that a major opportunity exists as an adjunct therapy
for the treatment of breast cancer. Preliminary discussions have begun with
prominent physicians regarding the use of Cs-131-based therapies for the
treatment of lung, pancreatic and brain cancer. There is the opportunity to
develop and market other radioactive isotopes to the US market, and to market
the Cs-131 isotope itself, separate from its use in our seeds. The Company
is
also in the preliminary stages of exploring alternate methods of delivering
our
isotopes to various organs of the body, as it may be advantageous to use
delivery methods other than a titanium-encapsulated seed to deliver radiation
to
certain organs.
Subsequent
to June 2005, the Company’s executive offices are located at 350 Hills Street,
Suite 106, Richland, WA 99354, (509) 375-1202, where IsoRay currently leases
approximately 3,765 square feet of office and laboratory space for $5,144
per
month from Energy Northwest. The lease expires December 31, 2007, but is
renewable. The Company is not affiliated with its lessor. Additional office
space will be needed as employees are hired, and is currently available at
this
location. The Company believes that its current facilities will be adequate
until the end of fiscal year 2007, but it will need additional facilities
at
that time. In the future, due to business growth, the Company may elect to
combine administrative services and production in one building which the
Company
may lease or build depending on market conditions.
We
also
leased, which commenced as of regulatory licensing approval on October 6,
2005,
a facility located in Richland, Washington that management believes will
provide
adequate space to manufacture the Cs-131 product for the prostate cancer
markets
until late 2007, with a maximum manufacturing capacity of approximately 60,000
seeds per month and total square footage of 4,400 feet. The lease was for
a term
of twelve months following regulatory licensing approval, with a twelve-month
extension option. Payment for the initial lease term was the issuance of
24,007
shares of IsoRay, Inc. common stock. The lessor is Pacific EcoSolutions
Incorporated (PEcoS), and the Company is not affiliated with this lessor.
Equipment installed at this 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. The
Company’s current production facility lease ends in October 2007. While the
landlord has agreed to work with the Company to minimize production disruptions,
the landlord has indicated that it does not intend to enter into a long-term
leasing agreement with the Company. Management is in the final stages of
negotiation to lease space for a new production facility. Once the new lease
is
signed, the Company will begin to obtain the necessary permits and licenses
and
to make the necessary leasehold improvements. Management believes that the
Company will be able to obtain the necessary permits for the new facility
in a
timely manner that will not cause delays in the leasehold improvements
construction schedule. This new facility is expected to be operational at
the
end of calendar year 2007. Management believes that the new production facility
lease currently being negotiated will be able to accommodate the Company’s
anticipated future growth for several years. The Company continues to use
PNNL
to provide third-party assay of its products, but has otherwise vacated PNNL
facilities. Management believes that if the Company is unable to obtain the
new
lease, the necessary permits, or finish the leasehold improvements before
having
to vacate the present manufacturing facility, that a temporary manufacturing
facility is available and could be used although production capacity and
scheduling flexibility would be limited.
43
The
Company’s management believes that all facilities occupied by the Company are
adequate for present requirements, and that the Company’s current equipment is
in good condition and is suitable for the operations involved.
LEGAL
PROCEEDINGS
We
are
not a party to any material pending legal proceeding. Management is not aware
of
any threatened litigation, claims or assessments.
Set
forth
below is certain information regarding our directors and executive officers,
each of whom took office in July 2005, except for Mr. Babcock and Mr. Smith,
who
took office on March 31, 2006 and Ms. Woods, who took office in February
2007
but was previously employed by our subsidiary. Our Board of Directors is
comprised of seven directors. There are no family relationships between any
of
our directors or executive officers. Each of our directors is elected to
serve until our next annual meeting of our shareholders and until his successor
is elected and qualified or until such director's earlier death, removal
or
termination. Our Board of Directors appoints our officers, and their terms
of
office are at the discretion of the Board of Directors, except to the extent
governed by an employment contract.
|
Name
|
|
Age
|
|
Position
Held
|
|
|
|
|
|
|
|
Roger
Girard
|
|
63
|
|
Chairman,
President, CEO
|
|
Jonathan
Hunt
|
|
39
|
|
Chief
Financial Officer - Treasurer
|
|
David
Swanberg
|
|
50
|
|
Executive
Vice President - Operations and Corporate Secretary,
Director
|
|
Robert
Kauffman
|
|
66
|
|
Director
|
|
Thomas
LaVoy
|
|
47
|
|
Director
|
|
Stephen
Boatwright
|
|
43
|
|
Director
|
|
Dwight
Babcock
|
59
|
Director
|
||
|
Albert
Smith
|
62
|
Director
|
||
|
Lori
Woods
|
|
44
|
Vice
President
|
44
Roger
Girard - In addition to serving as President, Chairman and CEO for the Company,
Mr. Girard is also the CEO, President and Chairman of the Board of IsoRay
Medical, Inc., and has served in these positions since the formation of IsoRay
Medical, Inc. Mr. Girard was CEO and Chairman of IsoRay’s predecessor company
from August of 2003 until October 1, 2004. Mr. Girard has been actively involved
in the management and the development of the management team at IsoRay, and
his
experienced leadership has helped drive IsoRay’s development to date. From June
1998 until August of 2003, Mr. Girard served as President of Strategic Financial
Services, a business consulting company based in Seattle, Washington designed
to
help wealthy individuals and companies with strategic planning and financial
strategy. Strategic Financial Services previously provided its services to
a
medical device company. Mr. Girard served as its sole employee. Mr. Girard
also
served as the managing partner for the Northwest office of Capital Consortium,
another business consulting company based in Seattle, during this time. Capital
Consortium employed four people and analyzed business market potential for
start-ups and early stage companies. Mr. Girard has knowledge, experience and
connections to private, institutional and public sources of
capital and is experienced in managing and designing capital structures for
business organizations as well as organizing and managing the manufacturing
process, distribution, sales, and marketing, based on his 35 years of
experience.
Jonathan
Hunt - Mr. Hunt has over 10 years of finance and accounting experience,
including financial reporting, SEC knowledge, and operational analysis. Before
joining IsoRay in 2006, he was employed by Hypercom Corporation, a global
provider of electronic payment solutions and manufacturer of credit card
terminals, serving as its Assistant Corporate Controller from 2005 to 2006.
His
finance background also includes serving as both a Manager and Director of
Financial Reporting and a Director of Operational Planning and Analysis for
Circle K Corporation and its affiliates from 2000 to 2005 and working for
PricewaterhouseCoopers LLP from 1992 to 1999 where his last position held
was
Business Assurance Manager. Mr. Hunt holds Masters of Accountancy and Bachelor
of Science degrees from Brigham Young University and is a Certified Public
Accountant.
David
Swanberg
- Mr.
Swanberg has more than 22 years experience in engineering and materials science,
nuclear waste and chemical processing, aerospace materials and processes, and
environmental technology development and environmental compliance. Beginning
in
November 1995 and until January 2004, Mr. Swanberg was employed full time as
Sr.
Chemical/Environmental Engineer for Science Applications International
Corporation working on a variety of projects including nuclear waste research
and development. Mr. Swanberg joined IsoRay’s predecessor company in March of
1999 on a part-time basis and has held management positions in the IsoRay
companies since 2000. Mr. Swanberg began full-time employment with IsoRay in
February 2004. He has been instrumental in development of IsoRay’s initial
product, the Cs-131 brachytherapy seed, including interfaces with technical,
regulatory, and quality assurance requirements. With IsoRay and its predecessor
companies, he has managed the development and production of radioactive seeds
to
support testing to meet NRC and FDA requirements, provided technical guidance
for characterization of the IsoRay seed to meet AAPM Task Group 43 protocols,
and coordinated production and testing of non-radioactive seeds to conform
to
ISO standards for brachytherapy devices. He is President of the Nuclear Medicine
Research Council. He holds an MS in Chemical Engineering, is a licensed Chemical
Engineer, and a certified Level II Radiation Worker.
Robert
Kauffman - Mr. Kauffman has served as Chief Executive Officer and Chairman
of the Board of Alanco Technologies, Inc. (NASDAQ: ALAN), an Arizona-based
information technology company, since July 1, 1998. Mr. Kauffman was
formerly President and Chief Executive Officer of NASDAQ-listed Photocomm,
Inc.,
from 1988 until 1997 (since renamed Kyocera Solar, Inc.). Photocomm was the
nation’s largest publicly owned manufacturer and marketer of wireless solar
electric power systems with annual revenues in excess of $35 million. Prior
to
Photocomm, Mr. Kauffman was a senior executive of the Atlantic Richfield
Company (ARCO) whose varied responsibilities included Senior Vice President
of
ARCO Solar, Inc., President of ARCO Plastics Company and Vice President of
ARCO
Chemical Company. Mr. Kauffman earned an M.B.A. in Finance at the Wharton
School of the University of Pennsylvania, and holds a B.S. in Chemical
Engineering from Lafayette College, Easton, Pennsylvania.
Thomas
LaVoy - Mr. LaVoy has served as Chief Financial Officer of SuperShuttle
International, Inc., since July 1997 and as Secretary since March 1998.
SuperShuttle is one of the largest providers of shuttle services in major
cities
throughout the West and Southwest regions of the United States. He has also
served as a director of Alanco Technologies, Inc. (NASDAQ: ALAN) since 1998.
From September 1987 to February 1997, Mr. Lavoy served as Chief Financial
Officer of NASDAQ-listed Photocomm, Inc. Mr. Lavoy was a Certified Public
Accountant with the firm of KPMG Peat Marwick from 1980 to 1983. Mr. Lavoy
has a
Bachelor of Science degree in Accounting from St. Cloud University, Minnesota,
and is a Certified Public Accountant.
45
Stephen
Boatwright - Mr. Boatwright has been a member of Keller Rohrback, PLC in
Phoenix, Arizona since January 2005. From 1997 through January 2005,
Mr. Boatwright was a partner at Gammage & Burnham, PLC, also in
Phoenix, Arizona. Throughout his career, he has provided legal counsel to both
private and public companies in many diverse industries. In recent years,
Mr. Boatwright’s legal practice has focused on representing technology,
biotechnology, life science and medical device companies for their securities,
corporate and intellectual property licensing needs. Mr. Boatwright earned
both a J.D. and an M.B.A. from the University of Texas at Austin, and holds
a
B.A. in Philosophy from Wheaton College.
Dwight
Babcock - Mr. Babcock has served as Chairman and Chief Executive Officer of
Apex
Data Systems, Inc. an information technology company, since 1975. Apex Data
Systems automates the administration and claims adjudication needs of insurance
companies both nationally and internationally. Mr. Babcock was formerly
President and CEO of Babcock Insurance Corporation (BIC) from 1974 until 1985.
BIC was a nationally recognized Third Party Administrator operating within
35
states. Mr. Babcock has knowledge and experience in the equity arena and has
participated in various activities within the venture capital, private and
institutional capital markets. Mr. Babcock studied marketing and economics
at
the University of Arizona where he currently serves on the University of Arizona
Astronomy Board.
Albert
Smith - Mr. Smith was the co-founder of and served as Vice Chairman of CSI
Leasing, Inc., a private computer leasing company from 1972 until March 2005.
He
founded Extreme Video, LLC a private video conferencing company in Scottsdale,
Arizona in December 2005 where he presently serves as CEO and President. Mr.
Smith presently serves as a director for Center for Arizona Policy (Scottsdale)
and Doulos Ministries (Denver). Mr. Smith has extensive experience in marketing
and sales having managed a national sales force of over fifty people while
at
CSI Leasing, Inc. Mr. Smith has a BS in Business Administration from Ferris
State College.
Lori
Woods - Ms. Woods joined the Company in July 2006 and has over 20 years
experience in medical device technology and healthcare services. Ms. Woods
served as the CEO of Pro-Qura, a medical services company focusing on
brachytherapy quality assurance and education, from 2002 until joining the
Company. During her tenure at Pro-Qura, Ms. Woods developed its business
strategy, expanded its business portfolio in quality assurance beyond prostate
brachytherapy into other areas of cancer, and increased funding by 50%. Prior
to
this, she served as the Vice President of Sales at ATI Medical in 2002, Vice
President of Sales - West and Vice President of Marketing and Business
Development for Imagyn Medical Technologies from 2000 to 2002, Director of
Business Development for Seattle Prostate Institute from 1998 to 2000, and
Regional Vice President and Regional Manager of Interdent from 1994 to 1998.
Ms.
Woods holds a Bachelor of Science degree in Business Administration - Marketing
from Loma Linda University.
Significant
Employees
Certain
significant employees of our subsidiary, IsoRay Medical, Inc., and their
respective ages as of the date of this Prospectus are set forth in the table
below. Also provided is a brief description of the experience of each
significant employee during the past five years.
|
Name
|
|
Age
|
|
Position
Held
|
|
Lane
Bray
|
|
78
|
|
Chemist
|
|
Garrett
Brown
|
|
43
|
|
Chief
Technology Officer
|
|
Oleg
Egorov
|
36
|
Director
of Radiochemical Development
|
||
|
Lisa
Mayfield
|
37
|
Director
of Operations
|
||
|
Fredric
Swindler
|
|
59
|
|
VP,
Regulatory Affairs and Quality
Assurance
|
46
Lane
Bray
- Mr. Bray is known nationally and internationally as a technical expert in
separations, recovery, and purification of isotopes and is a noted authority
in
the use of cesium and strontium ion exchange for Department of Energy’s West
Valley and Hanford nuclear waste cleanup efforts. In 2000, Mr. Bray
received the ’Radiation Science and Technology’ award from the American Nuclear
Society. Mr. Bray has authored or co-authored over 110 research
publications, 12 articles for 9 technical books, and holds 24 U.S. and foreign
patents. Mr. Bray patented the USDOE/PNNL process for purifying medical
grade Yttrium-90 that was successfully commercialized in 1999. Mr. Bray
also recently invented and patented the proprietary isotope separation and
purification process that is assigned to IsoRay. Mr. Bray was elected
’Tri-Citian of the Year’ in 1988, nominated for ’Engineer of the Year’ by the
American Nuclear Society in 1995, and was elected ’Chemist of the Year for 1997’
by the American Chemical Society, Eastern Washington Section. Mr. Bray
retired from the Pacific Northwest National Laboratory in 1998. Since retiring
in 1998, Mr. Bray worked part time for PNNL on special projects until
devoting all of his efforts to IsoRay in 2004. Mr. Bray has been a
Washington State Legislator, a Richland City Councilman, and a Mayor of
Richland. Mr. Bray has a B.A. in Chemistry from Lake Forest
College.
Garrett
Brown - Dr. Brown was Manager of Radiochemistry - Hot Cell Operations for
International Isotopes, Inc., a major radiopharmaceutical and medical device
startup company, from January 1998 until May 1999 and was instrumental in
bringing a new brachytherapy seed implant device to commercialization.
Dr. Brown’s responsibilities included hands-on radiological work in fume
hoods, glove boxes and remote manipulator hot cells, process definition,
research, development, installation, optimization, waste minimization, procedure
documentation, facility design and training. Dr. Brown also served as the
technical interface to executive management for business development,
shipping/receiving, QA/QC, facilities and marketing/sales. Prior to that,
Dr. Brown, as a Senior Research Scientist at the Pacific Northwest National
Laboratory, was responsible for the weekly production of multi-Curie quantities
of medical grade Y-90, and research programs to develop high tech sorbents
for
separation of Cs-137, Sr-90 and Tc-99 from high-level radioactive wastes
stored
at the Hanford Nuclear Reservation. From May 1999 to 2003, Dr. Brown was a
technical consultant with GNB Technical Consultants. Dr. Brown has
co-authored numerous technical publications in the field. Dr. Brown has a
Ph.D. in Analytical Chemistry and BS in Chemistry, cum laude. He has served
as
IsoRay’s Chief Technical Officer since May of 2000. In March 2004,
Dr. Brown was certified as a Radiation Safety Officer.
Oleg
Egorov - Dr. Egorov is recognized nationally and internationally for his work
in
radiochemistry, radioanalytical chemistry, analytical chemistry and
instrumentation. Prior to joining IsoRay in December of 2005 as Director of
Radiochemical Development, Dr. Egorov worked from May 1998 as a Senior Research
Scientist at the Pacific Northwest National Laboratory (PNNL). Prior to that
time, he served the Environmental Molecular Sciences Laboratory at PNNL as
a
Graduate Research Fellow, from August 1994 to May 1998, and as a Graduate
Research Assistant to the University of Washington’s Center for Process
Analytical Chemistry from September 1992 to August 1993. Former positions
included a tenure as a Research Engineer at the Department of Radiochemistry
at
the Moscow State University, Moscow, Russia between September 1998 to August
1992, and Field Chemist at the Institute of Volcanology, at the Russian Academy
of Science at Petropavlovsk-Kamchatsky, Russia, during the summers of 1989
and
1990 concurrent to studies that lead to his acquisition of Master of Science
in
Radiochemistry from the Moscow State University. During his tenure at PNNL,
Dr.
Egorov had led world-class basic and applied R&D programs directed at new
chemistries and instrumentation for automated production of short-lived medical
isotopes for the treatment of cancer, automated process monitoring, radionuclide
sensors for groundwater monitoring, and laboratory automation. Dr. Egorov
pioneered the application of flow-based techniques for automating radiochemical
analyses of nuclear wastes, renewable surface sensing and separations, and
equilibration-based radionuclide sensing. He has authored/co-authored numerous
peer-reviewed publications in these areas, including several book chapters.
Dr.
Egorov holds four U.S./international patents, three of which have been licensed
to industry. Dr. Egorov was a recipient of numerous outstanding performance
and
key contributor awards. In 2003, Dr. Egorov was nominated for the American
Chemical Society Arthur F. Findeis Award for Achievements by a Young Analytical
Scientist. In 2004, Dr. Egorov was a recipient of a Federal Laboratory
Consortium Award for Excellence in Technology Transfer for “Alpha Particle
Immunotherapy for Treating Leukemia and Solid-Tumor Metastases”. Dr. Egorov
holds a M.S. in Radiochemistry from Moscow State University, Moscow, Russia;
a
M.S. in Environmental and Analytical Chemistry and a Ph.D. in Analytical
Chemistry from the University of Washington.
Lisa
Mayfield - Lisa Mayfield has over ten years of commercial healthcare sales,
marketing and business development experience. Between December 1993 and August
2004, Ms. Mayfield has held senior management positions in the pharmaceutical
and medical device and diagnostics sectors of Johnson & Johnson as well as
at J&J Corporate. During her time at J&J and prior to joining IsoRay in
December 2005, Ms. Mayfield was responsible for implementing positive business
results in over 11 different therapeutic markets. After leaving J&J and
prior to joining IsoRay, Ms. Mayfield worked as a consultant to various
healthcare companies in the radioisotope and oncology markets. As a result
of
her exposures, Ms. Mayfield has built a wealth of knowledge about the healthcare
marketplace as a whole and complements this knowledge with a comprehensive
understanding of internal operations. Ms. Mayfield has been responsible for
best
practices for product development, branding, forecasting, regulatory compliance,
reimbursement and strategic planning. During her time at IsoRay, Ms. Mayfield
has been able to successfully implement new policies and procedures that
facilitate growth as well as provide top level guidance over strategic business
operations. Ms. Mayfield is acting Director of Operations at IsoRay. Ms.
Mayfield holds a Bachelors of Science in Economics from the University of
Washington.
47
Fredric
Swindler - Mr. Swindler joined the Company in October 2006 and has over 30
years
experience in manufacturing and regulatory compliance. Mr. Swindler served
as
VP, Quality Assurance and Regulatory Affairs for Medisystems Corporation, a
manufacturer and distributor of medical devices, from 1994 until joining the
Company. During his tenure at Medisystems Corporation, Mr. Swindler developed
a
quality system to accommodate vertically integrated manufacturing, developed
regulatory strategies, policies and procedures, and submitted nine pre-market
notifications (510(k)) to the FDA. Prior to this, Mr. Swindler held various
positions with Marquest Medical Products from 1989 to 1994, Sherwood Medical
Products from 1978 to 1989, Oak Park Pharmacaceuticals in 1978, and Mead Johnson
& Company from 1969 to 1978. Mr. Swindler holds a Bachelor of Science degree
in Biomedical Engineering from Rose Hulman Institute of Technology and a Masters
of Business Administration from the University of Evansville.
Executive
Compensation
The
following summary compensation table sets forth information concerning
compensation for services rendered in all capacities during our past three
fiscal years awarded to, earned by or paid to each of the following executive
officers (the “Executive Officers”). None of the Company’s executive officers,
other than those listed below, received compensation in fiscal year 2006 in
excess of $100,000.
|
Annual
Compensation
|
Long-Term
Compensation Awards
|
||||||||||||||||||
|
Name
and Principal Position
|
Fiscal
Year(1)
|
Salary
|
Bonus
|
Restricted
Stock Awards
|
Securities
Underlying Options
|
All
Other Compensation
|
|||||||||||||
|
Roger
Girard, Chief Executive Officer(5)
|
2006
|
$
|
199,231
|
—
|
—
|
—
|
—
|
||||||||||||
|
2005
|
$
|
113,958
|
—
|
—
|
—
|
—
|
|||||||||||||
|
2004
|
$
|
71,031
|
—
|
$
|
9,900
|
513,840
|
—
|
||||||||||||
|
Thomas
Scallen, Former Chief Executive Officer(2)
|
2006
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
|
|
2005
|
—
|
—
|
—
|
—
|
$
|
50,000
|
(3)
|
|||||||||||
|
|
2004
|
—
|
—
|
$
|
7,871
|
(4)
|
—
|
—
|
|||||||||||
|
David
Swanberg, Executive Vice President - Operations
|
2006
|
$
|
120,000
|
$
|
25,000
|
—
|
150,000
|
—
|
|||||||||||
|
2005
|
$
|
54,746
|
—
|
—
|
—
|
—
|
|||||||||||||
|
2004
|
$
|
32,515
|
—
|
—
|
—
|
—
|
|||||||||||||
|
Barry
Griffiths, Former Western Area Director
|
2006
|
$
|
124,800
|
$
|
55,000
|
—
|
—
|
—
|
|||||||||||
|
2005
|
$
|
79,241
|
$
|
52,500
|
—
|
252,708
|
—
|
||||||||||||
|
2004
|
$
|
15,000
|
—
|
—
|
—
|
—
|
|||||||||||||
|
Curtis
Ellis, Midwest Area Director
|
2006
|
$
|
168,115
|
$
|
39,125
|
—
|
84,236
|
—
|
|||||||||||
|
2005
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||
|
2004
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||
48
|
(1)
|
Fiscal
year 2006 consisted of the period from July 1, 2005 to June 30, 2006;
fiscal year 2005 consisted of the period from October 1, 2004 through
June
30, 2005; and, fiscal year 2004 consisted of the year ended September
30,
2004.
|
|
(2)
|
Mr. Scallen
served as our Chief Executive Officer during the listed fiscal years
and
until his resignation effective July 28,
2005.
|
|
(3)
|
Represents
a $50,000 cash payment in June 2005 to Mr. Scallen in settlement of
all accrued but unpaid
compensation.
|
|
(4)
|
Represents
the issuance of 787,100 shares of restricted common stock as compensation
associated with the conversion of the outstanding notes payable and
accrued interest payable. This transaction was valued at approximately
$7,781, which was equal to the “fair value” of the Company’s common stock
on the conversion date. The Company relied upon Section 4(2) of the
Securities Act of 1933, as amended, for an exemption from registration
for
this issuance.
|
|
(5)
|
Mr.
Girard did not begin serving as our CEO until July 28, 2005, but
he has
served as CEO of our subsidiary and its predecessor company since
August
2003. The compensation listed was paid to Mr. Girard by IsoRay or
its
predecessor company.
|
Option/SAR
Grants in Last Fiscal Year
The
following table sets forth information concerning grants of stock options to
the
Executive Officers during the fiscal year ended June 30, 2006.
|
Name
|
Number
of Securities Underlying Options
|
Percent
of total options Granted to Employees in Fiscal
Year
|
Exercise
Price ($/Share)
|
Expiration
Date
|
|||||||||
|
David
Swanberg
|
150,000
|
23.45
|
%
|
$
|
1.00
|
8/18/2015
|
|||||||
|
Curtis
Ellis
|
84,236
|
13.17
|
%
|
$
|
4.15
|
8/01/2015
|
|||||||
Aggregated
Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The
following table sets forth the number of shares covered by unexercised stock
options held by the Executive Officers as of June 30, 2006, and the value of
“in-the-money” stock options, which represents the positive spread between the
exercise price of a stock option or warrant and the market price of the shares
subject to such option or warrant as of June 30, 2006.
|
Number
of Shares
Acquired
|
|
Number
of Securities Underlying Unexercised Options at Fiscal
Year-End
|
Value
of Unexercised In-the-Money Options at Fiscal
Year-End
|
||||||||||||||||
|
Name
|
on
Exercise
|
Value
Realized
|
Exercisable
|
Unexercisable
|
Exercisable
|
Unexercisable
|
|||||||||||||
|
Roger
Girard
|
0
|
$
|
0
|
513,840
|
0
|
$
|
1,186,970
|
$
|
N/A
|
||||||||||
|
David
Swanberg
|
0
|
$
|
0
|
150,000
|
0
|
$
|
375,000
|
$
|
N/A
|
||||||||||
|
Barry
Griffiths
|
0
|
$
|
0
|
84,236
|
168,472
|
$
|
194,585
|
$
|
389,170
|
||||||||||
|
Curtis
Ellis
|
0
|
$
|
0
|
0
|
84,236
|
$
|
N/A
|
$
|
N/A
|
||||||||||
Employment
Agreements
The
Company entered into an employment agreement with Roger Girard, its Chief
Executive Officer, effective October 6, 2005 (the “Girard Agreement”). The term
of the Girard Agreement is through October 6, 2009, and will automatically
extend for an additional one year term on each anniversary date unless the
term
is modified or terminated in accordance with the terms of the Girard Agreement
at least ninety days prior to a given anniversary date. The Girard Agreement
provides for a base salary of $300,000 which was effective July 1, 2006. Mr.
Girard is also entitled to participate in any benefit plans provided to key
executives of the Company, and to a bonus at the discretion of the Board of
Directors.
49
Other
than an employment agreement entered into with Lori Woods in February 2007,
the
Company has not entered into employment agreements with any other officers
as of
the date of this filing.
Director
Compensation
Since
July 28, 2005, we have paid our directors who are not employees of the Company
a
director’s fee of $1,000 per meeting attended, plus expenses. We also granted
each non-employee director immediately exercisable options to purchase 100,000
shares of our common stock during the fiscal year ended June 30, 2006. Robert
Kauffman, Thomas LaVoy and Stephen Boatwright each received 100,000 options
at
an exercise price of $2.00 per share. Dwight Babcock and Al Smith each received
100,000 options, 50,000 of which are exercisable at $6.30 per share and 50,000
of which are exercisable at $3.80 per share.
The
Company’s directors did not receive any cash compensation during the nine months
ended June 30, 2005 or the year ended September 30, 2004.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
The
Company’s Articles of Incorporation provide to directors and officers
indemnification to the full extent provided by law, and provide that, to the
extent permitted by Minnesota law, a director will not be personally liable
for
monetary damages to the Company or its shareholders for breach of his or her
fiduciary duty as a director, except for liability for certain actions that
may
not be limited under Minnesota law. On
July
1, 2006, the Company entered into Indemnification Agreements with each of its
directors and executive officers, and the Company intends to enter into
substantially identical agreements with any officers and directors who take
office in the future. The purpose of the Indemnification Agreements is to
provide all officers and directors with indemnification to the fullest extent
permitted under the Minnesota Business Corporations Act.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
SECURITIES
OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The
following tables set forth certain information regarding the beneficial
ownership of the Company’s common stock and preferred stock as of January 5,
2007 for (a) each person known by the Company to be a beneficial owner of
five
percent or more of the outstanding common or preferred stock of the Company,
(b)
each executive officer, director and nominee for director of the Company,
and
(c) directors and executive officers of the Company as a group. As of January
5,
2007, the Company had 16,296,045 shares of common stock and 77,080 shares
of
preferred stock outstanding.
|
Name
and Address of Beneficial Owner (1)
|
Amount
of Common Shares Owned
|
Derivative
Securities Exercisable or Convertible Within 60 Days of January
5,
2007
|
Total
Common Shares Beneficially Owned
|
Percent
of Common Shares Owned(2)
|
|||||||||
|
|
|
|
|
|
|||||||||
|
Roger
Girard, Chief Executive Officer, President and Chairman
|
368,534
|
513,840
|
882,374
|
5.25
|
%
|
||||||||
|
Jonathan
Hunt, Chief Financial Officer
|
--
|
--
|
--
|
--
|
%
|
||||||||
|
Michael
Dunlop, Former Chief Financial Officer
|
164,050
|
95,000
|
259,050
|
1.58
|
%
|
||||||||
|
David
Swanberg, Executive Vice President and Director(3)
|
324,327
|
162,167
|
486,494
|
2.96
|
%
|
||||||||
|
Robert
Kauffman, Director
|
43,802
|
150,000
|
193,802
|
1.18
|
%
|
||||||||
|
Thomas
LaVoy, Director
|
8,423
|
150,000
|
158,423
|
0.96
|
%
|
||||||||
|
Stephen
Boatwright, Director(4)
|
--
|
210,000
|
210,000
|
1.27
|
%
|
||||||||
|
Dwight
Babcock, Director(5)
|
61,002
|
162,500
|
223,502
|
1.36
|
%
|
||||||||
|
Albert
Smith, Director
|
108,947
|
162,500
|
271,447
|
1.65
|
%
|
||||||||
|
Thomas
K. Scallen, Former Chief Executive Officer(6)
|
50,000
|
--
|
50,000
|
0.31
|
%
|
||||||||
|
MicroCapital
Fund LP and MicroCapital Fund Ltd(7)
|
1,200,000
|
1,000,000
|
2,200,000
|
12.72
|
%
|
||||||||
|
All
Officers and Directors as a group (8 persons)
|
915,035
|
1,511,007
|
2,426,042
|
13.62
|
%
|
||||||||
50
|
(1)
|
Except
as otherwise noted, the address for each of these individuals is
c/o
IsoRay, Inc., 350 Hills St., Suite 106, Richland, Washington
99354.
|
|
(2)
|
Percentage
ownership is based on 16,296,045 shares of Common Stock outstanding
on
January 5, 2007. Shares of Common Stock subject to stock options,
warrants
or convertible debentures which are currently exercisable/convertible
or
will become exercisable/convertible within 60 days after January
5, 2007
are deemed outstanding for computing the percentage ownership of
the
person or group holding such options, but are not deemed outstanding
for
computing the percentage ownership of any other person or
group.
|
|
(3)
|
Mr.
Swanberg’s options include 6,667 options owned by his
spouse.
|
|
(4)
|
Mr.
Boatwright’s options include 60,000 options held by an entity controlled
by Mr. Boatwright.
|
|
(5)
|
Mr.
Babcock’s common shares include 2,695 shares owned by his
spouse.
|
|
(6)
|
Mr.
Scallen’s address is 4701 IDS Center, Minneapolis, MN
55302.
|
|
(7)
|
MicroCapital
Fund LP and MicroCapital Fund Ltd’s address is 1285 Avenue of the
Americas, New York, NY 10019.
|
Preferred
Stock Share Ownership as of January 5, 2007
|
Name
and Address of Beneficial Owner
|
Amount
of Preferred Shares Owned
|
Options
or Warrants Exercisable Within 60 Days of January 5,
2007
|
Total
Preferred Shares Beneficially Owned
|
Percent
of Preferred Shares Owned(1)
|
|||||||||
|
|
|
|
|
|
|||||||||
|
Aissata
Sidibe(2)
|
20,000
|
--
|
20,000
|
25.95
|
%
|
||||||||
|
Daniel
MacKay(3)
|
18,015
|
--
|
18,015
|
23.37
|
%
|
||||||||
|
William
and Karen Thompson Trust(4)
|
14,218
|
--
|
14,218
|
18.45
|
%
|
||||||||
|
Jamie
Granger(5)
|
10,529
|
--
|
10,529
|
13.66
|
%
|
||||||||
|
Hostetler
Living Trust(6)
|
9,479
|
--
|
9,479
|
12.30
|
%
|
||||||||
|
(1)
|
Percentage
ownership is based on 77,080 shares of Preferred Stock outstanding
on
January 5, 2007. Shares of Preferred Stock subject to stock options
or
warrants which are currently exercisable or will become exercisable
within
60 days after January 5, 2007 are deemed outstanding for computing
the
percentage ownership of the person or group holding such options,
but are
not deemed outstanding for computing the percentage ownership of
any other
person or group.
|
|
(2)
|
The
address of Ms. Sidibe is 229 Lasiandra Ct, Richland, WA
99352.
|
|
(3)
|
The
address of Mr. MacKay is 4041 NW Sierra Drive, Camas, WA
98607.
|
|
(4)
|
The
address of the William and Karen Thompson Trust is 285 Dondero
Way, San
Jose, CA 95119.
|
|
(5)
|
The
address of Jamie Granger is 53709 South Nine Canyon Road, Kennewick,
WA
99337.
|
|
(6)
|
The
address of the Hostetler Living Trust is 9257 NE 175th
Street, Bothell, WA 98011.
|
51
No
officers or directors beneficially own shares of Preferred Stock.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Through
June 30, 2005, the Company’s former Chief Executive Officer, Thomas K. Scallen,
advanced the Company an aggregate of approximately $44,500 to support
operations, settle outstanding trade accounts payable and provide working
capital. The advance was repayable upon demand and was non-interest bearing
and
was unsecured. Effective June 30, 2005, with the anticipation of the
consummation of the reverse acquisition transaction with IsoRay Medical, Inc.,
as previously discussed, these advances were forgiven and reclassified as
additional paid-in capital in the accompanying financial statements as of that
date.
Mr. Stephen
Boatwright, a Company director, has been actively involved in providing various
legal services to the Company, IsoRay Medical, Inc. and IsoRay Medical, Inc.’s
predecessors through the law firms of Gammage and Burnham and Keller Rohrback,
PLC. From September 2004 until January 2005, Gammage and Burnham received
approximately $141,000 as payment for legal services performed for IsoRay
Medical, Inc. and its predecessors. From February 2005 though June 30, 2005,
IsoRay Medical, Inc. paid Keller Rohrback, PLC approximately $144,000 for legal
services. During the fiscal year ended June 30, 2006, the Company paid Keller
Rohrback, PLC approximately $390,000 for legal services. In addition, the
Company had accrued at June 30, 2006 approximately $77,000 in legal fees to
be
paid. In exchange for consulting services including providing advice to IsoRay
Medical, Inc. as to the structure of organization and compensation arrangements
with employees and also in connection with developing various policies and
procedures, Quatsch Ventures, LLC, an entity controlled by Mr. Boatwright,
received options to purchase 84,236 shares of our common stock in 2004.
IsoRay
Medical, Inc.’s patent rights to its Cesium-131 process were acquired from Lane
Bray, a shareholder of the Company, and are subject to a 1% royalty on gross
profits and certain contractual restrictions. Pursuant to the royalty agreement,
the Company must also pay a royalty of 2% of Gross Sales, as defined, for any
sub-assignments of the aforesaid patented process to any third parties. The
royalty agreement will remain in force until the expiration of the patents
on
the assigned technology, unless earlier terminated in accordance with the terms
of the underlying agreement. To date, there have been no product sales
incorporating the technology and there is no royalty due pursuant to the terms
of the agreement.
On
January 16, 2005, in addition to certain other shareholders, the following
officers and directors (including certain now-former officers) of the Company
were awarded shares of common stock for guaranteeing a loan with the Benton
Franklin Economic Development District (“BFEDD”) in the amount of $230,000,
which was funded in December 2004, and a line of credit with Columbia River
Bank
in the amount of $395,000: Michael Dunlop guaranteed $15,000 of the BFEDD
loan
and $30,000 of the Columbia River Bank line of credit, for which he received
12,888 post-merger shares; Roger Girard guaranteed $20,000 of the BFEDD loan,
for which he received 5,728 post-merger shares; John Hrobsky guaranteed $15,000
of the Columbia River Bank line of credit, for which he received 4,296 post
merger shares; and David Swanberg guaranteed $30,000 of the Columbia River
Bank
line of credit, for which he received 8,592 post-merger shares. During fiscal
year 2006, certain original guarantors, including John Hrobsky, declined
to
continue guaranteeing the loans and forfeited the shares which had been granted
to them. Due to this the following officers agreed to increase the amount
of
their guarantees as follows: Michael Dunlop guaranteed an additional $5,000
of
the Columbia River Bank line of credit, for which he received an additional
1,432 common shares; and Roger Girard guaranteed an additional $105,000 of
the
Columbia River Bank line of credit, for which he received an additional 30,072
common shares.
52
On
May
27, 2005, the Company, Century Park Transitory Subsidiary, Inc., a Delaware
corporation, Thomas Scallen and Anthony Silverman (shareholders of the Company),
and IsoRay Medical, Inc., a Delaware corporation, entered into a Merger
Agreement. Pursuant to the Merger Agreement, Century Park Transitory Subsidiary,
Inc. was merged with and into IsoRay Medical, Inc. and IsoRay Medical, Inc.
became a wholly-owned subsidiary of the Company. The Merger Agreement was
subject to the satisfaction of certain conditions, including the granting of
certain “piggy-back” and demand registration rights to the purchasers of certain
convertible debentures of IsoRay Medical, Inc., Anthony Silverman and certain
other affiliates of the Company; the agreements of the officers and directors
of
IsoRay Medical, Inc. to lock-up the shares of common stock of the Company they
received in the merger for a period of one year from the closing of the merger;
the agreements of Thomas Scallen and Anthony Silverman to escrow certain shares
of common stock of the Company; and the receipt by IsoRay Medical, Inc. from
Anthony Silverman or his associates of one million dollars as the purchase
price
of certain securities of IsoRay Medical, Inc. before the closing. These
conditions were satisfied prior to the closing of the merger, which occurred
on
July 28, 2005.
The
Board
voted on July 28, 2005 to compensate each of the independent Directors $1,000
per meeting for their attendance at the Board meetings. On July 28, 2005, the
Company’s 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. On March 31, 2006 and June 30, 2006, the Company’s Board of
Directors granted a total of 100,000 options to purchase common stock to its
new
independent Directors: Albert Smith and Dwight Babcock. 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.
During
2005, IsoRay Medical, Inc. paid or accrued $5,600 for accounting services
performed by a company owned by a member of the Board of Directors of IsoRay
Medical, Inc.
Effective
July 12, 1999, Lane Bray, a Member of IsoRay, LLC (and also a shareholder of
IsoRay, Inc.), assigned his right, title and interest in an invention (including
the U.S. patent application therefore and any associated patent rights) to
IsoRay, LLC in exchange for a royalty equal to 1% of the Gross Profit, as
defined, from the sale of “seeds” incorporating the technology. IsoRay, LLC also
agreed to pay all remaining costs associated with obtaining the patent. In
January 2000, IsoRay, LLC applied for the patent, which was subsequently granted
effective May 23, 2000. The patent and associated royalty obligation were
transferred to IsoRay, Inc. (WA domiciled) effective May 1, 2002 in connection
with a tax-free reorganization whereby IsoRay LLC ceased operations, and
assigned all assets and liabilities to IsoRay, Inc. (WA domiciled).
IsoRay
Inc. assigned this patent to IsoRay Products LLC, who assigned the patent to
IsoRay Medical, Inc. who, pursuant to the royalty agreement must also pay a
royalty of 2% of Gross Sales, as defined, for any sub-assignments of the
aforesaid patented process to any third parties. The royalty agreement will
remain in force until the expiration of the patents on the assigned technology,
unless earlier terminated in accordance with the terms of the underlying
agreement. To date, there have been no product sales incorporating the
technology and there is no royalty due pursuant to the terms of the
agreement.
Patent
and Know-How Royalty License Agreement
Effective
August 1, 1998, Pacific Management Associates Corporation (PMAC) transferred
its
entire right, title and interest in an exclusive license agreement with Donald
Lawrence to IsoRay, LLC (a predecessor company) in exchange for a membership
interest. The terms of the license agreement require the payment of a royalty
based on the Net Factory Sales Price, as defined in the agreement, of licensed
product sales. Because the licensor’s patent application was ultimately
abandoned, only a 1% “know-how” royalty based on Net Factory Sales Price, as
defined, remains applicable. To date, there have been no product sales
incorporating the licensed technology and there is no royalty due pursuant
to
the terms of the agreement. The Company believes that because this technology
is
not presently being used and believes it will not be used in the future that
no
royalties will be paid under this agreement.
53
SELLING
SHAREHOLDERS
The
following table details the name of each selling shareholder (including, for
entity shareholders, the name of the natural person controlling the selling
shareholder in parentheses), the number of shares owned by that selling
shareholder, and the number of shares that may be offered by each selling
shareholder for resale under this prospectus. The selling shareholders may
sell up to 4,637,100 shares of our common stock from time to time in one or
more
offerings under this prospectus, of which 4,004,264 are shares of common stock
currently held by the selling shareholders, 43,219 are shares of common stock
issuable upon the conversion of preferred stock held by the selling shareholders
(including 6,967 shares of common stock issuable upon the conversion of
preferred stock receivable upon the exercise of warrants to purchase preferred
stock), 371,163 are shares of common stock issuable upon the exercise of
warrants held by the selling shareholders, and 218,454 are shares of common
stock issuable upon the exercise of options held by the selling shareholders.
Because each selling shareholder may offer all, some or none of the shares
it
holds, and because, based upon information provided to us, there are currently
no agreements, arrangements, or understandings with respect to the sale of
any
of the shares, no definitive estimate as to the number of shares that will
be
held by each selling shareholder after the offering can be provided. The
following table has been prepared on the assumption that all shares offered
under this prospectus will be sold to parties unaffiliated with the selling
shareholders. Except as indicated below, no selling shareholder nor any of
their
affiliates have held a position or office, or had any other material
relationship, with us.
54
|
Beneficial
Ownership
Before
the
Offering
(1)
|
|
Percentage
of
Common
Stock
Owned
Before
Offering
|
|
Shares
of
Common
Stock
Included
in
Prospectus(2)
|
|
Shares
of Common
Stock
Issuable
Upon
Conversion
or
Exercise
of
Preferred
Stock,
Options
or
Warrants
Included
in
Prospectus(3)
|
|
Exercise
Price of Option or Warrant Included in Prospectus
|
|
Grant
Date of Option or Warrant Included in Prospectus
|
|
Term
of Option or
Warrant
Included
in
Prospectus
|
|
Total
Shares of Common Stock Included in Prospectus
|
|
Beneficial
Ownership After the
Offering
(4)
|
|
Percentage
of Common Stock Owned
After
Offering (4)
|
|||||||||||||
|
Alan
E. Waltar and Anna E. Waltar, Trustees of the Alan E. and Anna
E. Waltar
Trust U/A DTD 7/3/98
|
57,982
|
*
|
7,480
|
-
|
7,480
|
50,502
|
*
|
||||||||||||||||||||||||
|
All
Seasons Painting Co. (Richard Rusch)
|
21,327
|
*
|
4,265
|
-
|
4,265
|
17,062
|
*
|
||||||||||||||||||||||||
|
Anastassatos,
Efthimios Christopher
|
14,819
|
*
|
4,819
|
-
|
4,819
|
10,000
|
*
|
||||||||||||||||||||||||
|
Babcock,
Dwight W. (5)
|
102,207
|
*
|
22,962
|
-
|
22,962
|
79,245
|
*
|
||||||||||||||||||||||||
|
Babcock,
Elaine
|
2,695
|
*
|
539
|
-
|
539
|
2,156
|
*
|
||||||||||||||||||||||||
|
Bales,
Matt
|
5,178
|
*
|
1,036
|
-
|
1,036
|
4,142
|
*
|
||||||||||||||||||||||||
|
Bartholomew,
Richard & Suzanne
|
17,772
|
*
|
3,554
|
-
|
3,554
|
14,218
|
*
|
||||||||||||||||||||||||
|
Bates,
Christopher Matthew
|
4,265
|
*
|
853
|
-
|
853
|
3,412
|
*
|
||||||||||||||||||||||||
|
Bates,
Robert and Lisa
|
47,873
|
*
|
16,335
|
-
|
16,335
|
31,538
|
*
|
||||||||||||||||||||||||
|
Bavispe
Limited Partnership (Robert Caylor)
|
126,283
|
*
|
14,235
|
-
|
14,235
|
112,048
|
1.28
|
%
|
|||||||||||||||||||||||
|
Bear
Stearns Securities Corporation Custodian Michael Eric Jacobson
IRA(9)
|
10,950
|
*
|
10,950
|
-
|
10,950
|
0
|
*
|
||||||||||||||||||||||||
|
Bear
Stearns Securities Corporation Custodian Mishawn Marie Nelson
IRA
|
10,950
|
*
|
10,950
|
-
|
10,950
|
0
|
*
|
||||||||||||||||||||||||
|
Bear
Stearns Securities Corporation Custodian Steven Mark Nelson
IRA(9)
|
10,950
|
*
|
10,950
|
-
|
10,950
|
0
|
*
|
||||||||||||||||||||||||
|
Berglin,
Bruce D. and Doneda E.
|
15,475
|
*
|
5,475
|
-
|
5,475
|
10,000
|
*
|
||||||||||||||||||||||||
|
Berglund,
Greg
|
35,769
|
*
|
15,769
|
-
|
15,769
|
20,000
|
*
|
||||||||||||||||||||||||
|
Betty
McCormick Trust
|
7,108
|
*
|
1,422
|
-
|
1,422
|
5,686
|
*
|
||||||||||||||||||||||||
|
Bock,
Daniel
|
18,072
|
*
|
18,072
|
-
|
18,072
|
0
|
*
|
||||||||||||||||||||||||
|
Boesel,
John(9)
|
1,084
|
*
|
1,084
|
$
|
0.59
- 2.37
|
3/25/2005
|
3/25/2007
|
1,084
|
0
|
*
|
|||||||||||||||||||||
55
|
Boggess,
Thomas S. IV and Jonette D.
|
36,145
|
*
|
36,145
|
-
|
36,145
|
0
|
*
|
||||||||||||||||||||||||
|
Boland,
John C.
|
28,437
|
*
|
5,687
|
-
|
5,687
|
22,750
|
*
|
||||||||||||||||||||||||
|
Boland,
John L.
|
116,098
|
*
|
10,384
|
7,109
|
17,493
|
98,605
|
1.13
|
%
|
|||||||||||||||||||||||
|
Bonanza,
LLC (David and Donna Whitehead)
|
39,672
|
*
|
25,454
|
-
|
25,454
|
14,218
|
*
|
||||||||||||||||||||||||
|
Boster,
Gary
|
29,399
|
*
|
29,399
|
-
|
29,399
|
0
|
*
|
||||||||||||||||||||||||
|
Bragdon,
George and Barbara
|
2,105
|
*
|
421
|
-
|
421
|
1,684
|
*
|
||||||||||||||||||||||||
|
Brown
Larsen, Pamela
|
14,218
|
*
|
2,844
|
2,844
|
11,374
|
*
|
|||||||||||||||||||||||||
|
Brown,
Alexis and Alan
|
4,211
|
*
|
842
|
-
|
842
|
3,369
|
*
|
||||||||||||||||||||||||
|
Brown,
Anne J.
|
14,218
|
*
|
2,844
|
-
|
2,844
|
11,374
|
*
|
||||||||||||||||||||||||
|
Brown,
Garrett N. (6)
|
552,237
|
4.11
|
%
|
31,546
|
-
|
31,546
|
520,691
|
5.95
|
%
|
||||||||||||||||||||||
|
Bunting,
Brandt E. & Collen M.
|
38,435
|
*
|
5,687
|
-
|
5,687
|
32,748
|
*
|
||||||||||||||||||||||||
|
Burstein,
Fred
|
290,016
|
2.16
|
%
|
290,016
|
-
|
290,016
|
0
|
*
|
|||||||||||||||||||||||
|
Burstein,
Fred IRA
|
16,425
|
*
|
16,425
|
-
|
16,425
|
0
|
*
|
||||||||||||||||||||||||
|
Cangiane,
Lorraine and Gilson, Bernard
|
10,950
|
*
|
10,950
|
-
|
10,950
|
0
|
*
|
||||||||||||||||||||||||
|
Carroll,
Bridget M.
|
14,218
|
*
|
14,218
|
-
|
14,218
|
0
|
*
|
||||||||||||||||||||||||
|
Chapman,
Milton A
|
48,782
|
*
|
9,756
|
-
|
9,756
|
39,026
|
*
|
||||||||||||||||||||||||
|
Clark,
R. Jeanne
|
25,541
|
*
|
4,878
|
230
|
5,108
|
20,433
|
*
|
||||||||||||||||||||||||
|
Clement,
James H.
|
20,046
|
*
|
7,642
|
747
|
$
|
1.06
|
2/28/2005
|
2/28/2007
|
8,388
|
11,657
|
*
|
||||||||||||||||||||
|
Clerf,
Craig
|
1,300
|
*
|
260
|
-
|
260
|
1,040
|
*
|
||||||||||||||||||||||||
|
Clerf,
Robert
|
1,950
|
*
|
390
|
-
|
390
|
1,560
|
*
|
||||||||||||||||||||||||
|
Clerf,
Roger
|
3,251
|
*
|
650
|
-
|
650
|
2,601
|
*
|
||||||||||||||||||||||||
|
Cohen,
Loren
|
26,426
|
*
|
16,426
|
-
|
16,426
|
10,000
|
*
|
||||||||||||||||||||||||
|
Collier
Living Trust
|
44,885
|
*
|
7,545
|
-
|
7,545
|
37,340
|
*
|
||||||||||||||||||||||||
|
Cone-Gilreath
Law Firm(Douglas Nicholson)
|
48,782
|
*
|
9,756
|
-
|
9,756
|
39,026
|
*
|
||||||||||||||||||||||||
|
Conner
III, Thomas E.
|
33,698
|
*
|
4,740
|
-
|
4,740
|
28,958
|
*
|
||||||||||||||||||||||||
|
Craddock,
Steven Lee
|
7,229
|
*
|
7,228
|
-
|
7,228
|
1
|
*
|
||||||||||||||||||||||||
|
Daniels,
Frederic R. & Anita C. Family Trust
|
72,477
|
*
|
9,597
|
2,488
|
$
|
1.06
|
2/28/2005
|
2/28/2007
|
12,085
|
60,391
|
*
|
||||||||||||||||||||
|
Daswick,
Gregory
|
10,663
|
*
|
2,133
|
-
|
2,133
|
8,530
|
*
|
||||||||||||||||||||||||
|
Daswick,
Michael and Kimberly
|
62,943
|
*
|
8,589
|
-
|
8,589
|
54,354
|
*
|
||||||||||||||||||||||||
|
DFC
401(k) Profit Sharing Plan FBO Benjamin J. Schwartz
|
24,882
|
*
|
5,564
|
-
|
5,564
|
19,318
|
*
|
||||||||||||||||||||||||
|
Douglas
D. Thornton Family Trust
|
308,957
|
2.30
|
%
|
61,791
|
-
|
61,791
|
247,166
|
2.82
|
%
|
||||||||||||||||||||||
|
Dunlop,
Michael(5)
(6)
|
286,618
|
2.13
|
%
|
24,746
|
-
|
24,746
|
261,872
|
2.99
|
%
|
||||||||||||||||||||||
|
Ecclestone,
Andrew
|
59,842
|
*
|
59,842
|
-
|
59,842
|
0
|
*
|
||||||||||||||||||||||||
|
Edmund,
Robert
|
3,369
|
*
|
674
|
-
|
674
|
2,695
|
*
|
||||||||||||||||||||||||
|
Engels,
Kevin F.
|
18,423
|
*
|
1,685
|
-
|
1,685
|
16,738
|
*
|
56
|
Fabri,
Jon
|
43,423
|
*
|
1,685
|
-
|
1,685
|
41,738
|
*
|
||||||||||||||||||||||||
|
Falls
Rd LLC (Paul Hatch)
|
23,698
|
*
|
4,740
|
-
|
4,740
|
18,958
|
*
|
||||||||||||||||||||||||
|
Feder,
Dr. Henry
|
14,218
|
*
|
2,844
|
-
|
2,844
|
11,374
|
*
|
||||||||||||||||||||||||
|
Feidelberg,
Steven O. and Codini,Anna-Maria, Trustees of the Feidelberg-Codini
Family
Trust U/T/A dated April 15, 2003
|
6,024
|
*
|
6,024
|
-
|
6,024
|
0
|
*
|
||||||||||||||||||||||||
|
Fernandez,
Leslie
|
3,688
|
*
|
738
|
738
|
2,950
|
*
|
|||||||||||||||||||||||||
|
Ferrick,
Patrick N.
|
9,479
|
*
|
1,896
|
-
|
1,896
|
7,583
|
*
|
||||||||||||||||||||||||
|
Fookes,
Larry
|
46,529
|
*
|
3,577
|
22,914
|
$
|
1.19
|
8/1/2005
|
7/31/2015
|
26,491
|
20,038
|
*
|
||||||||||||||||||||
|
Fookes,
Sharon
|
3,553
|
*
|
711
|
-
|
711
|
2,842
|
*
|
||||||||||||||||||||||||
|
Forest
Ridge Properties, Ltd. (Beverly Unger)
|
12,441
|
*
|
1,244
|
1,244
|
$
|
1.40
|
2/28/2005
|
2/28/2007
|
2,488
|
9,953
|
*
|
||||||||||||||||||||
|
Forsman,
John Arvid
|
14,218
|
*
|
2,844
|
2,844
|
11,374
|
*
|
|||||||||||||||||||||||||
|
Freeman,
Kevin
|
22,440
|
*
|
2,488
|
-
|
2,488
|
19,952
|
*
|
||||||||||||||||||||||||
|
Gainer,
Ronald G. & Linda J.
|
14,218
|
*
|
2,844
|
-
|
2,844
|
11,374
|
*
|
||||||||||||||||||||||||
|
Gaines,
Ira J.
|
30,950
|
*
|
10,950
|
-
|
10,950
|
20,000
|
*
|
||||||||||||||||||||||||
|
Galanty,
Thomas M.
|
10,950
|
*
|
10,950
|
-
|
10,950
|
0
|
*
|
||||||||||||||||||||||||
|
Giammattei,
Shawn and Peggy
|
252
|
*
|
50
|
-
|
50
|
202
|
*
|
||||||||||||||||||||||||
|
Girard,
Roger E. (5) (6)
|
852,301
|
6.35
|
%
|
73,285
|
-
|
73,285
|
779,016
|
8.90
|
%
|
||||||||||||||||||||||
|
Gold
Trust Co FBO Don Goeckner IRA
|
86,733
|
*
|
17,346
|
-
|
17,346
|
69,387
|
*
|
||||||||||||||||||||||||
|
Goldsmith,
Hugh G.
|
18,959
|
*
|
3,792
|
3,792
|
15,167
|
*
|
|||||||||||||||||||||||||
|
Goodrich,
Daniel A
|
10,950
|
*
|
10,950
|
-
|
10,950
|
0
|
*
|
||||||||||||||||||||||||
|
Granger,
Jamie
|
10,529
|
*
|
2,106
|
2,106
|
8,423
|
*
|
|||||||||||||||||||||||||
|
Griffith,
Richard and Barbara
|
17,772
|
*
|
3,554
|
-
|
3,554
|
14,218
|
*
|
||||||||||||||||||||||||
|
|
*
|
||||||||||||||||||||||||||||||
|
Harry
and Adeline Silverman Foundation
|
20,000
|
*
|
20,000
|
-
|
20,000
|
0
|
*
|
||||||||||||||||||||||||
|
Hartley,
James N.
|
9,479
|
*
|
1,896
|
1,896
|
7,583
|
*
|
|||||||||||||||||||||||||
|
Hedstrom,
Gary A.
|
12,527
|
*
|
505
|
505
|
12,022
|
*
|
|||||||||||||||||||||||||
|
Hernandez,
Jesus and Melissa
|
16,955
|
*
|
5,581
|
5,581
|
11,374
|
*
|
|||||||||||||||||||||||||
|
Holcomb,
Sr,, Hampton A.
|
10,950
|
*
|
10,950
|
10,950
|
0
|
*
|
|||||||||||||||||||||||||
|
Hostetler
Living Trust
|
18,679
|
*
|
1,895
|
1,895
|
3,790
|
14,889
|
*
|
||||||||||||||||||||||||
|
Huls,
Michael, Roth IRA
|
33,333
|
*
|
33,000
|
-
|
33,000
|
333
|
*
|
||||||||||||||||||||||||
|
Intellegration,
LLP(Christopher Smith)
|
35,526
|
*
|
25,526
|
-
|
25,526
|
10,000
|
*
|
||||||||||||||||||||||||
|
Jackson,
John J. & Ellen K.
|
14,218
|
*
|
2,844
|
-
|
2,844
|
11,374
|
*
|
||||||||||||||||||||||||
|
James
J. Minder & Susan A. Davis Family Trust
|
10,950
|
*
|
10,950
|
-
|
10,950
|
0
|
*
|
||||||||||||||||||||||||
|
Johnson,
Carolyn M.
|
8,422
|
*
|
1,684
|
-
|
1,684
|
6,738
|
*
|
||||||||||||||||||||||||
|
Johnson,
Tom and Lindsay
|
8,422
|
*
|
1,684
|
-
|
1,684
|
6,738
|
*
|
||||||||||||||||||||||||
|
Kaiser,
James S.
|
10,950
|
*
|
10,950
|
-
|
10,950
|
0
|
*
|
57
|
Kalos,
Shaun and Cathy
|
2,105
|
*
|
421
|
-
|
421
|
1,684
|
*
|
||||||||||||||||||||||||
|
Kang,
Dr. Young S.
|
16,260
|
*
|
3,252
|
-
|
3,252
|
13,008
|
*
|
||||||||||||||||||||||||
|
Kaser,
Kathryn and John Clark Kaser
|
710
|
*
|
142
|
-
|
142
|
568
|
*
|
||||||||||||||||||||||||
|
Kaser,
Kathryn and John Lucas Kaser
|
1,065
|
*
|
213
|
-
|
213
|
852
|
*
|
||||||||||||||||||||||||
|
Kaser,
Kathryn and Jordan Rae Emmil
|
1,065
|
*
|
213
|
-
|
213
|
852
|
*
|
||||||||||||||||||||||||
|
Kaser,
Kathryn and Kenneth Tyler Emmil
|
1,065
|
*
|
213
|
-
|
213
|
852
|
*
|
||||||||||||||||||||||||
|
Kaser,
Kathryn and Laura Kaser Emmil
|
710
|
*
|
142
|
-
|
142
|
568
|
*
|
||||||||||||||||||||||||
|
Kaser,
Kathryn and Levi Clark Kaser
|
1,065
|
*
|
213
|
-
|
213
|
852
|
*
|
||||||||||||||||||||||||
|
Kauffman,
Robert R. (5)
|
110,950
|
*
|
10,950
|
-
|
10,950
|
100,000
|
1.14
|
%
|
|||||||||||||||||||||||
|
Kelly,
Gerald
|
4,211
|
*
|
842
|
-
|
842
|
3,369
|
*
|
||||||||||||||||||||||||
|
Kelly,
Richard
|
1,675
|
*
|
1,675
|
$
|
.59
- 2.37
|
3/25/2005
|
3/25/2007
|
1,675
|
0
|
*
|
|||||||||||||||||||||
|
Kemeny,
Matthias D.
|
10,950
|
*
|
10,950
|
-
|
10,950
|
0
|
*
|
||||||||||||||||||||||||
|
Kennedy,
Patrick H. & Bonnie M. (6)
|
54,506
|
*
|
10,941
|
-
|
10,941
|
43,565
|
*
|
||||||||||||||||||||||||
|
Klostermann,
Bill and Donna
|
16,425
|
*
|
16,425
|
-
|
16,425
|
0
|
*
|
||||||||||||||||||||||||
|
Kocherer,
Rosalee
|
2,105
|
*
|
421
|
-
|
421
|
1,684
|
*
|
||||||||||||||||||||||||
|
Konietzko,
Neil
|
198,423
|
1.48
|
%
|
1,685
|
-
|
1,685
|
196,738
|
2.25
|
%
|
||||||||||||||||||||||
|
Korb,
Leroy J.
|
248,368
|
1.85
|
%
|
45,530
|
20,716
|
$
|
1.19
|
8/1/2005
|
7/31/2015
|
66,246
|
182,122
|
2.08
|
%
|
||||||||||||||||||
|
Koslowski,
Barbara
|
8,129
|
*
|
1,626
|
-
|
1,626
|
6,503
|
*
|
||||||||||||||||||||||||
|
Kryszek,
Jakob
|
40,522
|
*
|
8,104
|
-
|
8,104
|
32,418
|
*
|
||||||||||||||||||||||||
|
Lambert,
Pat(9)
|
115,444
|
*
|
33,000
|
16,590
|
$
|
.59
- 2.37
|
3/25/2005
|
3/25/2007
|
49,590
|
65,854
|
*
|
||||||||||||||||||||
|
Lane
A. & Gwen M. Bray Trust(6)
|
386,997
|
2.88
|
%
|
71,142
|
-
|
71,142
|
315,855
|
3.61
|
%
|
||||||||||||||||||||||
|
Lanza,
Costantio IRA
|
|||||||||||||||||||||||||||||||
|
Charles
Schwab & Co., Inc. Custodian
|
10,950
|
*
|
10,950
|
-
|
10,950
|
0
|
*
|
||||||||||||||||||||||||
|
Larson,
Damian
|
14,320
|
*
|
2,864
|
-
|
2,864
|
11,456
|
*
|
||||||||||||||||||||||||
|
Lavoy,
Thomas(5)
|
108,423
|
*
|
1,685
|
-
|
1,685
|
106,738
|
1.22
|
%
|
|||||||||||||||||||||||
|
Lawrence
Family Trust(6)
|
888,529
|
6.62
|
%
|
177,706
|
-
|
177,706
|
710,823
|
8.12
|
%
|
||||||||||||||||||||||
|
Lebowitz
Living Trust
|
142,188
|
1.06
|
%
|
28,438
|
-
|
28,438
|
113,750
|
1.30
|
%
|
||||||||||||||||||||||
|
Little,
John W. and Marina Zeiber
|
9,639
|
*
|
6,024
|
-
|
6,024
|
3,615
|
*
|
||||||||||||||||||||||||
|
Livingston,
James P. & Keri Segna
|
24,218
|
*
|
2,844
|
-
|
2,844
|
21,374
|
*
|
||||||||||||||||||||||||
|
Lord,
Brandon
|
421
|
*
|
84
|
-
|
84
|
337
|
*
|
||||||||||||||||||||||||
|
Lord,
Leonard L. and Patricia G.
|
4,211
|
*
|
842
|
-
|
842
|
3,369
|
*
|
||||||||||||||||||||||||
|
MacKay,
Daniel P
|
18,015
|
*
|
3,603
|
-
|
3,603
|
14,412
|
*
|
||||||||||||||||||||||||
|
Madsen,
James L.
|
166,706
|
1.24
|
%
|
27,130
|
-
|
$
|
1.19
|
8/1/2005
|
7/31/2015
|
27,130
|
139,576
|
1.59
|
%
|
||||||||||||||||||
|
Majchrowski,
Thomas
|
75,401
|
*
|
15,080
|
-
|
15,080
|
60,321
|
*
|
||||||||||||||||||||||||
|
Marlin
Hull LLC (Michael Huls)
|
169,422
|
1.26
|
%
|
169,422
|
-
|
169,422
|
0
|
*
|
58
|
Martin,
Leslie A
|
14,218
|
*
|
2,844
|
2,844
|
11,374
|
*
|
|||||||||||||||||||||||||
|
Matsock,
Mark
|
113,721
|
*
|
10,950
|
25,270
|
$
|
4.15
|
7/15/2005
|
7/15/2007
|
36,221
|
77,500
|
*
|
||||||||||||||||||||
|
McInnis,
Greg and Cynthia Family Trust
|
7,228
|
*
|
7,228
|
-
|
7,228
|
1
|
*
|
||||||||||||||||||||||||
|
McKenna,
Jean
|
16,260
|
*
|
3,252
|
-
|
3,252
|
13,008
|
*
|
||||||||||||||||||||||||
|
Mebesius,
William
|
10,950
|
*
|
10,950
|
-
|
10,950
|
0
|
*
|
||||||||||||||||||||||||
|
Meyers
Associates LP (8)
|
49,744
|
*
|
16,590
|
$
|
.59
- 2.37
|
3/25/2005
|
3/25/2007
|
16,590
|
33,154
|
*
|
|||||||||||||||||||||
|
Miller,
Thomas F.
|
289,159
|
2.15
|
%
|
289,159
|
-
|
289,159
|
0
|
*
|
|||||||||||||||||||||||
|
Moore,
Terry R
|
15,426
|
*
|
7,464
|
-
|
7,464
|
7,962
|
*
|
||||||||||||||||||||||||
|
Moseley,
Gerard F.
|
9,526
|
*
|
1,905
|
-
|
1,905
|
7,621
|
*
|
||||||||||||||||||||||||
|
Moss,
Lynette F.
|
44,438
|
*
|
15,249
|
-
|
15,249
|
29,189
|
*
|
||||||||||||||||||||||||
|
Mountain
View Asset Management (Andrew Eccleston)
|
24,096
|
*
|
24,096
|
-
|
24,096
|
0
|
*
|
||||||||||||||||||||||||
|
MountainView
Opportunistic Growth Fund LP (Andrew Eccleston)
|
94,223
|
*
|
30,745
|
-
|
30,745
|
63,478
|
*
|
||||||||||||||||||||||||
|
Muldoon,
William G and Janet L
|
126,854
|
*
|
26,022
|
2,488
|
$
|
1.06
|
2/28/2005
|
2/28/2007
|
28,510
|
98,344
|
1.12
|
%
|
|||||||||||||||||||
|
Murphy,
Tom
|
3,369
|
*
|
674
|
-
|
674
|
2,695
|
*
|
||||||||||||||||||||||||
|
Newman,
Bruce W. & Jeannie G.
|
16,587
|
*
|
3,318
|
-
|
3,318
|
13,269
|
*
|
||||||||||||||||||||||||
|
Nichols,
Dale and Kathyrn E. Kaser
|
17,772
|
*
|
3,554
|
-
|
3,554
|
14,218
|
*
|
||||||||||||||||||||||||
|
Oak
Ridge Financial Group Inc. (8)
|
3,285
|
*
|
3,285
|
$
|
.59
- 2.37
|
3/25/2005
|
3/25/2007
|
3,285
|
0
|
*
|
|||||||||||||||||||||
|
Oliver,
Marlene
|
58,322
|
*
|
44,002
|
$
|
1.19
|
8/1/2005
|
7/31/2015
|
44,002
|
14,320
|
*
|
|||||||||||||||||||||
|
Olson,
Claire A & Mary Ann
|
14,218
|
*
|
2,844
|
-
|
2,844
|
11,374
|
*
|
||||||||||||||||||||||||
|
Onwuegbusi,
Charles
|
10,950
|
*
|
10,950
|
-
|
10,950
|
0
|
*
|
||||||||||||||||||||||||
|
Ott,
Suzann J & Dennis L.
|
40,546
|
*
|
7,109
|
-
|
7,109
|
33,437
|
*
|
||||||||||||||||||||||||
|
Palitz,
Louis and Ruth
|
17,772
|
*
|
3,554
|
-
|
3,554
|
14,218
|
*
|
||||||||||||||||||||||||
|
Peterson,
Jerry
|
38,326
|
*
|
38,326
|
-
|
38,326
|
0
|
*
|
||||||||||||||||||||||||
|
Pinnacle
International Holdings
LLC (Cliff Aaron)
|
177,736
|
1.32
|
%
|
7,109
|
28,438
|
$
|
0.70
|
11/29/2005
|
10/30/2006
- 03/30/2007
|
35,547
|
142,189
|
1.62
|
%
|
||||||||||||||||||
|
Press,
Richard
|
227,652
|
1.70
|
%
|
45,530
|
-
|
45,530
|
182,122
|
2.08
|
%
|
||||||||||||||||||||||
|
Quatsch
Ventures, LLC (Stephen Boatwright) (5)
|
84,236
|
*
|
84,236
|
$
|
1.19
|
8/1/2005
|
7/31/2015
|
84,236
|
0
|
*
|
|||||||||||||||||||||
|
Reynolds,
J. Scott
|
6,024
|
*
|
6,024
|
-
|
6,024
|
0
|
*
|
||||||||||||||||||||||||
|
Roberts,
Cory B.
|
1,263
|
*
|
253
|
-
|
253
|
1,010
|
*
|
||||||||||||||||||||||||
|
Roberts,
Donald
|
4,211
|
*
|
842
|
-
|
842
|
3,369
|
*
|
||||||||||||||||||||||||
|
Roberts,
Elizabeth
|
1,263
|
*
|
253
|
-
|
253
|
1,010
|
*
|
||||||||||||||||||||||||
|
Roberts,
Joshua
|
2,947
|
*
|
589
|
-
|
589
|
2,358
|
*
|
59
|
Roberts,
Leslie and Rex Armstrong
|
10,950
|
*
|
10,950
|
-
|
10,950
|
0
|
*
|
||||||||||||||||||||||||
|
Rogers,
Philip and Stephanie(7)
|
8,245
|
*
|
8,245
|
-
|
8,245
|
0
|
*
|
||||||||||||||||||||||||
|
Roman,
Patrick and Nichole
|
1,052
|
*
|
210
|
-
|
210
|
842
|
*
|
||||||||||||||||||||||||
|
Ronald
L and Susan R. Kathren Trust
|
5,171
|
*
|
5,170
|
$
|
1.19
|
8/1/2005
|
7/31/2015
|
5,170
|
1
|
*
|
|||||||||||||||||||||
|
Root,
R. William, Jr.
|
176,157
|
1.31
|
%
|
37,131
|
-
|
37,131
|
139,026
|
1.59
|
%
|
||||||||||||||||||||||
|
Roozen,
Richard and Jaynie
|
5,474
|
*
|
5,474
|
-
|
5,474
|
0
|
*
|
||||||||||||||||||||||||
|
Rothstein,
Alan F.
|
35,546
|
*
|
7,109
|
-
|
7,109
|
28,437
|
*
|
||||||||||||||||||||||||
|
Rothstein,
Lawrence R. and Deborah E.
|
74,096
|
*
|
24,096
|
-
|
24,096
|
50,000
|
*
|
||||||||||||||||||||||||
|
Rowland,
Chris C.
|
10,475
|
*
|
5,475
|
-
|
5,475
|
5,000
|
*
|
||||||||||||||||||||||||
|
Rowland,
Joseph Perry Jr.
|
5,475
|
*
|
5,475
|
-
|
5,475
|
0
|
*
|
||||||||||||||||||||||||
|
Ruth
Schwartz Trust
|
60,716
|
*
|
12,143
|
-
|
12,143
|
48,573
|
*
|
||||||||||||||||||||||||
|
Safdi
Investments Limited
|
|||||||||||||||||||||||||||||||
|
Partnership
(Rosemary Safdi)
|
62,921
|
*
|
34,484
|
-
|
34,484
|
28,437
|
*
|
||||||||||||||||||||||||
|
Saito,
Dr. Robert N.
|
14,218
|
*
|
2,844
|
-
|
2,844
|
11,374
|
*
|
||||||||||||||||||||||||
|
Sanders
Family Limited Partnership III (Vernon Sanders)
|
54,166
|
*
|
20,472
|
-
|
20,472
|
33,694
|
*
|
||||||||||||||||||||||||
|
Scallen,
Thomas K. (7)
|
329,942
|
2.46
|
%
|
329,942
|
-
|
329,942
|
0
|
*
|
|||||||||||||||||||||||
|
Schatzmair,
Ralph
|
46,057
|
*
|
4,211
|
-
|
4,211
|
41,846
|
*
|
||||||||||||||||||||||||
|
Schenter,
Robert
|
218,860
|
1.63
|
%
|
35,489
|
41,416
|
$
|
1.19
|
8/1/2005
|
7/31/2015
|
76,905
|
141,955
|
1.62
|
%
|
||||||||||||||||||
|
Schipfer,
John D., Jr.
|
5,263
|
*
|
1,053
|
-
|
1,053
|
4,210
|
*
|
||||||||||||||||||||||||
|
Schloz
Family 1998 Trust
|
10,950
|
*
|
10,950
|
-
|
10,950
|
0
|
*
|
||||||||||||||||||||||||
|
Schloz,
Stanley
|
33,333
|
*
|
33,000
|
-
|
33,000
|
333
|
*
|
||||||||||||||||||||||||
|
Schreifels,
Donald B
|
140,943
|
1.05
|
%
|
27,465
|
-
|
27,465
|
113,478
|
1.30
|
%
|
||||||||||||||||||||||
|
Schwartz,
Jacob
|
15,950
|
*
|
10,950
|
-
|
10,950
|
5,000
|
*
|
||||||||||||||||||||||||
|
Segna,
Donald R & Joan F. (6)
|
511,213
|
3.81
|
%
|
96,515
|
-
|
96,515
|
414,698
|
4.74
|
%
|
||||||||||||||||||||||
|
Segna,
Jan M
|
14,218
|
*
|
2,844
|
-
|
2,844
|
11,374
|
*
|
||||||||||||||||||||||||
|
Segna,
Todd D. & Deborah L.J. Chew
|
21,327
|
*
|
4,265
|
-
|
4,265
|
17,062
|
*
|
||||||||||||||||||||||||
|
Selma
Teicher Trust, Stuart Teicher, Trustee
|
4,819
|
*
|
4,819
|
-
|
4,819
|
0
|
*
|
||||||||||||||||||||||||
|
Shukov,
George
|
227,652
|
1.70
|
%
|
45,530
|
-
|
45,530
|
182,122
|
2.08
|
%
|
||||||||||||||||||||||
|
Siddall,
John W.
|
104,752
|
*
|
54,752
|
-
|
54,752
|
50,000
|
*
|
||||||||||||||||||||||||
|
Sidibe,
Aissata
|
35,546
|
*
|
7,109
|
7,109
|
28,437
|
*
|
|||||||||||||||||||||||||
|
Silverman,
Anthony
|
442,627
|
3.30
|
%
|
298,236
|
139,391
|
$
|
4.15
|
7/15/2005
|
7/15/2007
|
437,627
|
5,000
|
*
|
|||||||||||||||||||
|
Silverman,
Anthony (shares held in escrow)
|
50,000
|
*
|
49,334
|
-
|
49,334
|
666
|
*
|
||||||||||||||||||||||||
|
Silverman,
Anthony IRA Rollover
|
304,753
|
2.27
|
%
|
54,753
|
-
|
54,753
|
250,000
|
2.86
|
%
|
||||||||||||||||||||||
|
Silverman,
Jeff
|
72,776
|
*
|
6,110
|
$
|
.59
- 2.37
|
3/25/2005
|
3/25/2007
|
6,110
|
66,666
|
*
|
|||||||||||||||||||||
|
Silverman,
Kay
|
24,096
|
*
|
24,096
|
-
|
24,096
|
0
|
*
|
60
|
Silverman,
Kay S. Revocable Trust
|
32,851
|
*
|
32,851
|
-
|
32,851
|
0
|
*
|
||||||||||||||||||||||||
|
Smith,
Albert(5)
|
171,447
|
1.28
|
%
|
21,789
|
12,500
|
$
|
0.00
|
10/14/2005
|
10/13/2007
|
34,289
|
137,158
|
1.57
|
%
|
||||||||||||||||||
|
Smith,
Thomas and Sheila
|
31,718
|
*
|
671
|
671
|
31,047
|
*
|
|||||||||||||||||||||||||
|
Source
Capital Group, Inc.(8)
|
10,584
|
*
|
1,084
|
$
|
0.59
- 2.37
|
3/25/2005
|
3/25/2007
|
1,084
|
9,500
|
*
|
|||||||||||||||||||||
|
Stack,
Peter R and Judy J
|
10,950
|
*
|
10,950
|
-
|
10,950
|
0
|
*
|
||||||||||||||||||||||||
|
Stealth
Investments, Inc. (James Scannell)
|
44,876
|
*
|
27,376
|
-
|
27,376
|
17,500
|
*
|
||||||||||||||||||||||||
|
Stenson,
Calvin B.
|
8,423
|
*
|
1,685
|
-
|
1,685
|
6,738
|
*
|
||||||||||||||||||||||||
|
Sterne
Agee and Leach, Inc. C/F Jill Ryan IRA
|
5,474
|
*
|
5,474
|
-
|
5,474
|
0
|
*
|
||||||||||||||||||||||||
|
Sterne
Agee and Leach, Inc. C/F Robert Ryan IRA
|
10,950
|
*
|
10,950
|
-
|
10,950
|
0
|
*
|
||||||||||||||||||||||||
|
Sterne
Agee Leach FBO Barry K Griffith IRA
|
10,950
|
*
|
10,950
|
-
|
10,950
|
0
|
*
|
||||||||||||||||||||||||
|
Stewart,
James P. and Patricia A.
|
10,950
|
*
|
10,950
|
-
|
10,950
|
0
|
*
|
||||||||||||||||||||||||
|
Stiller,
David L & Bonita L.
|
54,740
|
*
|
10,451
|
497
|
$
|
1.06
|
2/28/2005
|
2/28/2007
|
10,949
|
43,792
|
*
|
||||||||||||||||||||
|
Stokes,
William J.
|
78,052
|
*
|
15,610
|
-
|
15,610
|
62,442
|
*
|
||||||||||||||||||||||||
|
Strain,
Audrey
|
4,975
|
*
|
995
|
-
|
995
|
3,980
|
*
|
||||||||||||||||||||||||
|
Swanberg,
Daniel L. & Joni A.
|
9,479
|
*
|
1,896
|
-
|
1,896
|
7,583
|
*
|
||||||||||||||||||||||||
|
Swanberg,
David J. & Janet C. (5) (6)
|
448,827
|
3.34
|
%
|
58,047
|
-
|
58,047
|
390,780
|
4.46
|
%
|
||||||||||||||||||||||
|
TEC
Ministries
|
10,000
|
*
|
10,000
|
-
|
10,000
|
0
|
*
|
||||||||||||||||||||||||
|
The
Alan Gess Living Trust
|
36,327
|
*
|
4,265
|
-
|
4,265
|
32,062
|
*
|
||||||||||||||||||||||||
|
The
Anderson Family Trust UTD 12/20/93
|
21,059
|
*
|
4,212
|
-
|
4,212
|
16,847
|
*
|
||||||||||||||||||||||||
|
The
Bates Revocable Trust, Fred and Linda Bates, Trustees
|
37,144
|
*
|
6,283
|
-
|
6,283
|
30,861
|
*
|
||||||||||||||||||||||||
|
The
Lanzer Revocable Living Trust
|
18,072
|
*
|
18,072
|
-
|
18,072
|
0
|
*
|
||||||||||||||||||||||||
|
The
Nancy R. McCormick Family
|
|||||||||||||||||||||||||||||||
|
Trust
U/A dated June 14,2002,
|
4,819
|
*
|
4,819
|
-
|
4,819
|
0
|
*
|
||||||||||||||||||||||||
|
John
E McCormick, Trustee
|
|||||||||||||||||||||||||||||||
|
The
Smart Family Trust
|
15,450
|
*
|
6,469
|
-
|
6,469
|
8,981
|
*
|
||||||||||||||||||||||||
|
Thomas,
Cam
|
56,875
|
*
|
11,375
|
-
|
11,375
|
45,500
|
*
|
||||||||||||||||||||||||
|
Thompson,
April
|
4,975
|
*
|
995
|
-
|
995
|
3,980
|
*
|
||||||||||||||||||||||||
|
Thompson,
Randy
|
4,975
|
*
|
995
|
-
|
995
|
3,980
|
*
|
||||||||||||||||||||||||
|
Thompson,
William and Karen Trust (6)
|
14,218
|
*
|
2,844
|
2,844
|
11,374
|
*
|
|||||||||||||||||||||||||
|
Turchetta,
Anthony J
|
14,218
|
*
|
2,844
|
-
|
2,844
|
11,374
|
*
|
||||||||||||||||||||||||
|
Turnbull,
Timothy L.
|
8,530
|
*
|
1,706
|
-
|
1,706
|
6,824
|
*
|
||||||||||||||||||||||||
|
UBS
Financial Services IRA FBO Robert R Kauffman (5)
|
32,851
|
*
|
32,851
|
-
|
32,851
|
0
|
*
|
||||||||||||||||||||||||
|
Vencore
LLC
|
5,692
|
*
|
5,691
|
$
|
4.15
|
5/10/2004
|
5/10/2008
|
5,692
|
0
|
*
|
|||||||||||||||||||||
|
Weber,
Ronald
|
4,211
|
*
|
842
|
-
|
842
|
3,369
|
*
|
61
|
Weinstein,
Ronald A 2004 Living Trust
|
9,479
|
*
|
1,896
|
-
|
1,896
|
7,583
|
*
|
||||||||||||||||||||||||
|
Weinstein,
Ronald Alan and Cathy Lynn
|
99,765
|
*
|
9,953
|
-
|
9,953
|
89,812
|
1.03
|
%
|
|||||||||||||||||||||||
|
West,
Ron H.
|
4,211
|
*
|
842
|
-
|
842
|
3,369
|
*
|
||||||||||||||||||||||||
|
Whalen,
Ryan and Jennifer
|
1,052
|
*
|
210
|
-
|
210
|
842
|
*
|
||||||||||||||||||||||||
|
Wilkie,
David J
|
8,423
|
*
|
1,685
|
-
|
1,685
|
6,738
|
*
|
||||||||||||||||||||||||
|
William
Wesley Thompson & Karen Louise Thompson
|
|||||||||||||||||||||||||||||||
|
Revocable
Trust Dated January 6, 1999 (6)
|
21,464
|
*
|
4,293
|
-
|
4,293
|
17,171
|
*
|
||||||||||||||||||||||||
|
Wynnjam
Corp. (Nancy Lake)
|
107,057
|
*
|
10,950
|
96,106
|
$
|
4.15
|
7/15/2005
|
7/15/2007
|
107,057
|
0
|
*
|
||||||||||||||||||||
|
Zaragosa,
Ernesto
|
26,847
|
*
|
16,847
|
$
|
4.15
|
7/15/2005
|
7/15/2007
|
16,847
|
10,000
|
*
|
|||||||||||||||||||||
|
Zielke,
David C. and Diane M.
|
34,123
|
*
|
6,825
|
-
|
6,825
|
27,298
|
*
|
||||||||||||||||||||||||
|
Zimmerman,
Paul
|
21,327
|
*
|
4,265
|
-
|
4,265
|
17,062
|
*
|
||||||||||||||||||||||||
|
Totals
|
4,004,264
|
632,830
|
4,637,100
|
|
*
|
Less
than one percent.
|
|
(1)
|
The
number and percentage of shares beneficially owned is determined
in
accordance with Rule 13d-3 of the Securities Exchange Act of
1934, as
amended, and the information is not necessarily indicative
of beneficial
ownership for any other purpose. Under such rule, beneficial
ownership
includes any shares as to which the selling shareholder has
sole or shared
voting power or investment power and also any shares that the
selling
shareholder has the right to acquire within 60 days.
|
|
(2)
|
The
actual number of shares of common stock offered in this prospectus,
and
included in the registration statement of which this prospectus
is a part,
includes such additional number of shares of common stock as
may be issued
or issuable upon conversion of the preferred stock and exercise
of the
options and warrants, as applicable, by reason of any stock
split, stock
dividend or similar transaction involving the common stock,
in accordance
with Rule 416 under the Securities Act of 1933, as amended.
|
|
(3)
|
This
column includes all shares of common stock issuable upon conversion
of
preferred stock and exercise of options and warrants, as applicable,
held
by the named selling shareholder.
|
|
(4)
|
Assumes
that all securities registered will be sold.
|
|
(5)
|
These
selling shareholders are our executive officers and directors,
or are
entities controlled by our executive officers and
directors.
|
|
(6)
|
These
selling shareholders are executive officers and directors of
our
subsidiary, or are entities controlled by the executive officers
and
directors of our subsidiary.
|
|
(8)
|
These
selling shareholders are
broker/dealers.
|
|
(9)
|
These
selling shareholders are affiliates of
broker/dealers.
|
We
are
registering certain of the shares listed above pursuant to contractual
registration obligations. We entered into a Registration Rights Agreement dated
June 30, 2005 with certain shareholders and debenture holders, which provided
demand and piggyback registration rights. Our subsidiary entered into a
Registration Rights Agreement dated October 15, 2004, the obligations of which
we have assumed, pursuant to which certain shareholders (then shareholders
of
our subsidiary) were granted piggyback registration rights. In addition to
these
contractual registration obligations, our Board of Directors, at its October
5,
2005 meeting, voted in favor of registering 20% of all shares of common stock
acquired by former IsoRay Medical shareholders on or before October 1, 2004,
20%
of all other securities that could be converted or exercised into common stock
and were acquired by former IsoRay Medical shareholders on or before October
1,
2004, and 100% of all options granted under the Amended and Restated 2005 Stock
Option Plan that were not registered in the Company's Form S-8 filed on August
19, 2005.
62
PLAN
OF DISTRIBUTION
The
common stock offered by this prospectus is being offered by the selling
shareholders. The common stock may be sold or distributed from time to
time by the selling shareholders directly to one or more purchasers or through
brokers, dealers or underwriters who may act solely as agents at market prices
prevailing at the time of sale, at prices related to the prevailing market
prices, at negotiated prices, or at fixed prices, which may be changed.
The sale of the common stock offered by this prospectus may be effected in
one
or more of the following methods:
|
·
|
ordinary
brokers' transactions,
|
|
·
|
through
brokers, dealers, or underwriters who may act solely as agents,
|
|
·
|
"at
the market" into an existing market for the common stock,
|
|
·
|
in
other ways not involving market makers or established trading markets,
including direct sales to purchasers or sales effected through agents,
|
|
·
|
in
privately negotiated transactions, and
|
|
·
|
any
combination of the foregoing.
|
In
order
to comply with the securities laws of certain states, if applicable, the shares
may be sold only through registered or licensed brokers or dealers. In addition,
in certain states, the shares may not be sold unless they have been registered
or qualified for sale in the state or an exemption from the registration or
qualification requirement is available and complied with.
The
selling shareholders may pledge their shares to their brokers under the margin
provisions of customer agreements. If a selling shareholder defaults on a margin
loan, the broker may, from time to time, offer and sell the pledged shares.
Broker-dealers engaged by a selling shareholder may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling shareholders (or, if any broker-dealer acts as
agent for the purchaser of shares or warrants, from the purchaser) in amounts
to
be negotiated.
The
selling shareholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of
the
Securities Act of 1933, as amended, in connection with such sales. In such
event, any commissions received by such broker-dealers or agents and any profit
on the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act of 1933, as amended. The
selling shareholders who are affiliates of a broker-dealer will be deemed to
be
underwriters in connection with their resale of the shares registered
hereunder.
We
will
pay all of the expenses incident to the registration, offering, and sale of
the
shares to the public other than commissions or discounts of underwriters,
broker-dealers, or agents. We have also agreed to indemnify the selling
shareholders and related persons against specified liabilities, including
liabilities under the Securities Act.
While
they are engaged in a distribution of the shares included in this prospectus
the
selling shareholders are required to comply with Regulation M promulgated under
the Securities Exchange Act of 1934, as amended. With certain exceptions,
Regulation M precludes the selling shareholders, any affiliated purchasers,
and
any broker-dealer or other person who participates in the distribution, from
bidding for or purchasing, or attempting to induce any person to bid for or
purchase any security which is the subject of the distribution until the entire
distribution is complete. Regulation M also prohibits any bids or purchases
made
in order to stabilize the price of a security in connection with the
distribution of that security. All of the foregoing may affect the marketability
of the shares offered by this prospectus.
The
selling shareholders may also sell shares under Rule 144 promulgated under
the
Securities Act of 1933, as amended, rather than selling under this prospectus,
if eligible to do so. This offering will terminate on the date that all shares
offered by this prospectus have been sold by the selling shareholders or
are
eligible for sale under Rule 144(k). In general, under Rule 144 as
currently in effect, a person (or persons whose shares are required to be
aggregated) who has owned shares for at least one year would be entitled
to sell
within any three-month period a number of shares that does not exceed the
greater of (i) 1% of the number of shares of our common stock then outstanding
(which was equal to approximately 168,154 shares of common stock as of February
7, 2007) or (ii) the average weekly trading volume of our shares of common
stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Under Rule 144(k), a person who is not deemed to have been
our
affiliate at any time during the three months preceding a sale, and who has
owned the shares proposed to be sold for at least two years, is entitled
to sell
his shares without complying with the manner of sale, public information,
volume
limitation or notice provisions of Rule 144.
63
DESCRIPTION
OF SECURITIES
The
Company’s Articles of Incorporation provide that the Company has the authority
to issue 200 million shares of capital stock, which are currently divided
into
two classes as follows: 194 million shares of common stock, par value of
$0.001
per share; and 6 million shares of preferred stock, also with a par value
of
$0.001 per share. As of February 7, 2007, the Company had 16,815,360 shares
of
common stock and 59,065 shares of Series B preferred stock outstanding. The
Company also had options to purchase 3,089,639 shares of common stock, warrants
to purchase 4,300,831 shares of common stock, warrants to purchase 28,614
shares
of preferred stock, and $455,000 in principal amount of convertible debentures
(convertible into common stock at $4.15 per share) outstanding on that date.
The
Common Stock
Voting.
Holders
of the common stock are entitled to one vote per share on all matters to be
voted on by the Company’s shareholders. The Company’s bylaws provide that a
majority of the outstanding shares of the corporation entitled to vote
constitute a quorum at a meeting of the shareholders.
Dividends.
The
Company’s Board of Directors, in its sole discretion, may declare and pay
dividends on the common stock, payable in cash or other consideration, out
of
funds legally available, if all dividends due on the preferred stock have been
declared and paid. The Company has not paid any cash dividends on its common
stock and does not plan to pay any cash dividends on its common stock for the
foreseeable future.
Liquidation,
Subdivision, or Combination.
In the
event of any liquidation, dissolution or winding up of the Company or upon
the
distribution of its assets, all assets and funds remaining after payment in
full
of the Company’s debts and liabilities, and after the payment to holders of any
then outstanding preferred stock of the full preferential amounts to which
they
were entitled, would be divided and distributed among holders of the common
stock.
Anti-Takeover
Effects Of Provisions Of The Articles Of Incorporation.
The
authorized but unissued shares of our common and preferred stock are available
for future issuance without our shareholders’ approval. These additional shares
may be utilized for a variety of corporate purposes including but not limited
to
future public or direct offerings to raise additional capital, corporate
acquisitions and employee incentive plans. The issuance of such shares may
also
be used to deter a potential takeover of IsoRay that may otherwise be beneficial
to shareholders by diluting the shares held by a potential suitor or issuing
shares to a shareholder that will vote in accordance with IsoRay’s Board of
Directors’ desires. A takeover may be beneficial to shareholders because, among
other reasons, a potential suitor may offer shareholders a premium for their
shares of stock compared to the then-existing market price.
On
February 1, 2007, the Board of Directors of IsoRay, Inc. declared a
dividend of one preferred share purchase right (a “Right”) for each outstanding
Common Share of the par value of $.001 per share (the “Common Shares”) of the
Company. The dividend is payable on February 16, 2007 (the “Record Date”) to
shareholders of record on that date.
Each
Right entitles the registered holder to purchase from the Company one
one-hundredth of a Series C Junior Participating Preferred Share of the par
value of $.001 per share (the “Preferred Shares”) of the Company at a price of
$25 per one one-hundredth of a Preferred Share (the “Purchase Price”), subject
to adjustment. The description and terms of the Rights are set forth in a
Rights
Agreement (the “Rights Agreement”), dated as of February 1, 2007, between
the Company and Computershare Trust Company N.A., as Rights Agent (the “Rights
Agent”).
64
Initially,
the Rights will attach to all certificates representing Common Shares then
outstanding and no separate Right Certificates will be distributed. The Rights
will separate from the Common Shares and a Distribution Date for the Rights
will
occur upon the earlier of:
(i) the
close
of business on the fifteenth day following a public announcement that a person
or group of affiliated or associated persons has become an “Acquiring Person”
(i.e., has become, subject to certain exceptions, the beneficial owner of
15% or
more of the voting power of the outstanding shares of voting capital stock
of
the Company in the election of directors), or
(ii) the
close
of business on the fifteenth day following the first public announcement
relating to a tender offer or exchange offer the consummation of which would
result in a person or group of affiliated or associated persons becoming,
subject to certain exceptions, the beneficial owner of 15% or more of the
voting
power of the outstanding shares of voting capital stock of the Company in
the
election of directors (or such later date as may be determined by the Board
of
Directors of the Company prior to a person or group of affiliated or associated
persons becoming an Acquiring Person).
Until
the
Distribution Date,
(i) the
Rights will be evidenced by the Common Share certificates and will be
transferred with and only with the Common Shares,
(ii) new
Common Share certificates issued after the Record Date upon transfer or new
issuance of the Common Shares will contain a notation incorporating the Rights
Agreement by reference, and
(iii) the
surrender for transfer of any Common Share certificate, even without such
notation or a copy of this Summary of Rights attached thereto, will also
constitute the transfer of the Rights associated with the Common Shares
represented by such certificate.
As
promptly as practicable following the Distribution Date, separate certificates
evidencing the Rights (“Right Certificates”) will be mailed to holders of record
of the Common Shares as of the close of business on the Distribution Date
and
such separate Right Certificates alone will evidence the
Rights.
The
Rights are not exercisable until the Distribution Date. The Rights will expire
on February 16, 2017, unless extended or earlier redeemed or exchanged by
the
Company as described below.
The
Purchase Price payable, and the number of Preferred Shares or other securities
or property issuable, upon exercise of the Rights are subject to adjustment
from
time to time to prevent dilution:
(i) in
the
event of a stock dividend on, or a subdivision, combination or reclassification
of, the Preferred Shares,
(ii) upon
the
grant to holders of the Preferred Shares of certain rights, options or warrants
to subscribe for or purchase Preferred Shares or convertible securities at
less
than the then current market price of the Preferred Shares,
or
(iii) upon
the
distribution to holders of the Preferred Shares of evidences of indebtedness
or
assets (excluding regular periodic cash dividends or dividends payable in
Preferred Shares) or of subscription rights or warrants (other than those
described in clause (ii) hereof).
The
number of Preferred Shares issuable upon the exercise of a Right is also
subject
to adjustment in the event of a dividend on Common Shares payable in Common
Shares, or a subdivision, combination or consolidation of the Common
Shares.
65
With
certain exceptions, no adjustment in the Purchase Price will be required
until
cumulative adjustments require an adjustment of at least 1% in the Purchase
Price. No fractional Preferred Shares will be issued (other than fractional
shares which are integral multiples of one one-hundredth (subject to adjustment)
of a Preferred Share, which may, at the election of the Company, be evidenced
by
depositary receipts) if in lieu thereof a payment in cash is made based on
the
closing price (pro-rated for the fraction) of the Preferred Shares on the
last
trading date prior to the date of exercise.
In
the
event that any person or group of affiliated or associated persons becomes
an
Acquiring Person, proper provision shall be made so that each holder of a
Right,
other than Rights that are or were beneficially owned by the Acquiring Person
(which will thereafter be void), will thereafter have the right to receive
upon
exercise thereof at the then current exercise price of the Right that number
of
Common Shares having a market value of two times the exercise price of the
Right, subject to certain possible adjustments.
In
the
event that, after the Distribution Date or within 15 days prior thereto,
the
Company is acquired in certain mergers or other business combination
transactions or 50% or more of the assets or earning power of the Company
and
its subsidiaries (taken as a whole) are sold after the Distribution Date
or
within 15 days prior thereto, each holder of a Right (other than Rights which
have become void under the terms of the Rights Agreement) will thereafter
have
the right to receive, upon exercise thereof at the then current exercise
price
of the Right, that number of common shares of the acquiring company (or,
in
certain cases, one of its affiliates) having a market value of two times
the
exercise price of the Right.
In
certain events specified in the Rights Agreement, the Company is permitted
to
temporarily suspend the exercisability of the Rights.
At
any
time after a person or group of affiliated or associated persons becomes
an
Acquiring Person (subject to certain exceptions) and prior to the acquisition
by
a person or group of affiliated or associated persons of 50% or more of the
voting power of the outstanding shares of voting capital stock of the Company
in
the election of directors, the Board of Directors of the Company may exchange
all or part of the Rights (other than Rights which have become void under
the
terms of the Rights Agreement) for Common Shares or equivalent securities
at an
exchange ratio per Right equal to the result obtained by dividing the exercise
price of a Right by the current per share market price of the Common Shares,
subject to adjustment.
At
any
time prior to such time as a person or group of affiliated or associated
persons
becomes an Acquiring Person, the Board of Directors of the Company may redeem
the Rights in whole, but not in part, at a price of $.001 per Right, subject
to
adjustment (the “Redemption Price”), payable in cash. The period of time during
which the Rights may be redeemed may be extended by the Board of Directors
of
the Company if no person has become an Acquiring Person. The redemption of
the
Rights may be made effective at such time, on such basis and with such
conditions as the Board of Directors in its sole discretion may establish.
The
Board of Directors and the Company shall not have any liability to any person
as
a result of the redemption or exchange of the Rights pursuant to the provisions
of the Rights Agreement.
The
terms
of the Rights may be amended by the Board of Directors of the Company, subject
to certain limitations after such time as a person or group of affiliated
or
associated persons becomes an Acquiring Person, without the consent of the
holders of the Rights, including an amendment prior to the date a person
or
group of affiliated or associated persons becomes an Acquiring Person to
lower
the 15% threshold for exercisability of the Rights to not less than the greater
of (i) the sum of .001% and the largest percentage of the outstanding
shares of voting capital stock of the Company with voting power in the election
of directors then known by the Company to be beneficially owned by any person
or
group of affiliated or associated persons (subject to certain exceptions)
or
(ii) 10%.
Until
a
Right is exercised, the holder thereof, as such, will have no rights as a
shareholder of the Company, including, without limitation, the right to vote
or
to receive dividends.
The
foregoing description of the Rights Agreement is qualified in its entirety
by
reference to the full text of the Rights Agreement.
66
The
Preferred Stock
The
Company’s preferred stock is divided into three series - Series A, Series B and
Series C - designated as follows:
|
·
|
1,000,000
shares of Series A are authorized and 5,000,000 shares of Series
B are
authorized. As of February 7, 2007 there were no shares of
Series A issued and outstanding; there were 59,065 Series B preferred
shares issued and outstanding. The Company has no plans to issue
any
Series A shares for the foreseeable
future.
|
|
·
|
The
Series A shares are entitled to a 10% dividend annually on the stated
value per share ($1.20) of the Series A, while the Series B shares
are
entitled to a cumulative 15% dividend annually on the stated value
per
share ($1.20) of the Series B. Such dividends will be declared and
paid at
the discretion of the Board to the extent funds are legally available
for
the payment of dividends.
|
|
·
|
Both
series of preferred shares vote equally with the common stock, with
each
share of preferred having the number of votes equal to the voting
power of
one share of common stock, except that the vote or written consent
of a
majority of the outstanding preferred shares is required for any
changes
to the Company’s Articles of Incorporation, Bylaws or Certificate of
Designation or for any bankruptcy, insolvency, dissolution or liquidation
of the company.
|
|
·
|
Shares
of either series of preferred stock may be converted at the option
of the
holder into shares of common stock at a rate of one share of common
stock
for each share of preferred stock being converted, subject to adjustment
for stock splits, stock combinations, reorganization, merger,
consolidation, reclassification, exchange or
substitution.
|
|
·
|
Both
series of preferred stock are subject to automatic conversion into
common
stock upon the closing of a firmly underwritten public offering pursuant
to an effective registration statement under the Act, covering the
offer
and sale of common stock in which the gross proceeds to the Company
are at
least $4 million.
|
|
·
|
The
Board of Directors has approved the cancellation of the Series A
Preferred
Stock, given that there are no Series A shares issued, and this
cancellation will occur in the near future. The Board of Directors
has no
plans at this time to issue additional series of preferred stock.
|
In
connection with its adoption of the Rights Agreement, the Company’s Board of
Directors approved the filing of a Certificate of Designation of Rights,
Preferences and Privileges of Series C Junior Participating Preferred Stock
of
the Company (the “Certificate of Designation”). The Company filed the
Certificate of Designation with the Secretary of State of the State of Minnesota
on February 2, 2007.
The
Series C Preferred Shares will not be redeemable. Each Series C Preferred
Share
will be entitled to a minimum preferential quarterly dividend payment of
the
greater of $1.00 per share or 100 times the dividend declared per Common
Share,
subject to adjustment. In the event of liquidation, the holders of the Series
C
Preferred Shares will be entitled to a minimum preferential liquidation payment
of the greater of $100 per share or 100 times the payment made per Common
Share,
subject to adjustment. Each 1/100th
of a
Series C Preferred Share will have one vote per share, voting together with
holders of Common Shares, subject to adjustment. In the event of any
consolidation, merger, combination, statutory share exchange or other
transaction in which Common Shares are exchanged, each Series C Preferred
Share
will be entitled to receive 100 times the amount received per Common Share,
subject to adjustment. These rights are protected by customary antidilution
provisions. Outstanding Series B Preferred Shares are senior to the Series
C
Preferred Shares in terms of dividends and liquidation
payments.
67
The
foregoing description of the rights of the Series C Preferred Shares is
qualified in its entirety by reference to the full text of the Certificate
of
Designation.
Warrants
We
are
registering 371,163 shares of common stock underlying warrants as part of this
Prospectus. The warrants vary in exercise price from $0.70 to $4.15 (excluding
a
warrant issued at an exercise price of $10.00 for 12,500 shares of common stock)
and have terms expiring from March 26, 2007 to May 10, 2008. The number of
shares and price at which the warrants are exercisable is subject to adjustment
in certain events, such as mergers, reorganizations or stock splits, to prevent
dilution. If one of these events occurs, the number of shares into which the
warrants may be converted and the exercise price will be adjusted as needed
to
ensure that the warrant holder continues to have the right to receive a
comparable number of shares or cash consideration as the holder would have
received had the holder already exercised its warrant prior to the event. The
warrants have no price protection features, and may not be redeemed by the
Company.
Although
not included in this Registration Statement, the Company also has warrants
outstanding entitling the holder to purchase one share of Common Stock at any
time until expiration (varying from October 2007 to February 2008) for $6.00
or
$6.50. The total number of shares of common stock issuable upon conversion
of
these warrants is 1,964,650 shares. The
number of shares and price at which these warrants are exercisable is subject
to
adjustment in certain events, such as mergers, reorganizations or stock splits,
to prevent dilution. At any time after the closing bid price for the common
stock on the NASDAQ (or, if the Common Stock is not then traded on the NASDAQ,
then on the principal exchange on which the Common Stock is traded) has equaled
or exceeded $9.00 per share for any consecutive two month period, upon 30 days’
written notice, the Company may redeem any unexercised outstanding warrants
for
$0.01 per warrant. Holders of these warrants will have the right to exercise
the
warrants after such notification and through the redemption date of the
warrants. These warrants have no price protection features.
The
Company also has an additional 2,269,500 warrants outstanding that are not
included in this Registration Statement. These warrants entitle the holder
to
purchase one share of common stock at any time until their expiration on August
17, 2011 for $3.00. The number of shares and price at which these warrants
are
exercisable is subject to adjustment in certain events, such as mergers,
reorganizations or stock splits, to prevent dilution. At any time after the
closing bid price for the common stock on the NASDAQ (or, if the Common Stock
is
not then traded on the NASDAQ, then on the principal exchange on which the
Common Stock is traded) has equaled or exceeded $4.50 per share for any
consecutive two month period, upon 30 days’ written notice, the Company may
redeem any unexercised outstanding warrants for $0.01 per warrant. Holders
of
these warrants will have the right to exercise the warrants after such
notification and through the redemption date of the warrants. These warrants
have no price protection features.
Options
We
are
registering certain shares of common stock underlying options as part of this
Prospectus. The options vary in exercise price from $1.19 to $2.00 per share
and
have ten year terms expiring in July of 2015. These options were granted under
the Option Plan and consist of options that were not included in either of
the
Company's now-effective Form S-8 registration statements. Each of the options
included in this Prospectus vested in full immediately upon their grant in
July
of 2005, and they were issued in exchange for IsoRay Medical, Inc. options
that
were granted prior to the Company's merger.
Keller
Rohrback, PLC, Phoenix, Arizona will issue an opinion with respect to the
validity of the shares of common stock being offered hereby. Mr. Boatwright,
a
member of Keller Rohrback, PLC, is a director of the Company. Mr. Boatwright
beneficially owned options to purchase 210,000 shares of our common stock
as of
the date of the opinion. Keller Rohrback, PLC provides legal services to
the
Company and IsoRay Medical. During IsoRay’s fiscal year ended June 30, 2006,
IsoRay paid Keller Rohrback, PLC approximately $390,000 for legal services.
68
EXPERTS
Our
audited financial statements for the fiscal years ended June 30, 2006 and June
30, 2005 have been audited by DeCoria, Maichel & Teague, P.S., independent
registered public accountants. The report of this registered public
accounting firm, which appears elsewhere herein, includes an explanatory
paragraph as to our ability to continue as a going concern. Our financial
statements are included in reliance upon this report and upon the authority
of
such firm as an expert in auditing and accounting.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND
FINANCIAL DISCLOSURE
The
Company’s Board of Directors engaged DeCoria, Maichel & Teague, P.S., the
independent auditor for the Company’s wholly-owned subsidiary, to be its new
independent auditor effective November 15, 2005, which was also the effective
date of S.W. Hatfield, CPA’s dismissal as the Company’s certifying accountant by
the Board.
Except
for an expression of doubt about our ability to continue as a going concern,
S.W. Hatfield’s audit reports on the Company’s financial statements as of June
30, 2005 and September 30, 2004 did not contain an adverse opinion or disclaimer
of opinion, nor were they qualified or modified as to uncertainty, audit scope
or accounting principles.
During
the two fiscal years ended June 30, 2005 and September 30, 2004, and through
November 15, 2005 there were no disagreements with S.W. Hatfield on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements, if not resolved to the
satisfaction of S.W. Hatfield would have caused it to make a reference to the
subject matter of the disagreements in connection with its report; and there
were no reportable events as described in Item 304(a)(1)(iv)(B) of Regulation
S-B promulgated by the Securities and Exchange Commission (the “SEC”) pursuant
to the Securities Exchange Act of 1934, as amended.
During
the Company’s two fiscal years ending prior to November 15, 2005 and through
November 15, 2005, the Company did not consult DeCoria, Maichel & Teague
with respect to the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company’s financial statements, or any other matters or
reportable events listed in Item 304(a)(2) of Regulation S-B. However, IsoRay
Medical, the Company’s wholly-owned subsidiary, has consulted with DeCoria,
Maichel & Teague, its independent auditor, during these time periods solely
in connection with IsoRay Medical’s financial statements.
FURTHER
INFORMATION
We
are
subject to the reporting requirements of the Securities Exchange Act of 1934,
as
amended, and file reports, proxy statements and other information with the
Securities and Exchange Commission. These reports, proxy statements and
other information may be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at 100 F Street, N.E.,
Room
1580, Washington, D.C. 20549 and at the Securities and Exchange Commission’s
regional offices. You can obtain copies of these materials from the Public
Reference Section of the Securities and Exchange Commission upon payment of
fees
prescribed by the Securities and Exchange Commission. You may obtain
information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission’s Web site contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Securities and Exchange Commission. The address of that site is
www.sec.gov.
69
Index
to Financial Statements
|
Page
|
||
|
Unaudited
Financial Statements:
|
||
|
Consolidated
Balance Sheets as of December 31, 2006 and June
30, 2006
|
F-2
|
|
|
Consolidated
Statements of Operations for the three and six months ended December
31,
2006 and 2005
|
F-3
|
|
|
Consolidated
Statements of Cash Flows for the six months ended December 31, 2006
and 2005
|
F-4
|
|
|
Notes
to Consolidated Financial Statements
|
F-5
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-10
|
|
|
Financial
Statements:
|
||
|
Consolidated
Balance Sheets as of June 30, 2006 and 2005
|
F-11
|
|
|
Consolidated
Statements of Operations for the years ended June 30, 2006 and
2005
|
F-12
|
|
|
Consolidated
Statements of Stockholders’ Equity (Deficit) for the years ended June 30,
2006 and 2005
|
F-13
|
|
|
Consolidated
Statements of Cash Flows for the years ended June 30, 2006 and
2005
|
F-14
|
|
|
Notes
to Consolidated Financial Statements
|
F-15
|
F-1
Consolidated
Balance Sheets
|
December
31,
|
|||||||
|
2006
|
June
30,
|
||||||
|
(Unaudited)
|
2006
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
3,700,108
|
$
|
2,207,452
|
|||
|
Accounts
receivable, net of allowance for doubtful accounts
|
|||||||
|
of
$49,306 and $85,183, respectively
|
982,001
|
596,447
|
|||||
|
Inventory
|
229,899
|
161,381
|
|||||
|
Prepaid
expenses
|
212,606
|
161,546
|
|||||
|
Total
current assets
|
5,124,614
|
3,126,826
|
|||||
|
Fixed
assets, net of accumulated depreciation
|
1,945,239
|
1,642,293
|
|||||
|
Deferred
financing costs, net of accumulated amortization
|
230,645
|
274,358
|
|||||
|
Licenses,
net of accumulated amortization
|
263,363
|
273,475
|
|||||
|
Other
assets, net of accumulated amortization
|
350,889
|
338,987
|
|||||
|
Total
assets
|
$
|
7,914,750
|
$
|
5,655,939
|
|||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
842,584
|
$
|
584,296
|
|||
|
Accrued
payroll and related taxes
|
718,983
|
614,645
|
|||||
|
Accrued
interest payable
|
11,206
|
11,986
|
|||||
|
Notes
payable, due within one year
|
47,189
|
51,351
|
|||||
|
Capital
lease obligations, due within one year
|
197,227
|
183,554
|
|||||
|
Convertible
debentures payable, due within one year
|
455,000
|
455,000
|
|||||
|
Total
current liabilities
|
2,272,189
|
1,900,832
|
|||||
|
Notes
payable, due after one year
|
551,974
|
581,557
|
|||||
|
Capital
lease obligations, due after one year
|
118,258
|
220,415
|
|||||
|
Asset
retirement obligation
|
70,516
|
67,425
|
|||||
|
Total
liabilities
|
3,012,937
|
2,770,229
|
|||||
|
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; 77,080 and 144,759 shares issued
and
|
|||||||
|
outstanding
|
77
|
145
|
|||||
|
Common
stock, $.001 par value; 100,000,000 shares authorized;
|
|||||||
|
16,296,045
and 15,157,901 shares issued and outstanding
|
16,296
|
15,158
|
|||||
|
Subscriptions
receivable
|
-
|
(6,122,007
|
)
|
||||
|
Additional
paid-in capital
|
23,277,585
|
22,538,675
|
|||||
|
Accumulated
deficit
|
(18,392,145
|
)
|
(13,546,261
|
)
|
|||
|
Total
shareholders' equity
|
4,901,813
|
2,885,710
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
7,914,750
|
$
|
5,655,939
|
|||
The
accompanying notes are an integral part of these financial
statements.
F-2
IsoRay,
Inc. and Subsidiary
Consolidated
Statements of Operations
Three
and Six Months Ended December 31, 2006 and 2005
(Unaudited)
|
Three
months ended December 31,
|
Six
months ended December 31,
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Product
sales
|
$
|
1,414,155
|
$
|
486,247
|
$
|
2,439,599
|
$
|
697,162
|
|||||
|
Cost
of product sales
|
1,387,394
|
916,274
|
2,675,539
|
1,636,440
|
|||||||||
|
Gross
margin / (loss)
|
26,761
|
(430,027
|
)
|
(235,940
|
)
|
(939,278
|
)
|
||||||
|
Operating
expenses:
|
|||||||||||||
|
Research
and development
|
216,254
|
96,837
|
461,852
|
122,619
|
|||||||||
|
Sales
and marketing expenses
|
890,018
|
340,532
|
1,562,948
|
655,571
|
|||||||||
|
General
and administrative expenses
|
821,529
|
675,444
|
2,554,661
|
1,636,393
|
|||||||||
|
Total
operating expenses
|
1,927,801
|
1,112,813
|
4,579,461
|
2,414,583
|
|||||||||
|
Operating
loss
|
(1,901,040
|
)
|
(1,542,840
|
)
|
(4,815,401
|
)
|
(3,353,861
|
)
|
|||||
|
Non-operating
income (expense):
|
|||||||||||||
|
Interest
income
|
50,004
|
3,193
|
90,187
|
10,152
|
|||||||||
|
Financing
expense
|
(67,413
|
)
|
(195,480
|
)
|
(120,670
|
)
|
(351,108
|
)
|
|||||
|
Debt
conversion expense
|
-
|
(244,097
|
)
|
-
|
(244,097
|
)
|
|||||||
|
Non-operating
income (expense), net
|
(17,409
|
)
|
(436,384
|
)
|
(30,483
|
)
|
(585,053
|
)
|
|||||
|
Net
loss
|
$
|
(1,918,449
|
)
|
$
|
(1,979,224
|
)
|
$
|
(4,845,884
|
)
|
$
|
(3,938,914
|
)
|
|
|
Basic
and Diluted loss per share
|
$
|
(0.12
|
)
|
$
|
(0.17
|
)
|
$
|
(0.31
|
)
|
$
|
(0.36
|
)
|
|
|
Shares
used in computing net loss per share:
|
|||||||||||||
|
Basic
and Diluted
|
15,919,236
|
11,852,047
|
15,609,992
|
10,844,913
|
|||||||||
The
accompanying notes are an integral part of these financial
statements.
F-3
IsoRay,
Inc. and Subsidiary
Consolidated
Statements of Cash Flows
Three
and Six Months Ended December 31, 2006 and 2005
(Unaudited)
|
Six
months ended December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
|
Net
loss
|
$
|
(4,845,884
|
)
|
$
|
(3,938,914
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used by operating activities:
|
|||||||
|
Depreciation
and amortization of fixed assets
|
184,510
|
95,432
|
|||||
|
Amortization
of deferred financing costs and other assets
|
69,580
|
103,546
|
|||||
|
Accretion
of asset retirement obligation
|
3,091
|
-
|
|||||
|
Noncash
share-based compensation
|
897,887
|
-
|
|||||
|
Merger
consulting fees paid by 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
|
-
|
244,097
|
|||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
receivable, net
|
(385,554
|
)
|
(417,647
|
)
|
|||
|
Inventory
|
(68,518
|
)
|
(74,093
|
)
|
|||
|
Prepaid
expenses
|
(51,060
|
)
|
62,350
|
||||
|
Accounts
payable and accrued expenses
|
258,288
|
(291,895
|
)
|
||||
|
Accrued
payroll and related taxes
|
154,338
|
65,032
|
|||||
|
Accrued
interest payable
|
(780
|
)
|
42,065
|
||||
|
Net
cash used by operating activities
|
(3,784,102
|
)
|
(3,735,266
|
)
|
|||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
|
Purchases
of fixed assets
|
(487,456
|
)
|
(347,357
|
)
|
|||
|
Additions
to licenses and other assets
|
(27,657
|
)
|
(64,096
|
)
|
|||
|
Net
cash used by investing activities
|
(515,113
|
)
|
(411,453
|
)
|
|||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Net
advances on bank line of credit
|
-
|
200,000
|
|||||
|
Proceeds
from issuance of notes payable
|
-
|
250,000
|
|||||
|
Proceeds
from sales of convertible debentures payable
|
-
|
550,000
|
|||||
|
Principal
payments on notes payable
|
(33,745
|
)
|
(279,926
|
)
|
|||
|
Principal
payments on capital lease obligations
|
(88,484
|
)
|
(66,329
|
)
|
|||
|
Proceeds
from cash sales of common stock, net of offering costs
|
4,702,931
|
2,324,168
|
|||||
|
Proceeds
from cash sales of preferred stock, pursuant to exercise of warrants
|
8,709
|
-
|
|||||
|
Proceeds
from cash sales of common stock, pursuant to exercise of warrants
|
611,997
|
59,565
|
|||||
|
Proceeds
from cash sales of common stock, pursuant to exercise of options
|
590,463
|
72,928
|
|||||
|
Payments
to common shareholders in lieu of issuing fractional shares
|
-
|
(734
|
)
|
||||
|
Net
cash provided by financing activities
|
5,791,871
|
3,109,672
|
|||||
|
Net
increase in cash and cash equivalents
|
1,492,656
|
(1,037,047
|
)
|
||||
|
Cash
and cash equivalents, beginning of period
|
2,207,452
|
1,685,731
|
|||||
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$
|
3,700,108
|
$
|
648,684
|
|||
|
Non-cash
investing and financing activities:
|
|||||||
|
Cashless
exercise of common stock options
|
$
|
50,000
|
$
|
-
|
|||
|
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
|
|||||
The
accompanying notes are an integral part of these financial
statements.
F-4
IsoRay, Inc.
Notes
to the Unaudited Consolidated Financial Statements
For
the three and six month periods ended December 31, 2006 and
2005
|
1.
|
Basis
of Presentation
|
The
accompanying consolidated financial statements are those of IsoRay, Inc., and
its wholly-owned subsidiary (“IsoRay” or the “Company”). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The
accompanying interim consolidated financial statements have been prepared
in
conformity with U.S. generally accepted accounting principles, consistent
in all
material respects with those applied in the Company’s Annual Report on Form
10-KSB for the fiscal year ended June 30, 2006, except for the July 1, 2006
adoption of Statement of Financial Accounting Standards No. 123R,
“Share-Based Payment” (“SFAS No. 123R”) — See Note 2. The financial information
is unaudited but reflects all adjustments, consisting only of normal recurring
accruals, which are, in the opinion of the Company’s management, necessary for a
fair statement of the results for the interim periods presented. Interim
results
are not necessarily indicative of results for a full year. The information
included in this Form 10-QSB should be read in conjunction with the Company’s
Annual Report on Form 10-KSB for the fiscal year ended June 30,
2006.
| 2. |
Share-Based
Compensation
|
Effective
July 1, 2006, the Company adopted SFAS No. 123R using the modified-prospective
method. Prior to July 1, 2006, the Company accounted for share-based
employee compensation, including stock options, using the method prescribed
in
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees
and
related interpretations (“APB 25”). No share-based employee compensation cost
was reflected in the statement of operations prior to the adoption of SFAS
No.
123R. Results for prior periods have not been restated.
The
following table presents the share-based compensation expense recognized
in
accordance with SFAS No. 123R during the three and six months ended December
31,
2006 and in accordance with APB 25 during the three and six months ended
December 31, 2005:
|
Three
months
|
Six
months
|
||||||||||||
|
ended
December 31,
|
ended
December 31,
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Cost
of product sales
|
$
|
20,492
|
$
|
--
|
$
|
71,325
|
$
|
--
|
|||||
|
Research
and development
|
7,879
|
--
|
19,714
|
--
|
|||||||||
|
Sales
and marketing
|
52,456
|
--
|
99,237
|
--
|
|||||||||
|
General
and administrative
|
35,617
|
--
|
707,611
|
--
|
|||||||||
|
Total
share-based compensation
|
$
|
116,444
|
$
|
--
|
$
|
897,887
|
$
|
--
|
|||||
The
adoption of SFAS No. 123R increased net loss for the three and six months
ended
December 31, 2006 by $116,444 and $897,887, respectively. Basic loss per
common
share for the three and six months ended December 31, 2006 would have been
$0.11
and $0.25, respectively, if the Company had not adopted SFAS No. 123R, compared
to reported basic loss per common share of $0.12 and $0.31, respectively.
The
total value of the stock option awards is expensed ratably over the service
period of the employees receiving the awards. As of December 31, 2006, total
unrecognized compensation cost related to stock-based options and awards
was
$1,041,962 and the related weighted-average period over which it is expected
to
be recognized is approximately 1.16 years.
F-5
The
Company currently provides stock-based compensation under three equity incentive
plans approved by the Board of Directors: the Amended and Restated 2005 Employee
Stock Option Plan, the Amended and Restated 2005 Stock Option Plan, and the
2006
Director Stock Option Plan. Stock option awards granted from these plans are
granted at the fair market value on the date of grant, and vest over a period
determined at the time the options are granted, generally ranging from zero
to
three years, and generally have a maximum term of ten years. For stock options
with graded vesting terms, the Company recognizes compensation cost on a
straight-line basis over the requisite service period for each separately
vesting portion of the award as if the award was, in substance, multiple
awards.
A
summary
of stock option activity within the Company’s share-based compensation plans and
charges for the six months ended December 31, 2006 is as
follows:
|
Shares
|
Price
(a)
|
Life
(b)
|
Value
(c)
|
||||||||||
|
Outstanding
at June 30, 2006
|
3,129,692
|
$
|
2.05
|
||||||||||
|
Granted
(d)
|
727,900
|
3.14
|
|||||||||||
|
Cancelled
|
(129,454
|
)
|
1.19
|
||||||||||
|
Exercised
|
(543,499
|
)
|
1.18
|
||||||||||
|
Outstanding
at December 31, 2006
|
3,184,639
|
$
|
2.49
|
8.84
|
$
|
8,029,758
|
|||||||
|
Expected
to vest at
|
|||||||||||||
|
December
31, 2006
|
3,149,762
|
$
|
2.47
|
8.84
|
$
|
7,997,372
|
|||||||
|
Vested
and exercisable at
|
|||||||||||||
|
December
31, 2006
|
2,543,997
|
$
|
2.16
|
8.71
|
$
|
7,223,876
|
|||||||
|
(a)
|
Weighted
average price per share.
|
|
(b)
|
Weighted
average remaining contractual life.
|
|
(c)
|
Aggregate
intrinsic value.
|
|
(d)
|
All
options granted had exercise prices equal to the ending market price
of
the Company’s common stock on the grant
date.
|
The
aggregate intrinsic value of options exercised during the six months ended
December 31, 2006 was $1,557,600.
The
weighted average fair value of stock option awards granted and the key
assumptions used in the Black-Scholes valuation model to calculate the fair
value are as follows for the three and six months ended December 31, 2006
and
2005:
|
Three
months
|
Six
months
|
||||||||||||
|
ended
December 31,
|
ended
December 31,
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Weighted
average fair value of options granted
|
$
|
2.14
|
$
|
1.55
|
$
|
2.11
|
$
|
0.91
|
|||||
|
Key
assumptions used in determining fair value:
|
|||||||||||||
|
Weighted
average risk-free interest rate
|
4.74
|
%
|
4.34
|
%
|
4.88
|
%
|
4.53
|
%
|
|||||
|
Expected
life of the option (in years)
|
6.00
|
5.00
|
5.58
|
7.59
|
|||||||||
|
Expected
stock price volatility
|
75.00
|
%
|
30.69
|
%
|
75.00
|
%
|
30.18
|
%
|
|||||
|
Expected
dividend yield
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
|||||
F-6
The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
changes in the subjective input assumptions can materially affect the fair
value
estimate, in management’s opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options. The risk-free interest rate is based on the U.S. treasury security
rate
in effect as of the date of grant. The expected lives of options and the
volatility are based on historical data of the Company.
The
following table illustrates the effect on net loss and net loss per common
share
for the three and six months ended December 31, 2005 as if the Company had
applied the fair value recognition provisions of SFAS No. 123 to all outstanding
stock option awards for periods presented prior to the Company’s adoption of
SFAS No. 123R:
|
Three
months
|
Six
months
|
||||||
|
ended
|
ended
|
||||||
|
December
31,
|
December
31,
|
||||||
|
2005
|
2005
|
||||||
|
Net
loss, as reported
|
$
|
1,979,224
|
$
|
3,938,914
|
|||
|
Stock-based
compensation expense determined
|
|||||||
|
under
fair value methods for all stock options
|
3,254
|
159,254
|
|||||
|
Proforma
net loss
|
$
|
1,982,478
|
$
|
4,098,168
|
|||
|
Net
loss per share:
|
|||||||
|
Basic,
as reported
|
$
|
0.17
|
$
|
0.36
|
|||
|
Basic,
pro forma
|
$
|
0.17
|
$
|
0.38
|
|||
3. Loss
per Share
The
Company accounts for its income (loss) per common share according to SFAS No.
128, Earnings
Per Share.
Under
the provisions of SFAS No. 128, primary and fully diluted earnings per share
are
replaced with basic and diluted earnings per share. Basic earnings per share
is
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. Common stock
equivalents, including warrants to purchase the Company's common stock and
common stock issuable upon the conversion of notes payable, are excluded from
the calculations when their effect is antidilutive. Basic weighted average
shares outstanding for the year ended June 30, 2005 have been adjusted to
reflect the exchange ratio contained in the merger transaction dated July 28,
2005. At June 30, 2006 and 2005, the calculation of diluted weighted average
shares does not include preferred stock, options, or warrants that are
potentially convertible into common stock as those would be antidilutive due
to
the Company’s net loss position.
F-7
Securities
that could be dilutive in the future as of December 31, 2006 and 2005 are
as
follows:
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Preferred
stock
|
77,080
|
292,328
|
|||||
|
Preferred
stock warrants
|
28,614
|
221,812
|
|||||
|
Common
stock warrants
|
4,707,131
|
1,653,346
|
|||||
|
Common
stock options
|
3,184,639
|
2,817,768
|
|||||
|
Convertible
debentures
|
109,639
|
127,711
|
|||||
|
Total
potential dilutive securities
|
8,107,103
|
5,112,965
|
|||||
4. Risks
and Uncertainties
The
Company’s financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and settlement of liabilities
and
commitments in the normal course of business. However, our large operating
losses and accumulated deficit, among other things, raise substantial doubt
about our ability to continue as a going concern. Management plans to raise
additional financing (including the sale of additional equity or borrowings)
and
grow the revenues of our core product while continually analyzing other market
opportunities. However, no assurance can be given that such financing will
be
completed on terms acceptable to the Company or that the Company will be able
to
meet its revenue targets. If the Company is unable to obtain additional
financing and grow revenues, we may have to curtail our business or cease
operations. The financial statements do not include any adjustments relating
to
the recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going
concern.
5. Supply
Contract
On
October 6, 2006, IsoRay Medical, Inc., the wholly owned subsidiary of the
Company, entered into a Contract with FSUE "SSE - Research Institute of Atomic
Reactors" ("RIAR") in Russia. The Contract provides for delivery to IsoRay
Medical of purified Cs-131 isotope, which is used by IsoRay Medical to produce
its proprietary Cs-131 brachytherapy seed used in cancer therapy. The total
value of the Contract over its term, which expires on May 1, 2014, is
$6,300,000. Delivery of the isotope is scheduled to commence in about October
2007 and continue through December 2013, upon submission of written orders
by
IsoRay Medical forty-five days in advance of the planned date of delivery.
IsoRay
Medical also entered into an Agreement for Exclusive Right to Buy on October
6,
2006 with RIAR. This Agreement gives IsoRay Medical the exclusive right to
purchase the Cs-131 isotope produced by RIAR for a period of seven years, or
through October 6, 2013.
6. Subsequent
Events
Warrant
Exercises
During
January 2007, two warrant holders exercised warrants issued in connection
with
the August 2006 Stock Purchase Agreement. The Company received $1,218,900
in
cash and issued 406,300 common shares pursuant to these
exercises.
Proxy
Statement
On
January 16, 2007, the Company filed a proxy statement and annual meeting
notice
with the SEC. The Board of Directors set January 5, 2007 as the record date
for
the annual meeting to be held on February 20, 2007. All shareholders of record
on January 5, 2007 were mailed proxy materials. There are two proposals
scheduled to be voted on at the annual meeting. The first is the election
of
seven directors to hold office until the 2008 annual meeting and the second
is
to ratify the selection of DeCoria, Maichel & Teague, P.S. as the Company’s
independent registered public accounting firm for the fiscal year ending
June
30, 2007.
F-8
Form
S-3
On
January 26, 2007, the Company filed a Form S-3 registration statement using
a
“shelf” registration process. Under this shelf registration process, we may
offer from time to time up to $20,000,000 in the aggregate, inclusive of
any
exercise price thereof, of the following securities: (1) shares of our common
stock; (2) warrants to purchase shares of our common stock; or (3) any
combination of the foregoing.
Preferred
Dividends
On
February 1, 2007, the Board of Directors declared a dividend on the Series
B
Preferred Stock of all outstanding and cumulative dividends through December
31,
2006. The total dividend of $38,458 will be paid on February 15,
2007.
Share
Rights Plan
On
February 1, 2007, the Board of Directors adopted a share rights plan. The
plan
grants to the Company’s common shareholders a right to purchase a fractional
share of preferred stock for each outstanding common share held of record
at the
close of business on February 16, 2007, or alternatively (in lieu of purchasing
preferred stock) entitles its registered holder to purchase $50 of the Company
common stock at a price of $25 per share, subject to adjustment. This purchase
right generally cannot be exercised by the Company’s common shareholders to
purchase stock until after a person or group acquires beneficial ownership
of
15% or more of the Company's voting stock. However, the purchase rights held
by
the person or group that acquires 15% voting power will automatically become
void and they will be unable to exercise their rights to purchase any shares
of
stock of the Company.
In
addition, upon a merger or similar transaction resulting in an acquisition
of
the Company, each exercisable purchase right can be exercised by its holder
to
purchase common stock of the acquiring company with a market value of twice
the
right's exercise price. The purchase rights will expire on February 16, 2017.
Until
a
person or group acquires 15% or more of the Company's voting stock, the Board
of
Directors may redeem the rights for $.001 per right (subject to adjustment).
In
certain events, the Board of Directors may also exchange the rights for shares
of the Company common stock, delay or temporarily suspend the exercisability
of
the rights or reduce the 15 percent stock ownership threshold to not less
than
10 percent.
By-Law
Amendments
On
February 1, 2007, the Board of Directors adopted by-law amendments requiring
advance notice to the Company of shareholder business proposals and director
nominations. These amendments will take effect for the 2008 Annual Shareholder
Meeting.
F-9
Report
of Independent Registered Public Accounting Firm
Board
of
Directors and Stockholders
IsoRay,
Inc.
Richland,
Washington
We
have
audited the accompanying consolidated balance sheets of IsoRay, Inc. and
Subsidiary (“the Company”) (see Note 1) as of June 30, 2006 and 2005, and the
related consolidated statements of operations, changes in shareholders’ equity
(deficit) and cash flows for the years then ended. These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of IsoRay, Inc. and
Subsidiary as of June 30, 2006 and 2005, and the consolidated results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 3 to the financial
statements, certain conditions raise substantial doubt about the Company’s
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The accompanying financial statements
do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/
DeCoria, Maichel & Teague, P.S.
Spokane,
Washington
September
26, 2006
F-10
IsoRay,
Inc. and Subsidiary
Consolidated
Balance Sheets
|
June
30,
|
|||||||
|
2006
|
|
2005
|
|||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
2,207,452
|
$
|
1,653,144
|
|||
|
Accounts
receivable, net of allowance for doubtful accounts
|
|||||||
|
of
$85,183 and $17,075, respectively
|
596,447
|
49,969
|
|||||
|
Inventory
|
161,381
|
81,926
|
|||||
|
Prepaid
expenses
|
161,546
|
181,266
|
|||||
|
Total
current assets
|
3,126,826
|
1,966,305
|
|||||
|
Fixed
assets, net of accumulated depreciation
|
1,642,293
|
842,323
|
|||||
|
Deferred
financing costs, net of accumulated amortization
|
274,358
|
548,837
|
|||||
|
Licenses,
net of accumulated amortization
|
273,475
|
18,656
|
|||||
|
Other
assets, net of accumulated amortization
|
338,987
|
226,263
|
|||||
|
Total
assets
|
$
|
5,655,939
|
$
|
3,602,384
|
|||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY (DEFICIT)
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
584,296
|
$
|
695,588
|
|||
|
Accrued
payroll and related taxes
|
614,645
|
157,924
|
|||||
|
Accrued
interest payable
|
11,986
|
41,325
|
|||||
|
Notes
payable, due within one year
|
51,351
|
43,116
|
|||||
|
Capital
lease obligations, due within one year
|
183,554
|
9,604
|
|||||
|
Convertible
debentures payable, due within one year
|
455,000
|
-
|
|||||
|
Total
current liabilities
|
1,900,832
|
947,557
|
|||||
|
Notes
payable, due after one year
|
581,557
|
562,224
|
|||||
|
Capital
lease obligations, due after one year
|
220,415
|
19,584
|
|||||
|
Convertible
debentures payable, due after one year
|
-
|
3,587,875
|
|||||
|
Asset
retirement obligation
|
67,425
|
-
|
|||||
|
Total
liabilities
|
2,770,229
|
5,117,240
|
|||||
|
Shareholders'
equity (deficit):
|
|||||||
|
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; 144,759 and 1,338,167 shares
issued and
outstanding
|
145
|
1,338
|
|||||
|
Common
stock, $.001 par value; 194,000,000 and 100,000,000 shares authorized;
|
|||||||
|
15,157,901
and 6,163,623 shares issued and outstanding
|
15,158
|
6,164
|
|||||
|
Subscriptions
receivable
|
(6,122,007
|
)
|
-
|
||||
|
Additional
paid-in capital
|
22,538,675
|
3,805,773
|
|||||
|
Accumulated
deficit
|
(13,546,261
|
)
|
(5,328,131
|
)
|
|||
|
Total
shareholders' equity (deficit)
|
2,885,710
|
(1,514,856
|
)
|
||||
|
Total
liabilities and shareholders' equity (deficit)
|
$
|
5,655,939
|
$
|
3,602,384
|
|||
The
accompanying notes are an integral part of these financial
statements.
F-11
IsoRay,
Inc. and Subsidiary
Consolidated
Statements of Operations
|
Year
ended June 30,
|
|||||||
|
2006
|
|
2005
|
|||||
|
Product
sales
|
$
|
1,994,306
|
$
|
201,731
|
|||
|
Cost
of product sales
|
3,815,122
|
1,474,251
|
|||||
|
Gross
loss
|
(1,820,816
|
)
|
(1,272,520
|
)
|
|||
|
Operating
expenses:
|
|||||||
|
Research
and development
|
450,425
|
137,532
|
|||||
|
Sales
and marketing expenses
|
1,420,500
|
701,822
|
|||||
|
General
and administrative expenses
|
3,503,522
|
1,871,325
|
|||||
|
Total
operating expenses
|
5,374,447
|
2,710,679
|
|||||
|
Operating
loss
|
(7,195,263
|
)
|
(3,983,199
|
)
|
|||
|
Non-operating
income (expense):
|
|||||||
|
Interest
income
|
51,744
|
2,394
|
|||||
|
Financing
expense
|
(689,100
|
)
|
(167,493
|
)
|
|||
|
Loss
on disposal of fixed assets
|
-
|
(120,890
|
)
|
||||
|
Debt
conversion expense (Note 11)
|
(385,511
|
)
|
-
|
||||
|
Non-operating
income (expense), net
|
(1,022,867
|
)
|
(285,989
|
)
|
|||
|
Net
loss
|
$
|
(8,218,130
|
)
|
$
|
(4,269,188
|
)
|
|
|
Basic
loss per share
|
$
|
(0.68
|
)
|
$
|
(0.78
|
)
|
|
|
Shares
used in computing net loss per share:
|
|||||||
|
Basic
|
12,051,964
|
5,470,046
|
|||||
The
accompanying notes are an integral part of these financial
statements.
F-12
IsoRay,
Inc. and Subsidiary
Consolidated
Statement of Changes in Shareholders' Equity
(Deficit)
|
IsoRay,
Inc. (MN) (1)
|
IsoRay
Medical, Inc.
|
||||||||||||||||||||||||||||||||||||||||||
|
Series
B Preferred Stock
|
Common
Stock
|
IsoRay,
Inc. (WA) Common Stock (2)
|
Series
B Preferred Stock
|
Common
Stock
|
Subscriptions
|
Additional
Paid-in
|
Accumulated
|
||||||||||||||||||||||||||||||||||||
|
Shares
|
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Receivable
|
Capital
|
Deficit
|
Total
|
|
||||||||||||||||||||||||||||
|
Balances
at June 30, 2004
|
-
|
$
|
-
|
-
|
$
|
-
|
2,767,700
|
$
|
2,768
|
-
|
$
|
-
|
8,424
|
$
|
8
|
$
|
-
|
$
|
1,369,910
|
$
|
(1,058,943
|
)
|
$
|
313,743
|
|||||||||||||||||||
|
Issuance
of IsoRay, Inc. (WA) common shares pursuant to exercise of
options
|
71,580
|
71
|
71,509
|
71,580
|
|||||||||||||||||||||||||||||||||||||||
|
Issuance
of IsoRay, Inc. (WA) common shares as compensation
|
57,025
|
57
|
56,968
|
57,025
|
|||||||||||||||||||||||||||||||||||||||
|
Issuance
of IsoRay Products LLC member shares for cash, net of offering
costs
|
303,743
|
303,743
|
|||||||||||||||||||||||||||||||||||||||||
|
Merger
of IsoRay, Inc (WA) and IsoRay Products LLC into IsoRay Medical,
Inc.
|
(2,896,305
|
)
|
(2,896
|
)
|
1,249,832
|
1,249
|
5,195,205
|
5,196
|
(3,549
|
)
|
-
|
||||||||||||||||||||||||||||||||
|
Reversal
of dividends accrued by IsoRay Products LLC
|
91,765
|
91,765
|
|||||||||||||||||||||||||||||||||||||||||
|
Issuance
of IsoRay Medical, Inc. common shares for cash pursuant to
private
placement, net of offering costs
|
644,828
|
645
|
1,355,933
|
1,356,578
|
|||||||||||||||||||||||||||||||||||||||
|
Issuance
of IsoRay Medical, Inc. common shares pursuant to exercise
of warrants
granted in connection with private placement
|
109,296
|
109
|
64,766
|
64,875
|
|||||||||||||||||||||||||||||||||||||||
|
Issuance
of IsoRay Medical, Inc. common shares as inducement for guarantee
of debt
|
177,856
|
178
|
348,203
|
348,381
|
|||||||||||||||||||||||||||||||||||||||
|
Issuance
of IsoRay Medical, Inc. common shares as partial payment
for laser welding
stations
|
25,526
|
26
|
49,974
|
50,000
|
|||||||||||||||||||||||||||||||||||||||
|
Issuance
of Series B preferred shares pursuant to exercise of warrants
|
90,823
|
91
|
96,651
|
96,742
|
|||||||||||||||||||||||||||||||||||||||
|
Exchange
of Series B preferred shares for IsoRay Medical, Inc. common
shares
|
(2,488
|
)
|
(2
|
)
|
2,488
|
2
|
-
|
-
|
|||||||||||||||||||||||||||||||||||
|
Payments
to common shareholders in lieu of issuing fractional shares
|
(100
|
)
|
(100
|
)
|
|||||||||||||||||||||||||||||||||||||||
|
Net
loss
|
(4,269,188
|
)
|
(4,269,188
|
)
|
|||||||||||||||||||||||||||||||||||||||
|
Balances
at June 30, 2005
|
-
|
-
|
-
|
-
|
-
|
-
|
1,338,167
|
1,338
|
6,163,623
|
6,164
|
-
|
3,805,773
|
(5,328,131
|
)
|
(1,514,856
|
)
|
|||||||||||||||||||||||||||
|
Merger
of IsoRay, Inc. (formerly Century Park Pictures Corporation)
and IsoRay
Medical, Inc., net of fractional shares paid in cash (see
Note 1)
|
1,338,132
|
1,338
|
6,163,518
|
6,164
|
(1,338,167
|
)
|
(1,338
|
)
|
(6,163,623
|
)
|
(6,164
|
)
|
-
|
||||||||||||||||||||||||||||||
|
Common
stock held by shareholders of Century Park Picture Corporation
after the
reverse acquisition
|
2,498,534
|
2,499
|
8,733
|
11,232
|
|||||||||||||||||||||||||||||||||||||||
|
Issuance
of common shares as payment for merger consulting services
|
168,472
|
169
|
329,831
|
330,000
|
|||||||||||||||||||||||||||||||||||||||
|
Payments
to shareholders in lieu of issuing fractional shares
|
(734
|
)
|
(734
|
)
|
|||||||||||||||||||||||||||||||||||||||
|
Issuance
of preferred stock pursuant to exercise of warrants
|
8,708
|
8
|
6,977
|
6,985
|
|||||||||||||||||||||||||||||||||||||||
|
Issuance
of preferred stock pursuant to exercise of warrants paid
by surrending a
partial note payable
|
44,788
|
45
|
48,268
|
48,313
|
|||||||||||||||||||||||||||||||||||||||
|
Issuance
of common stock pursuant to exercise of warrants
|
84,147
|
84
|
49,866
|
49,950
|
|||||||||||||||||||||||||||||||||||||||
|
Issuance
of common stock pursuant to exercise of options
|
101,284
|
101
|
119,476
|
119,577
|
|||||||||||||||||||||||||||||||||||||||
|
Conversion
of preferred stock to common stock
|
(1,246,869
|
)
|
(1,246
|
)
|
1,246,869
|
1,246
|
-
|
||||||||||||||||||||||||||||||||||||
|
Exchange
of convertible debentures payable to common stock
|
911,271
|
911
|
3,681,964
|
3,682,875
|
|||||||||||||||||||||||||||||||||||||||
|
Issuance
of warrants pursuant to short-term inducement to convert debentures
|
385,511
|
385,511
|
|||||||||||||||||||||||||||||||||||||||||
|
Issuance
of warrants as inducement for note payable from shareholder
(see Note 9)
|
60,000
|
60,000
|
|||||||||||||||||||||||||||||||||||||||||
|
Issuance
of common stock pursuant to the October 2005 private placement,
net of
offering costs
|
1,500,000
|
1,500
|
5,406,626
|
5,408,126
|
|||||||||||||||||||||||||||||||||||||||
|
Issuance
of common stock pursuant to the February 2006 private placement,
net of
offering costs
|
268,889
|
269
|
1,107,955
|
1,108,224
|
|||||||||||||||||||||||||||||||||||||||
|
Issuance
of common stock to Mercatus subject to a subscription receivable
agreement
|
1,748,146
|
1,748
|
(6,122,007
|
)
|
6,120,259
|
-
|
|||||||||||||||||||||||||||||||||||||
|
Issuance
of common stock for payment of invoices
|
39,007
|
39
|
184,996
|
185,035
|
|||||||||||||||||||||||||||||||||||||||
|
Issuance
of common stock pursuant to the June 2006 warrant exercise
solicitation,
net of offering costs
|
427,764
|
428
|
1,223,174
|
1,223,602
|
|||||||||||||||||||||||||||||||||||||||
|
Net
loss
|
(8,218,130
|
)
|
(8,218,130
|
)
|
|||||||||||||||||||||||||||||||||||||||
|
Balances
at June 30, 2006
|
144,759
|
$
|
145
|
15,157,901
|
$
|
15,158
|
-
|
$
|
-
|
-
|
$
|
-
|
-
|
$
|
-
|
$
|
(6,122,007
|
)
|
$
|
22,538,675
|
$
|
(13,546,261
|
)
|
$
|
2,885,710
|
||||||||||||||||||
1.
IsoRay, Inc (MN) is the current registrant (formerly Century Park Pictures
Corporation) and a Minnesota corporation.
2.
IsoRay, Inc. (WA) is a former Washington corporation which was merged
into
IsoRay Medical, Inc. in fiscal year 2005.
The
accompanying notes are an integral part of these financial
statements.
F-13
IsoRay,
Inc. and Subsidiary
Consolidated
Statements of Cash Flows
|
Year
ended June 30,
|
|||||||
|
2006
|
|
2005
|
|||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
|
Net
loss
|
$
|
(8,218,130
|
)
|
$
|
(4,269,188
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used by operating activities:
|
|||||||
|
Depreciation
and amortization of fixed assets
|
271,060
|
140,099
|
|||||
|
Amortization
of deferred financing costs and other assets
|
384,266
|
82,358
|
|||||
|
Accretion
of asset retirement obligation
|
4,385
|
-
|
|||||
|
Loss
on disposal of fixed assets
|
-
|
120,890
|
|||||
|
Merger
consulting fees paid by issuance of common stock
|
330,000
|
-
|
|||||
|
Consulting
and repair fees paid by issuance of common stock
|
39,750
|
57,025
|
|||||
|
Rent
expense paid by issuance of common stock
|
90,026
|
-
|
|||||
|
Debt
conversion expense (Note 11)
|
385,511
|
-
|
|||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
receivable, net
|
(546,478
|
)
|
(49,969
|
)
|
|||
|
Inventory
|
(79,455
|
)
|
(62,200
|
)
|
|||
|
Prepaid
expenses
|
41,252
|
(104,133
|
)
|
||||
|
Accounts
payable and accrued expenses
|
(132,646
|
)
|
566,567
|
||||
|
Accrued
payroll and related taxes
|
456,721
|
99,914
|
|||||
|
Accrued
interest payable
|
(29,339
|
)
|
33,090
|
||||
|
Net
cash used by operating activities
|
(7,003,077
|
)
|
(3,385,547
|
)
|
|||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
|
Purchases
of fixed assets
|
(474,795
|
)
|
(724,029
|
)
|
|||
|
Additions
to licenses and other assets
|
(395,201
|
)
|
(431,438
|
)
|
|||
|
Cash
acquired in reverse acquisition (Note 1)
|
32,587
|
-
|
|||||
|
Net
cash used by investing activities
|
(837,409
|
)
|
(1,155,467
|
)
|
|||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Proceeds
from issuance of notes payable, net of financing costs
|
646,542
|
315,000
|
|||||
|
Proceeds
from sales of convertible debentures payable
|
550,000
|
3,587,875
|
|||||
|
Principal
payments on notes payable
|
(592,790
|
)
|
(23,653
|
)
|
|||
|
Principal
payments on capital lease obligations
|
(124,688
|
)
|
(2,914
|
)
|
|||
|
Proceeds
from cash sales of common shares pursuant to private placement,
net of
offering costs
|
6,516,350
|
1,847,511
|
|||||
|
Proceeds
from cash sales of preferred stock, pursuant to exercise of warrants
|
6,985
|
-
|
|||||
|
Proceeds
from cash sales of common stock, pursuant to exercise of warrants
|
49,950
|
-
|
|||||
|
Proceeds
from cash sales of common stock, pursuant to exercise of options
|
119,577
|
-
|
|||||
|
Proceeds
from cash sales of common stock, pursuant to June 2006 warrant
exercises
|
1,223,602
|
-
|
|||||
|
Payments
to common shareholders in lieu of issuing fractional shares
|
(734
|
)
|
(100
|
)
|
|||
|
Net
cash provided by financing activities
|
8,394,794
|
5,723,719
|
|||||
|
Net
increase in cash and cash equivalents
|
554,308
|
1,182,705
|
|||||
|
Cash
and cash equivalents, beginning of period
|
1,653,144
|
470,439
|
|||||
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$
|
2,207,452
|
$
|
1,653,144
|
|||
|
Supplemental
disclosures of cash flow information:
|
|||||||
|
Cash
paid for interest
|
$
|
361,832
|
$
|
57,657
|
|||
|
Non-cash
investing and financing activities:
|
|||||||
|
Exchange
of convertible debentures payable for shares of common stock
|
$
|
3,682,875
|
$
|
-
|
|||
|
Fixed
assets acquired by capital lease obligations
|
507,947
|
32,102
|
|||||
|
Increase
in PP&E related to asset retirement obligation
|
63,040
|
||||||
|
Issuance
of common shares as partial payment for production equipment
|
25,248
|
50,000
|
|||||
|
Issuance
of common shares as partial payment of notes payable
|
48,313
|
-
|
|||||
|
Liabilities
acquired in acquisition
|
21,355
|
-
|
|||||
|
Prepaid
rent paid by issuance of common stock
|
120,036
|
-
|
|||||
|
Issuance
of warrants as an inducement for a note payable
|
60,000
|
-
|
|||||
|
Issuance
of preferred shares for debt reduction
|
-
|
46,007
|
|||||
|
Issuance
of common shares as compensation for guarantee of debt
|
-
|
348,381
|
|||||
|
Reversal
of dividends payable to IsoRay Products LLC members
|
-
|
(91,765
|
)
|
||||
The
accompanying notes are an integral part of these financial
statements.
F-14
IsoRay,
Inc.
Notes
to Consolidated Financial Statements
For
the years ended June 30, 2006 and 2005
1. Organization
Historical
Organization
Century
Park Pictures Corporation (“Century”) was organized under Minnesota law in 1983.
Century is a public company subject to the periodic reporting requirements
of
the Securities Exchange Act of 1934.
Century
had no operations since its fiscal year ended September 30, 1999 through
June
30, 2005.
Merger
Transaction
On
May
27, 2005, IsoRay Medical, Inc. (“Medical”) entered into a merger agreement with
Century to merge with Century’s newly-formed, wholly-owned subsidiary.
On
July
28, 2005, the merger transaction closed. As a result of the merger, Medical
became a wholly-owned subsidiary of Century, which concurrently changed its
name
to IsoRay, Inc. (“IsoRay” or “the Company”).
IsoRay
issued shares of its common and preferred stock to the holders of common
and
preferred stock of Medical at a rate of 0.842362 share of IsoRay’s stock for
each share of Medical’s stock. Options and warrants to purchase common and
preferred stock of Medical were also converted at the same rate into options
and
warrants to purchase common and preferred stock of IsoRay, Inc. On a
fully-diluted basis, Medical’s shareholders owned approximately 82% of IsoRay’s
outstanding securities.
Management
believes the transaction was structured to qualify as a non-taxable
reorganization under Section 368(a)(1)(A) of the Internal Revenue Code of
1986,
as amended.
Financial
Presentation
Medical,
a Delaware corporation, was incorporated effective June 15, 2004 to develop,
manufacture and sell isotope-based medical products and devices for the
treatment of cancer and other diseases. Medical is headquartered in Richland,
Washington.
Medical
was formed for the purpose of combining the operations of IsoRay, Inc. (a
former
Washington corporation) (“IsoRay (WA)”) and its subsidiary, IsoRay Products LLC,
two companies that shared common ownership and management with Medical.
Medical’s management initiated a merger transaction effective October 1, 2004,
in order to accomplish the combining of operations.
Statement
of Financial Accounting Standards (SFAS) No. 141, Business
Combinations,
requires that following a merger the accounting acquirer’s financial statements
should be used for historical comparisons. Although the legal acquirer was
Century, for accounting purposes Medical was the acquirer and as such Medical’s
historical financial statements are shown for comparative purposes. Also
for
accounting purposes, the merger was accounted for as though it happened on
July
1, 2005.
As
part
of the reverse merger, Medical acquired cash of $32,587 and accounts payable
of
$21,355.
F-15
2. Summary
of Significant Accounting Policies
Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary (collectively the “Company”). All
significant intercompany accounts and transactions have been
eliminated.
Basis
of Presentation
During
the fourth quarter of fiscal year 2005, Medical’s management determined that
Medical had emerged from the development stage, inasmuch as its planned
principal operations had commenced. Prior to that time, Medical’s activities had
consisted primarily of conducting research and development and soliciting
equity
and debt financing. Accordingly, the Company’s financial statements are no
longer presented as those of a development stage enterprise as they were
in
prior periods, as prescribed by Statement of Financial Accounting Standards
(SFAS) No. 7, Accounting
and Reporting by Development Stage Enterprises.
Cash
Equivalents
The
Company considers all highly liquid investments with maturities of three
months
or less when purchased to be cash equivalents.
Accounts
Receivable
Accounts
receivable are stated at the amount that management of the Company expects
to
collect from outstanding balances. Management provides for probable
uncollectible amounts through an allowance for doubtful accounts. Additions
to
the allowance for doubtful accounts are based on management’s judgment,
considering historical write-offs, collections and current credit conditions.
Balances which remain outstanding after management has used reasonable
collection efforts are written off through a charge to the allowance for
doubtful accounts and a credit to the applicable accounts receivable. Payments
received subsequent to the time that an account is written off are considered
bad debt recoveries.
Inventory
Inventory
is reported at the lower of cost or market, determined using the weighted
average method, or net realizable value.
Fixed
Assets
Fixed
assets are carried at the lower of cost or net realizable value. Production
equipment with a cost of $2,500 or greater, and other fixed assets with a
cost
of $1,000 or greater are capitalized. Major betterments that extend the useful
lives of assets are also capitalized. Normal maintenance and repairs are
charged
to expense as incurred. When assets are sold or otherwise disposed of, the
cost
and accumulated depreciation are removed from the accounts and any resulting
gain or loss is recognized in operations.
Depreciation
is computed using the straight-line method over the following estimated useful
lives:
| Production equipment | 7 years | |||
| Office equipment | 5 years | |||
| Furniture and fixtures | 5 years |
F-16
Leasehold
improvements and capital lease assets are amortized over the shorter of the
life
of the lease or the estimated life of the asset.
The
Company has adopted the provisions of SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
The
provisions of SFAS No. 144 require that an impairment loss be recognized
when
the estimated future cash flows (undiscounted and without interest) expected
to
result from the use of an asset are less than the carrying amount of the
asset.
Measurement of an impairment loss is based on the estimated fair value of
the
asset if the asset is expected to be held and used.
Management
of the Company periodically reviews the net carrying value of all of its
equipment on an asset by asset basis. These reviews consider the net realizable
value of each asset, as measured in accordance with the preceding paragraph,
to
determine whether an impairment in value has occurred, and the need for any
asset impairment write-down.
Although
management has made its best estimate of the factors that affect the carrying
value based on current conditions, it is reasonably possible that changes
could
occur which could adversely affect management's estimate of net cash flows
expected to be generated from its assets, and necessitate asset impairment
write-downs.
Deferred
Financing Costs
Financing
costs related to the acquisition of debt are deferred and amortized over
the
term of the related debt using the effective interest method. Deferred
financing costs include the fair value of shares issued to certain shareholders
for their guarantee of certain Company debt (see Notes 8 and 9). Amortization
of
deferred financing costs, totaling $296,608 and $76,746 for the years ended
June
30, 2006 and 2005, respectively, is included in financing expense on the
statements of operations.
Licenses
Amortization
of licenses is computed using the straight-line method over the estimated
economic useful lives of the assets. In fiscal year 2006, the Company entered
into an agreement with IBt, SA, a Belgian company (“IBt”) to use IBt’s
proprietary “Ink Jet” production process and paid to IBt $275,000. The IBt
license is being amortized over the 15 year term of the license. Amortization
of
licenses was $20,530 and $2,674 for the years ended June 30, 2006 and 2005,
respectively.
The
Company periodically reviews the carrying values of licenses in accordance
with
SFAS No. 144 and any impairments are recognized when the expected future
operating cash flows to be derived from such assets are less than their carrying
value.
Based
on
the licenses recorded at June 30, 2006, and assuming no subsequent impairment
of
the underlying assets, the annual amortization expense for each fiscal year
ended June 30th, is expected to be as follows: $20,224 for 2007, $20,224
for
2008, $20,224 for 2009, $18,600 for 2010, and $18,333 for 2010.
Other
Assets
Other
assets, which include deferred charges and patents, are stated at cost, less
accumulated amortization. Amortization of patents is computed using the
straight-line method over the estimated economic useful lives of the assets.
The
Company periodically reviews the carrying values of patents in accordance
with
SFAS No. 144 and any impairments are recognized when the expected future
operating cash flows to be derived from such assets are less than their carrying
value.
F-17
Based
on
the patents and other intangible assets recorded in other assets at June
30,
2006, and assuming no subsequent impairment of the underlying assets, the
annual
amortization expense for each fiscal year ended June 30th, is expected to
be as
follows: $10,790 for 2007, $4,826 for 2008, $1,843 for 2009, $1,843 for 2010,
and $1,843 for 2010.
Asset
Retirement Obligation
SFAS
No.
143, Asset
Retirement Obligations,
establishes standards for the recognition, measurement and disclosure of
legal
obligations associated with the costs to retire long-lived assets. Accordingly,
under SFAS No. 143, the fair value of the future retirement costs of the
Company’s leased assets are recorded as a liability on a discounted basis when
it is incurred and an equivalent amount is capitalized to property and
equipment. The initial recorded obligation, which has been discounted using
the
Company’s credit-adjusted risk free-rate, will be reviewed periodically to
reflect the passage of time and changes in the estimated future costs underlying
the obligation. The Company amortizes the initial amount capitalized to property
and equipment and recognizes accretion expense in connection with the discounted
liability over the estimated remaining useful life of the leased
assets.
During
the years ended June 30, 2006 and 2005, the asset retirement obligation changed
as follows:
|
2006
|
||||
|
Beginning
balance
|
$
|
-
|
||
|
New
obligations
|
63,040 | |||
|
Accretion
of discount
|
4,385 | |||
|
Ending
balance
|
$
|
67,425
|
||
Financial
Instruments
The
Company discloses the fair value of financial instruments, both assets and
liabilities, recognized and not recognized in the balance sheet, for which
it is
practicable to estimate the fair value. The fair value of a financial instrument
is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than a forced liquidation
sale.
The
carrying amounts of financial instruments, including cash and cash equivalents;
accounts receivable; accounts payable; notes payable; capital lease obligations;
and convertible debentures payable, approximated their fair values at June
30,
2006 and 2005.
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.
F-18
Revenue
for the fiscal years ended June 30, 2006 and 2005 was derived solely from
sales
of the 131Cs
brachytherapy seed, which is used in the treatment of cancer. The Company
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
SFAS
No.
123, Accounting
for Stock-Based Compensation,
as
amended by SFAS No. 148, requires companies to recognize stock-based expense
based on the estimated fair value of employee stock options. Alternatively,
SFAS
No. 123 allows companies to retain the current approach set forth in Accounting
Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB
25),
provided that expanded footnote disclosure is presented. The Company has
not
adopted the fair value method of accounting for stock-based compensation
under
SFAS No. 123, but provides the pro forma disclosure required when appropriate
(see Note 12).
Research
and Development Costs
Research
and development costs, including salaries, research materials, administrative
expenses and contractor fees, are charged to operations as incurred. The
cost of
equipment used in research and development activities which has alternative
uses
is capitalized as part of fixed assets and not treated as an expense in the
period acquired. Depreciation of capitalized equipment used to perform research
and development is classified as research and development expense in the
year
computed.
Advertising
and Marketing Costs
Advertising
and marketing costs are expensed as incurred except for the cost of tradeshows
which are deferred until the tradeshow occurs.
Shipping
and Handling Costs
Shipping
and handling costs are expensed as incurred and included in cost of product
sales.
Legal
Contingencies
In
the
ordinary course of business, the Company is involved in legal proceedings
involving contractual and employment relationships, product liability claims,
patent rights, and a variety of other matters. The Company records contingent
liabilities resulting from asserted and unasserted claims against it, when
it is
probable that a liability has been incurred and the amount of the loss is
reasonably estimable. The Company discloses contingent liabilities when there
is
a reasonable possibility that the ultimate loss will exceed the recorded
liability. Estimating probable losses requires analysis of multiple factors,
in
some cases including judgments about the potential actions of third-party
claimants and courts. Therefore, actual losses in any future period are
inherently uncertain. Currently, the Company does not believe any probable
legal
proceedings or claims will have a material impact on its financial position
or
results of operations. However, if actual or estimated probable future losses
exceed the Company’s recorded liability for such claims, it would record
additional charges as other expense during the period in which the actual
loss
or change in estimate occurred.
F-19
Income
Taxes
Income
taxes are accounted for under the liability method. Under this method, the
Company provides deferred income taxes for temporary differences that will
result in taxable or deductible amounts in future years based on the reporting
of certain costs in different periods for financial statement and income
tax
purposes. This method also requires the recognition of future tax benefits
such
as net operating loss carryforwards, to the extent that realization of such
benefits is more likely than not. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax
rates is recognized in operations in the period that includes the enactment
of
the change.
Income
(Loss) Per Common Share
The
Company accounts for its income (loss) per common share according to SFAS
No.
128, Earnings
Per Share.
Under
the provisions of SFAS No. 128, primary and fully diluted earnings per share
are
replaced with basic and diluted earnings per share. Basic earnings per share
is
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. Common stock
equivalents, including warrants to purchase the Company's common stock and
common stock issuable upon the conversion of notes payable, are excluded
from
the calculations when their effect is antidilutive. Basic weighted average
shares outstanding for the year ended June 30, 2005 have been adjusted to
reflect the exchange ratio contained in the merger transaction dated July
28,
2005 (see Note 1). At June 30, 2006 and 2005, the calculation of diluted
weighted average shares does not include preferred stock, options, or warrants
that are potentially convertible into common stock as those would be
antidilutive due to the Company’s net loss position.
Securities
that could be dilutive in the future as of June 30, 2006 and 2005 are as
follows:
|
2006
|
2005
|
||||||
|
Preferred
stock
|
144,759
|
1,338,167
|
|||||
|
Preferred
stock warrants
|
179,512
|
233,008
|
|||||
|
Common
stock warrants
|
2,502,769
|
136,158
|
|||||
|
Common
stock options
|
3,129,692
|
2,237,802
|
|||||
|
Convertible
debentures
|
109,639
|
864,548
|
|||||
|
Total
potential dilutive securities
|
6,066,371
|
4,809,683
|
|||||
Use
of
Estimates
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management of
the
Company to make estimates and assumptions that affect the amounts reported
in
the financial statements and accompanying notes. Accordingly, actual results
could differ from those estimates and affect the amounts reported in the
financial statements.
Reclassification
Entries
Certain
reclassifications, primarily the separate disclosure of deferred financing
costs
and licenses, have been made to the 2005 financial statements to conform
to the
presentation in the 2006 financial statements.
F-20
3. Risks
and Uncertainties
The
Company’s financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and settlement of liabilities
and
commitments in the normal course of business. However, our large operating
losses and accumulated deficit, among other things, raise substantial doubt
about our ability to continue as a going concern. Management plans to raise
additional financing (including the sale of additional equity or borrowings)
and
grow the revenues of our core product while continually analyzing other market
opportunities. However, no assurance can be given that such financing will
be
completed on terms acceptable to the Company or that the Company will be
able to
meet its revenue targets. If the Company is unable to obtain additional
financing and grow revenues, we may have to curtail our business or cease
operations. The financial statements do not include any adjustments relating
to
the recoverability of assets and classification of liabilities that might
be
necessary should the Company be unable to continue as a going
concern.
4. Inventory
Inventory
consists of the following at June 30, 2006 and 2005:
|
2006
|
2005
|
||||||
|
Raw
materials
|
$
|
61,531
|
$
|
27,659
|
|||
|
Work
in process
|
67,906 | 54,267 | |||||
|
Finished
goods
|
31,944 | - | |||||
|
$
|
161,381
|
$
|
81,926
|
||||
The
cost
of materials and production costs contained in inventory that are not useable
due to the passage of time, and resulting loss of bio-effectiveness, are
written
off to cost of product sales at the time it is determined that the product
is
not useable. It is not possible to determine what portion of cost of product
sales is represented by “spoilage.”
5. Prepaid
Expenses
Prepaid
expenses consist of the following at June 30, 2006 and 2005:
|
2006
|
2005
|
||||||
|
Prepaid
contract work
|
$
|
7,913
|
$
|
65,328
|
|||
|
Prepaid
insurance
|
21,340
|
15,853
|
|||||
|
Prepaid
rent
|
30,009
|
-
|
|||||
|
Other
prepaid expenses
|
102,284
|
100,085
|
|||||
|
$
|
161,546
|
$
|
181,266
|
||||
6. Fixed
Assets
Fixed
assets consist of the following at June 30, 2006 and 2005:
|
2006
|
2005
|
||||||
|
Production
equipment
|
$
|
590,908
|
$
|
399,448
|
|||
|
Office
equipment
|
70,060
|
31,028
|
|||||
|
Furniture
and fixtures
|
100,653
|
7,736
|
|||||
|
Leasehold
improvements
|
652,404
|
138,692
|
|||||
|
Capital
lease assets (a)
|
599,738
|
34,049
|
|||||
|
Construction
in progress
|
34,254
|
366,034
|
|||||
|
2,048,017
|
976,987
|
||||||
|
Less
accumulated depreciation
|
(405,724
|
)
|
(134,664
|
)
|
|||
|
$
|
1,642,293
|
$
|
842,323
|
||||
(a) June
30,
2006 balance includes asset retirement addition of $63,040.
F-21
Depreciation
and amortization expense related to fixed assets totaled $271,060 and $140,099
for 2006 and 2005, respectively. Accumulated amortization of capital lease
assets totaled $55,644 at June 30, 2006.
7. Other
Assets
Other
assets, net of accumulated amortization, consist of the following at June
30,
2006 and 2005:
|
2006
|
2005
|
||||||
|
Deferred
charges
|
$
|
318,885
|
$
|
204,649
|
|||
|
Patents
and trademarks, net of
|
|||||||
|
accumulated
amortization of
|
|||||||
|
$13,831
and $12,318
|
20,102
|
21,614
|
|||||
|
$
|
338,987
|
$
|
226,263
|
||||
Deferred
charges consist of prepaid legal fees for patents which have not yet been
obtained, and prepayments and deposits on fixed assets and contracts.
Amortization of patents and trademarks was $1,513 and $2,938 for the years
ended
June 30, 2006 and 2005, respectively.
8. Bank
Line of Credit
The
Company has a $375,000 revolving line of credit with Columbia River Bank
that
expires on March 1, 2007. Amounts outstanding under the line bear interest
at
the bank’s reference rate (Wall Street Journal Prime Rate, which was 8.25% at
June 30, 2006) plus 2.0%. The line of credit is collateralized by all accounts
receivable and inventory, and is personally guaranteed by certain shareholders
up to $375,000 (see Note 12). The Company had no borrowings under the line
of
credit at June 30, 2006.
9. Notes
Payable
Notes
payable consist of the following at June 30, 2006 and 2005:
|
2006
|
2005
|
||||||
|
Tri-City
Industrial Development Council
|
|||||||
|
(TRIDEC)
note payable (a)
|
$
|
10,000
|
$
|
20,000
|
|||
|
Benton-Franklin
Economic Development
|
|||||||
|
District
(BFEDD) note payable (b)
|
204,237
|
222,693
|
|||||
|
Columbia
River Bank note payable (c)
|
-
|
43,654
|
|||||
|
Convertible
notes payable (d)
|
-
|
318,993
|
|||||
|
Hanford
Area Economic Investment Fund
|
|||||||
|
Committee
(HAEIFC) note payable (e)
|
418,671
|
-
|
|||||
|
632,908
|
605,340
|
||||||
|
Less
amounts due within one year
|
(51,351
|
)
|
(43,116
|
)
|
|||
|
Amounts
due after one year
|
$
|
581,557
|
$
|
562,224
|
|||
F-22
| (a) |
This
is a non-interest bearing note, due in annual installments of $10,000,
maturing August 2006. The note payable to TRIDEC bears no interest,
but
has not been discounted because the note was exchanged solely for
cash.
|
| (b) |
The
note payable to BFEDD, which is collateralized by substantially
all of the
Company’s assets, and guaranteed by certain shareholders, was executed
pursuant to a Development Loan Agreement. The note contains certain
restrictive covenants relating to: working capital; levels of long-term
debt to equity; incurrence of additional indebtedness; payment
of
compensation to officers and directors; and payment of dividends.
The note
is payable in monthly installments including interest at 8.0% per
annum
with a final balloon payment due in October 2009. At June 30, 2006,
the
Company was not in compliance with certain of the covenants. The
Company
has obtained a waiver from BFEDD, relating to these covenants,
through
June 30, 2007.
|
| (c) |
During
fiscal year 2006, the Company repaid the note payable to Columbia
River
Bank from cash on hand.
|
| (d) |
The
merger agreement between Medical, IsoRay (WA), and IsoRay Products
LLC
(see Note 1) provided the former note holders of IsoRay Products
LLC with
the option of exchanging their notes for IsoRay Medical, Inc. Series
A
preferred shares, or receiving IsoRay Medical, Inc. notes payable
with
substantially the same terms and conditions as their IsoRay Products
LLC
notes. None of the IsoRay Products LLC note holders elected to
receive
IsoRay Medical, Inc. Series A preferred shares. Accordingly, all
the note
holders (i.e., investors) were issued convertible notes. Note holders
can
convert principal and accrued interest on their outstanding balances
into
Series B preferred shares by exercising the warrants that were
issued to
them in connection with the merger (see Note 1). The notes accrued
interest at 10%, which was paid quarterly, and were scheduled to
mature in
2006 and 2007. All of the notes were converted into preferred shares
or
repaid during 2006.
|
| (e) |
In
June 2006, the Company entered into a note payable with HAEIFC,
which is
collateralized by receivables, inventory, equipment, and certain
life
insurance policies. The total note payable facility is for $1.4
million
and is to be used to purchase production equipment. In June 2006,
the
Company requested an initial disbursement of approximately $400,000.
The
note contains certain restrictive covenants relating to: financial
ratios;
payment of compensation to officers and directors; and payment
of
dividends. The note accrues interest at 9% and is payable in monthly
installments with the final installment due in July
2016.
|
On
October 14, 2005, the Company borrowed $250,000 under a short-term note payable
from a shareholder who was later appointed to the Board of Directors in April
2006. The note, which bore interest at the rate of 10.0%, was paid in full
on
its due date of December 1, 2005. In connection with the loan, the Company
granted a warrant to purchase 12,500 shares of common stock at an aggregate
total exercise price of $10. The Company recorded financing expenses of $60,000
related to the issuance of these warrants.
F-23
Principal
maturities on notes payable are due as follows:
|
Year
ending June 30,
|
||||
|
2007
|
$
|
51,351
|
||
|
2008
|
49,072
|
|||
|
2009
|
53,593
|
|||
|
2010
|
179,068
|
|||
|
2011
|
38,204
|
|||
|
Thereafter
|
261,620
|
|||
|
$
|
632,908
|
|||
10. Capital
Lease Obligations
The
Company leases certain equipment under long-term agreements that represent
capital leases. Future minimum lease payments under capital lease obligations
are as follows:
|
Year
ending June 30,
|
||||
|
2007
|
$
|
232,336
|
||
|
2008
|
215,057
|
|||
|
2009
|
27,627
|
|||
|
2010
|
-
|
|||
|
2011
|
-
|
|||
|
Thereafter
|
-
|
|||
|
Total
future minimum lease payments
|
475,020
|
|||
|
Less
amounts representing interest
|
(71,051
|
)
|
||
|
Present
value of net minimum lease payments
|
403,969
|
|||
|
Less
amounts due in one year
|
(183,554
|
)
|
||
|
Amounts
due after one year
|
$
|
220,415
|
||
11. Convertible
Debentures Payable
Through
June 30, 2005, the Company had sold $3,587,875 of convertible debentures
pursuant to the January 31, 2005 Offering (see Note 12). In July 2005, the
Company sold an additional $550,000 of these convertible debentures. The
debentures, which bear interest at 8% and mature two years from the date
of
issuance (through June 2007), can be converted into shares of the Company’s
common stock at a rate of $4.15 per share plus, at the discretion of the
Company, either a cash payment for accrued interest, or that number of common
shares equal to the amount of unpaid accrued interest at $4.15 per
share.
After
the
debentures had been outstanding for six months, the Company could, at its
option, prepay them, in whole or in part, by paying the principal and interest
accrued through the date of the prepayment. If only a portion of the debenture
is prepaid, a new debenture with substantially the same terms and conditions
will be issued to the debenture holder for the remaining principal
balance.
On
December 13, 2005, the Board of Directors announced a short-term conversion
inducement to current holders of the 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 June 30, 2006, holders of $3,682,875 of debentures had converted
to
common stock of the Company, responding to the inducement of the second exercise
method described above. As of June 30, 2006, the Company had issued 911,271
shares of common stock (including approximately 23,840 incremental shares
not
previously available to holders of debentures under the original conversion
terms), and 659,469 warrants to purchase shares of common, exercisable at
$6.00
per share. As of June 30, 2006, the Company recognized $385,511 in non-cash
short-term inducement expense, in accordance with SFAS No. 84.
F-24
12. Shareholders’
Equity (Deficit)
The
authorized capital structure of the Company consists of $.001 par value
preferred stock and $.001 par value common stock.
Preferred
Stock
The
Company's Certificate of Incorporation authorizes 6,000,000 shares of $0.001
par
value preferred stock available for issuance with such rights and preferences,
including liquidation, dividend, conversion and voting rights, as described
below.
Series
A
Series
A
preferred shares are entitled to a 10% dividend annually on the stated par
value
per share. These shares are convertible into shares of common stock at the
rate
of one share of common stock for each share of Series A preferred stock,
and are
subject to automatic conversion into common stock upon the closing of an
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933 covering the offer and sale of common stock
in
which the gross proceeds to the Company are at least $4 million. Series A
preferred shareholders have voting rights equal to the voting rights of common
stock, except that the vote or written consent of a majority of the outstanding
preferred shares is required for any changes to the Company’s Certificate of
Incorporation, Bylaws or Certificate of Designation, or for any bankruptcy,
insolvency, dissolution or liquidation of the Company. Upon liquidation of
the
Company, the Company’s assets are first distributed ratably to the Series A
preferred shareholders. At June 30, 2006, there were no Series A preferred
shares outstanding.
Series
B
Series
B
preferred shares are entitled to a cumulative 15% dividend annually on the
stated par value per share. These shares are convertible into shares of common
stock at the rate of one share of common stock for each share of Series B
preferred stock, and are subject to automatic conversion into common stock
upon
the closing of an underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933 covering the offer
and
sale of common stock in which the gross proceeds to the Company are at least
$4
million. Series B preferred shareholders have voting rights equal to the
voting
rights of common stock, except that the vote or written consent of a majority
of
the outstanding preferred shares is required for any changes to the Company’s
Certificate of Incorporation, Bylaws or Certificate of Designation, or for
any
bankruptcy, insolvency, dissolution or liquidation of the Company. Upon
liquidation of the Company, the Company’s assets are first distributed ratably
to the Series A preferred shareholders, then to the Series B preferred
shareholders. At June 30, 2006, there were 144,759 Series B preferred shares
outstanding and cumulative dividends in arrears were $39,356.
F-25
In
addition to the shares of common stock and Series B preferred stock issued
pursuant to the merger transaction (see Note 1), the Company had the following
transactions that affected shareholders’ equity (deficit) during the years ended
June 30, 2006 and 2005.
IsoRay,
Inc. June 2006 Warrant Exercise Solicitation
In
June
2006, the Board of Directors approved a limited one-time discount of the
exercise price of outstanding warrants (with exercise prices over $3.00)
to
$3.00 per share of common stock if the warrants were exercised on or before
June
30, 2006. The warrants were primarily held by investors who purchased them
as part of the Company’s October 2005 and February 2006 private placement
offerings. The Company issued 427,764 common shares and raised $1,223,602,
net
of offering costs, through this warrant exercise solicitation.
IsoRay,
Inc. February 2006 Private Placement
On
February 1, 2006 the Company commenced an offering of Investment Units (“Units”)
for sale, pursuant to a Private Placement Offering (the “February 2006
Offering”), which management believes was exempt from registration under the
Securities Act of 1933 ("the Act") pursuant to Section 4(2) of the Act and
Rule
506 of Regulation D. The February 2006 Offering consisted 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.
The Units were sold for $22,500 per Unit. The Company closed this offering
on
February 24, 2006. Approximately $1.1 million, net of offering costs, was
raised
under the February 2006 Offering.
IsoRay,
Inc. 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"). The Purchase Agreements permitted Mercatus
to purchase 1,748,146 shares of the Company's common stock at a purchase
price
of $3.502 per share subject to receipt of funding. As no funding had been
received, on May 18, 2006, the Company requested immediate return of the
certificates representing all shares of common stock to which Mercatus had
previously subscribed in accordance with the terms of the Purchase Agreements.
The Purchase Agreements call for return of certificates within ten days if
funding is not received within two days of receipt of the notice. After
significant delay and the Company's attainment of a court order, the share
certificates were returned. On August 8, 2006, the share certificates were
cancelled and the Purchase Agreements were terminated (see Note
17).
IsoRay,
Inc. October 2005 Private Placement
On
January 30, 2006 the Company closed an offering of Units for sale, pursuant
to a
Private Placement Offering (“the October 2005 Offering”) of October 17, 2005,
which management believes was exempt from registration under the Securities
Act
of 1933 ("the Act") pursuant to Section 4(2) of the Act and Rule 506 of
Regulation D. The October 2005 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 October 2005 Offering,
at
the sole discretion of the Company, to a maximum of 300 Units. The Units
were
sold for $20,000 per Unit. Approximately $5.4 million, net of offering costs,
was raised under the October 2005 Offering.
F-26
IsoRay
Medical, Inc. January 2005 Private Placement
In
January 2005, Medical commenced an offering (“the January 2005 Offering”) of up
to $2,000,000 of 8% convertible debentures (see Note 11) to accredited investors
in a private placement, which management believes was exempt from registration
under the Securities Act of 1933 ("the Act") pursuant to Section 4(2) of
the Act
and Rule 506 of Regulation D. On May 27, 2005, Medical amended and restated
the
January 2005 Offering to increase the maximum amount of the offering to
$4,150,000.
Through
June 30, 2005, Medical sold debentures totaling $3,587,875. In connection
with
the sales of these debentures, Medical paid commissions totaling $216,783
and
legal expenses totaling $56,470, which amounts have been recorded as deferred
financing costs.
In
July
2005, Medical sold an additional $550,000 of debentures pursuant to this
offering. The sale of these additional debentures was not subject to payment
of
commissions.
In
2006,
$3,682,875 of the debentures were converted to common stock pursuant to a
short-term conversion inducement (see Note 11).
IsoRay
Medical, Inc. October 2004 Private Placement
In
October 2004, Medical commenced an offering (“the October 2004 Offering”) of up
to $2,000,000 of securities to accredited investors in a private placement,
which management believes was exempt from registration under the Securities
Act
of 1933 ("the Act") pursuant to Section 4(2) of the Act and Rule 506 of
Regulation D. The October 2004 Offering consisted of up to 100 Investment
Units,
each unit consisting of 10,000 shares of Medical’s common stock and a callable
warrant to purchase 3,000 shares of common stock at an exercise price of
$.50
per share, for $20,000 per Investment Unit. Simultaneous with the October
2004
Offering, the officers and directors of Medical had the right to independently
sell similar Investment Units pursuant to a separate private placement
memorandum on substantially the same terms and conditions as the October
2004
Offering.
During
the year ended June 30, 2005, Medical sold 76.55 Investment Units, representing
765,500 common shares and callable warrants for the purchase of 229,650 common
shares, for cash totaling $1,531,000. In connection with the sales of the
Investment Units, Medical paid commissions and expense allowances totaling
$119,980 to broker-dealers, and legal expenses totaling $54,442 to attorneys,
which amounts have been recorded as reductions of additional paid-in
capital.
In
connection with the October 2004 Offering, Medical granted the selling
broker-dealers warrants to purchase 4.23 Investment Units at $20,000 per
Investment Unit. These Investment Units, which expire on March 25, 2007,
represent 42,300 IsoRay Medical, Inc. common shares and 12,690 warrants to
purchase common shares at $.50 per share.
Issuance
of Common Stock for Guarantee of Debt
During
fiscal year 2005, Medical issued 211,140 shares of its common stock to certain
shareholders as an inducement for their guarantee of the Columbia River Bank
line of credit (see Note 8) and the note payable to Benton-Franklin Economic
Development District (see Note 9). The transactions were recorded at the
fair
value of the shares, estimated to be $348,381, since management considered
this
amount to be more readily determinable than the value of the guarantees.
The
guarantees were recorded as deferred financing costs (see Note 2).
F-27
Issuance
of Common Stock in Payment of Consulting Services
During
2006, the Company issued 173,472 shares of its common stock in full satisfaction
of consulting services including 168,472 shares that were issued as payment
for
merger consulting services (see Note 1). The shares were valued using the
market
price of the stock on the date of issue.
Issuance
of Common Stock in Partial Payment of Equipment Purchase
During
2006, the Company issued 10,000 shares of its common stock and paid $962
of cash
in full satisfaction for the purchase of production equipment and repairs
and
maintenance invoices totaling $40,962. The shares were valued using the market
price of the stock on the date of issue.
During
2005, Medical issued 30,303 shares of its common stock and paid $40,000 of
cash
in full satisfaction of the $90,000 purchase price of three laser welding
stations. The transaction was recorded at the purchase price of the laser
welding stations, since management considered this amount to be more readily
determinable than the fair value of the shares.
Cash
Payments for Fractional Shares
During
2006, the Company paid a combined total of $734 to the former common and
preferred shareholders of Medical and Century for fractional shares that
resulted from the merger that was effective July 28, 2005 (see Note
1).
During
2005, Medical paid a combined total of $100 to the former common shareholders
of
IsoRay, Inc. (WA) and the former Class A, B and C members of IsoRay Products
LLC
for fractional shares that resulted from the merger that was effective October
1, 2004 (see Note 1).
Warrants
to Purchase Series B Preferred Stock
Pursuant
to a private placement of debt units during 2003 and 2004, IsoRay Products
LLC
issued $365,000 of notes payable to investors (see Note 9) and granted warrants
for the purchase of 227,750 of its Class A member shares. In connection with
the
merger transaction of IsoRay (WA) and IsoRay Products LLC into IsoRay Medical,
Inc. (see Note 1), Medical exchanged the IsoRay Products LLC warrants for
warrants to purchase 384,440 IsoRay Medical, Inc. Series B preferred shares.
The
warrants activity is summarized as follows:
|
2006
(a)
|
2005
(a)
|
||||||||||||
|
Warrants
|
Price
(b)
|
Warrants
|
Price
(b)
|
||||||||||
|
Beginning
balance outstanding
|
233,008
|
$
|
0.84
|
323,830
|
$
|
0.91
|
|||||||
|
Exercised
|
(53,496
|
)
|
1.03
|
(90,822
|
)
|
1.07
|
|||||||
|
Ending
balance outstanding
|
179,512
|
$
|
0.79
|
233,008
|
$
|
0.84
|
|||||||
| (a) |
2005
share and price data and 2006 beginning balances have been adjusted
to
reflect the 0.842362 conversion ratio (see Note
1).
|
| (b) |
Weighted
average price per share.
|
F-28
The
following table summarizes additional information about the Company’s preferred
warrants outstanding as of June 30, 2006:
|
Number
of Warrants
|
Price
|
Expiration
Date
|
|||||
|
56,876
|
$
|
0.70
|
October
30, 2006
|
||||
|
28,438
|
0.70
|
January
31, 2007
|
|||||
|
31,102
|
1.06
|
February
28, 2007
|
|||||
|
6,220
|
1.40
|
February
28, 2007
|
|||||
|
56,876
|
0.70
|
March
30, 2007
|
|||||
|
179,512
|
|||||||
Warrants
to Purchase Common Stock
In
connection with the February 2006 Offering, the October 2005 Offering, the
October 2004 Offering, and at other times the Company has issued warrants
for
the purchase of common stock. The warrants activity is summarized as
follows:
|
2006
(a)
|
2005
(a)
|
||||||||||||
|
|
Warrants
|
Price
(b)
|
Warrants
|
Price
(b)
|
|||||||||
|
Beginning
balance outstanding
|
136,158
|
$
|
1.20
|
-
|
$
|
-
|
|||||||
|
Warrants
issued
|
2,878,522
|
5.85
|
245,454
|
0.93
|
|||||||||
|
Exercised
|
(511,911
|
)
|
2.49
|
(109,296
|
)
|
0.59
|
|||||||
|
Ending
balance outstanding
|
2,502,769
|
$
|
5.73
|
136,158
|
$
|
1.20
|
|||||||
|
(a)
|
2005
share and price data and 2006 beginning balances have been adjusted
to
reflect the 0.842362 conversion ratio (see Note
1).
|
|
(b)
|
Weighted
average price per share.
|
The
following table summarizes additional information about the Company’s common
warrants outstanding as of June 30, 2006:
|
Number
of Warrants
|
Range
of Exercise Prices
|
Expiration
Date
|
|||||
|
19,500
|
$
|
6.00
|
January
2007
|
||||
|
2,488
|
$
|
1.06
|
February
2007
|
||||
|
46,419
|
$
|
0.59
to $2.37
|
March
2007
|
||||
|
277,616
|
$
|
4.15
|
July
2007
|
||||
|
12,500
|
$
|
0.0008
|
October
2007
|
||||
|
53,000
|
$
|
6.00
|
October
2007
|
||||
|
162,500
|
$
|
6.00
|
November
2007
|
||||
|
935,382
|
$
|
5.75
to $6.00
|
December
2007
|
||||
|
680,750
|
$
|
6.00
|
January
2008
|
||||
|
281,923
|
$
|
6,00
to $6,50
|
February
2008
|
||||
|
5,691
|
$
|
4.15
|
March
2008
|
||||
|
25,000
|
$
|
2.00
|
July
2015
|
||||
|
2,502,769
|
|||||||
F-29
Common
Stock Option Plans
On
July
28, 2005, the Company adopted the Amended and Restated 2005 Stock Option
Plan
(the "Option Plan") and the Amended and Restated 2005 Employee Stock Option
Plan
(the "Employee Plan"), pursuant to which it may grant equity awards to eligible
persons. The Option Plan allows the Board of Directors to grant options to
purchase up to 1,800,000 shares of common stock to directors, officers, key
employees and service providers of the Company, and the Employee Plan allows
the
Board of Directors to grant options to purchase up to 2,000,000 shares of
common
stock to officers and key employees of the Company. These options can be
granted
with various vesting schedules and have a maximum term of 10 years.
These
plans replaced the IsoRay Medical, Inc. 2004 Stock Option Plan (“the 2004 Plan”)
and the IsoRay Medical, Inc. 2004 Employee Stock Option Plan (“the 2004 Employee
Plan”). The stated purpose of the plans was to provide an incentive-based form
of compensation to directors, officers, key employees and service providers
of
Medical and encourage such persons to invest in shares of Medical’s common
stock, thereby acquiring a proprietary interest in the success of
Medical.
Replacement
options were issued from the Option Plan and the Employee Plan to replace
those
options previously granted under the 2004 Plan and the 2004 Employee Plan.
The
replacement options are included in the totals show below for options granted
and outstanding pursuant to the Option Plan and the Employee Plan.
Stock-Based
Compensation
As
described in Note 2, the Company currently accounts for stock-based compensation
in accordance with SFAS No. 123. As permitted by SFAS No. 123, management
currently accounts for share-based payments to employees using APB 25's
intrinsic value method, and provides expanded footnote disclosure when
necessary.
In
December 2004, the Financial Accounting Standards Board issued SFAS No. 123
(revised 2004), Share-Based
Payment
("SFAS
No. 123(R)"), which is a revision of SFAS No. 123. SFAS No. 123(R) also
supersedes APB 25, and amends SFAS No. 95, Statement
of Cash Flows.
Generally, the approach in SFAS No. 123(R) is similar to the approach prescribed
by SFAS No. 123. SFAS No. 123(R) requires that all share-based payments to
employees, including grants of employee stock options, be recognized in the
income statement based on their fair values. Pro forma disclosure will no
longer
be permitted. SFAS No. 123(R) is effective at the beginning of the first
fiscal
year beginning after December 15, 2005. The Company plans to adopt
SFAS 123(R) on July 1, 2006 on a prospective basis. Upon adoption, all
future employee stock option grants plus the balance of the non-vested grants
awarded prior to July 1, 2006, will be expensed over the stock option
vesting period based on the fair value at the date the options are granted.
The
Company estimates that the impact of adoption will be an additional expense
of
$189,430 for employee stock options granted prior to June 30, 2006.
F-30
A
summary
of the Company’s stock option activity and related information for the years
ended June 30, 2006 and 2005 is as follows:
|
2006
(a)
|
|
2005
(a)
|
|||||||||||
|
Shares
|
|
Price
(b)
|
|
Shares
|
|
Price
(b)
|
|||||||
|
Beginning
balance outstanding
|
2,237,802
|
$
|
1.31
|
383,430
|
$
|
1.19
|
|||||||
|
Granted
(c)
|
1,189,722
|
3.23
|
1,962,703
|
1.33
|
|||||||||
|
Cancelled
|
(196,548
|
)
|
1.19
|
-
|
-
|
||||||||
|
Exercised
|
(101,284
|
)
|
1.18
|
(108,331
|
)
|
1.19
|
|||||||
|
Ending
balance outstanding
|
3,129,692
|
$
|
2.05
|
2,237,802
|
$
|
1.31
|
|||||||
|
Exercisable
at end of year
|
2,649,576
|
$
|
1.79
|
||||||||||
|
(e)
|
2005
share and price data and 2006 beginning balances have been adjusted
to
reflect the 0.842362 conversion ratio (see Note
1).
|
|
(f)
|
Weighted
average price per share.
|
|
(g)
|
All
options granted had exercise prices equal to the ending market
price of
the Company’s common stock on the grant
date.
|
The
following table summarizes additional information about the Company’s stock
options outstanding as of June 30, 2006:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Range
of Exercise Prices
|
Shares
|
|
Price
(a)
|
|
Life
(b)
|
|
Shares
|
|
Price
(a)
|
|||||||
|
$1.00
to $1.19
|
1,886,179
|
$
|
1.16
|
8.97
yrs
|
1,717,707
|
$
|
1.16
|
|||||||||
|
$1.96
to $2.00
|
653,791
|
1.98
|
9.09
yrs
|
653,791
|
1.98
|
|||||||||||
|
$3.80
to $4.15
|
318,472
|
3.99
|
9.49
yrs
|
128,078
|
3.88
|
|||||||||||
|
$5.50
to $6.55
|
271,250
|
6.15
|
9.64
yrs
|
150,000
|
6.38
|
|||||||||||
|
Total
options
|
3,129,692
|
2,649,576
|
||||||||||||||
|
(a)
|
Weighted
average exercise price.
|
| (b) |
Weighted
average remaining contractual life.
|
The
pro
forma net loss presented below for the years ended June 30, 2006 and 2005
was
determined as if the Company had accounted for these options under the fair
value method of SFAS No. 123. The fair value of these options was estimated
at
the date of grant using the Black-Scholes method set forth in SFAS No.
123(R).
|
2006
|
|
2005
|
|||||
|
Net
loss as reported
|
$
|
8,158,130
|
$
|
4,269,188
|
|||
|
SFAS
No. 123 stock option expense
|
1,167,086
|
771,365
|
|||||
|
Pro
forma net loss
|
$
|
9,325,216
|
$
|
5,040,553
|
|||
|
Net
loss per share:
|
|||||||
|
Basic,
as reported
|
$
|
0.68
|
$
|
0.78
|
|||
|
Basic,
pro forma
|
0.77
|
0.92
|
|||||
|
Diluted,
as reported
|
0.68
|
0.78
|
|||||
|
Diluted,
pro forma
|
0.77
|
0.92
|
|||||
F-31
The
following assumptions were used in calculating the fair value of the
options:
|
2006
|
|
2005
|
|||||
|
Weighted
average risk-free interest rate
|
4.67
|
%
|
3.50
|
%
|
|||
|
Expected
life of the option (in years)
|
7.31
|
10.00
|
|||||
|
Expected
price volatility
|
31.24
|
%
|
30.00
|
%
|
|||
|
Expected
dividend yield
|
0.00
|
%
|
0.00
|
%
|
|||
If
the
Company had fully accounted for its employee stock options in accordance
with
the provisions of SFAS No. 123, compensation expense would have been $1,167,086
and $771,365 greater than the amounts recorded for the years ended June 30,
2006
and 2005, respectively.
13. Income
Taxes
The
Company recorded no income tax provision or benefit for the years ended June
30,
2006 and 2005.
At
June
30, 2006, the Company had a net deferred tax asset of approximately $3,820,000,
arising principally from net operating loss carryforwards. The deferred tax
asset was calculated based on the currently enacted 34% statutory income
tax
rate. Since management of the Company cannot determine if it is more likely
than
not that the Company will realize the benefit of its net deferred tax asset,
a
valuation allowance equal to the full amount of the net deferred tax asset
at
June 30, 2006 has been established.
At
June
30, 2006, the Company had tax basis net operating loss carryforwards of
approximately $11,000,000 available to offset future regular taxable income.
These net operating loss carryforwards expire through 2026.
IsoRay
Products LLC was a limited liability company prior to the merger with Medical.
In lieu of current federal income taxes arising at the company level, the
individual members were taxed on their proportionate share of the company’s
taxable income. Accordingly, there are no net operating loss carryforwards
related to this entity.
14. Related
Party Transactions
In
addition to transactions described in Note 12, the Company had the following
transactions with related parties:
The
Company received various legal services from two law firms in which one of
the
firm’s partners is a member of the Company’s Board of Directors. The total
amounts paid in 2006 and 2005 to the law firms was $390,000 and $285,000,
respectively. The 2006 expenses include approximately $77,000 accrued in
accounts payable as of June 30, 2006.
During
fiscal year 2006, the Company paid $60,000 to a shareholder for strategic
business and financial consulting.
During
2005, Medical paid or accrued $5,600 for accounting services performed by
a
company owned by a member of Medical’s Board of Directors.
15. Commitments
and Contingencies
Royalty
Agreement for Invention and Patent Application
A
shareholder of the Company previously assigned his rights, title and interest
in
an invention to IsoRay Products LLC in exchange for a royalty equal to 1%
of the
Gross Profit, as defined, from the sale of “seeds” incorporating the technology.
The patent and associated royalty obligations were transferred to the Company
in
connection with the merger transactions (see Note 1).
F-32
The
Company must also pay a royalty of 2% of Gross Sales, as defined, for any
sub-assignments of the aforesaid patented process to any third parties. The
royalty agreement will remain in force until the expiration of the patents
on
the assigned technology, unless earlier terminated in accordance with the
terms
of the underlying agreement. To date, there have been no product sales
incorporating the technology and there is no royalty due pursuant to the
terms
of the agreement.
Patent
and Know-How Royalty License Agreement
IsoRay
Products LLC was the holder of an exclusive license to use certain “know-how.”
This license was transferred to Medical and subsequently to the Company in
connection with the merger transactions (see Note 1). The terms of the original
license agreement required the payment of a royalty based on the Net Factory
Sales Price, as defined in the agreement, of licensed product sales. Because
the
licensor’s patent application was ultimately abandoned, only a 1% “know-how”
royalty based on Net Factory Sales Price, as defined, remains applicable.
To
date, there have been no product sales incorporating the licensed technology
and
there is no royalty due pursuant to the terms of the agreement. Management
does
not believe that it will ever incorporate this technology in its products
and
therefore that no royalty payment will be due.
Battelle
Memorial Institute Production Agreement
In
April
2004, IsoRay Products LLC entered into an agreement with Battelle Memorial
Institute, Pacific Northwest Division (Battelle), the operator of the Pacific
Northwest National Laboratory, for certain production-related services and
facilities. This agreement was assumed by Medical and subsequently by the
Company following the merger transactions (see Note 1). In accordance with
the
terms of the agreement, the Company is required to make advance payments,
which
are then applied against billings by Battelle as services are provided. During
the years ended June 30, 2006 and 2005, the Company incurred $868,650 and
$574,225, respectively, of costs for production-related services and facilities
provided by Battelle. At June 30, 2006, prepaid expenses include $7,913 related
to this agreement. The agreement, which expires December 31, 2007, may be
terminated at any time by either party, upon giving a 60-day written notice
to
the other party.
Operating
Lease Agreements
The
Company leases office and laboratory space and production and office equipment
under noncancelable operating leases. The lease agreements require monthly
lease
payments and expire on various dates through June 2011. Future minimum lease
payments under operating leases are as follows:
|
Year
ending June 30,
|
||||
|
2007
|
$
|
45,443
|
||
|
2008
|
13,369
|
|||
|
2009
|
9,747
|
|||
|
2010
|
9,604
|
|||
|
2011
|
9,175
|
|||
|
Thereafter
|
-
|
|||
|
$
|
87,338
|
|||
F-33
In
February 2005, the Company entered into a lease agreement for a portion of
a
building in which it established production facilities. The lease term commenced
on regulatory licensing approval, which was obtained in October 2005, and
terminates one year from the commencement date of the lease. The annual rental
was paid using 24,007 shares of the Company’s common stock. Rent expense of
$90,026 has been recognized in the year ended June 30, 2006 relating to this
facility.
Rental
expense (including rent paid with common stock) amounted to $155,838 and
$28,641
for the years ended June 30, 2006 and 2005, respectively.
License
Agreement with IBt
In
February 2006, the Company signed a license agreement with International
Brachytherapy s.a. (“IBt”) covering North America and providing the Company with
access to IBt’s Ink Jet production process and its proprietary polymer seed
technology for use in brachytherapy procedures using Cesium-131. The Company
paid license fees of $275,000 during 2006 and another payment of $225,000
was to
be made in August 2006 pursuant to the license agreement. Royalty payments
based
on net sales revenue incorporating the technology are also required, with
minimum quarterly royalties ranging from $100,000 to $200,000 and minimum
annual
royalties ranging from $400,000 to $800,000 over the term of the
agreement.
As
of the
date of this report, the August 2006 payment has not been made as the Company
has been in continued negotiations with IBt concerning the amount and timing
of
future royalty payments due to the low market acceptance of the polymer seed
technology.
16. Concentrations
of Credit and Other Risks
Financial
Instruments
The
Company’s financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts
receivable.
The
Company’s cash and cash equivalents are maintained with high-quality financial
institutions. The accounts are guaranteed by the Federal Deposit Insurance
Corporation (FDIC) up to $100,000. At June 30, 2006, uninsured cash balances
totaled $1,726,445.
The
Company’s accounts receivable result from credit sales to customers. The Company
had three customers whose sales were greater than 10% for each of the years
ended June 30, 2006 and 2005. These customers represented 49.15% and 70.93%
of
the Company’s total revenues for the years ended June 30, 2006 and 2005,
respectively. Those same customers accounted for 47.9% and 77.5% of the
Company’s net accounts receivable balance at June 30, 2006 and 2005,
respectively.
Sales
to
the Company’s largest customer totaled 20.6% and 30.6% of total revenues in 2006
and 2005, respectively.
The
loss
of any of these significant customers would have a temporary adverse effect
on
the Company’s revenues, which would continue until the Company located new
customers to replace them.
F-34
The
Company routinely assesses the financial strength of its customers and provides
an allowance for doubtful accounts as necessary.
Inventories
Most
components used in the Company’s product are purchased from outside sources.
Certain components are purchased from single suppliers. The failure of any
such
supplier to meet its commitment on schedule could have a material adverse
effect
on the Company’s business, operating results and financial condition. If a
sole-source supplier were to go out of business or otherwise become unable
to
meet its supply commitments, the process of locating and qualifying alternate
sources could require up to several months, during which time the Company’s
production could be delayed. Such delays could have a material adverse effect
on
the Company’s business, operating results and financial condition.
17. Subsequent
Events
The
following events and transactions have occurred subsequent to June 30,
2006:
Return
of Subscription Receivable Shares
The
Company had previously entered into Purchase Agreements with Mercatus in
December 2005 that permitted Mercatus to purchase 1,748,146 shares of common
stock subject to the receipt of funding (see Note 12). As no funding had
been
received, on May 18, 2006, the Company requested the return of the share
certificates. After significant delay and the Company’s attainment of a court
order, the share certificates were returned. On August 8, 2006, the share
certificates were cancelled and the Purchase Agreements were
terminated.
August
2006 Stock Purchase Agreement
On
August
17, 2006, the Company sold certain shares of its common stock and warrants
to
purchase common stock pursuant to a Common Stock and Warrant Purchase Agreement
(the "Purchase Agreement") dated August 9, 2006. The securities were issued
to
25 accredited investors pursuant to the exemption from registration provided
by
Section 4(2) of the Securities Act of 1933, as amended. MicroCapital, LLC
acted
as the lead investor for the transaction. A total of $5,158,000 in cash proceeds
(less 6% commissions to registered broker-dealers and other legal costs)
was
received by the Company in exchange for the issuance of 2,063,200 shares
of
common stock and warrants to purchase 2,063,200 shares of common stock. In
addition, brokers assisting the Company with the capital raise were issued
warrants to purchase 206,300 shares of common stock on identical terms as
the
warrants issued to investors. If all warrants were exercised, the Company
would
receive $6,808,500.
Pursuant
to the Purchase Agreement, the purchase price per share of the Company’s common
stock was $2.50, and the accompanying warrants were issued with an exercise
price of $3.00 per share. The warrants and the Purchase Agreement contain
anti-dilution provisions, including one providing that, if the Company issues
stock or rights to acquire stock at a price less than $2.00 (excluding certain
issuances such as options to employees, directors and certain consultants
and
shares issued in connection with licensing or leasing transactions), the
Company
is required to issue to each investor additional shares equal to 25% of what
such investor purchased in the original transaction. The warrants are
exercisable by the holder (subject to anti-dilution and adjustment provisions)
for a period of five years from the date of issuance. The warrants are callable
by the Company for 45 days after a period of 60 trading days in which the
price
of the underlying stock exceeds $4.50 per share for 30 of the 60 days, and
only
if a registration statement covering the underlying shares is
effective.
F-35
In
connection with the Purchase Agreement, the Company also entered into a
Registration Rights Agreement whereby the Company has agreed to file a
registration statement to cover the re-sale of the shares of common stock
sold
and issuable upon exercise of the warrants. Under the Registration Rights
Agreement, the Company has agreed to file the registration statement within
60
days of the closing, cure any defect causing the registration statement to
fail
to be effective within 10 business days, and cause suspension periods for
the
registration statement to not exceed 60 days in any 360 day period. If the
Company fails to comply with these provisions, the Company will be required
to
pay as liquidated damages an amount equal to 2% of the aggregate purchase
price
paid by the investors for each 30 day period during which the failure continues,
not to exceed 10% of the aggregate purchase price.
Settlement
Agreements with Former Executives
In
September 2006, the Company entered into a settlement agreement with a former
executive. As part of the settlement the Company agreed to pay the former
executive $100,000 in September 2006 and $215,000 in January 2007. As the
former
executive’s employment with the Company ended in March 2006, the full amount of
both payments was accrued as of June 30, 2006 in accrued payroll.
Also
in
September 2006, the Company reached a preliminary settlement agreement with
its
former Chief Financial Officer. The preliminary settlement calls for payments
totaling $288,000 through September 2007. As the former Chief Financial
Officer’s employment ended in September 2006, no accrual was made as of June 30,
2006.
F-36
Part
II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
| Item 24. |
Indemnification
of Directors and Officers
|
The
Company's Articles of Incorporation provide to directors and officers
indemnification to the full extent provided by law, and provide that, to
the
extent permitted by Minnesota law, a director will not be personally liable
for
monetary damages to the Company or its shareholders for breach of his or
her
fiduciary duty as a director, except for liability for certain actions that
may
not be limited under Minnesota law. On July 1, 2006, the Company entered
into
Indemnification Agreements with each of its directors and executive officers,
and the Company intends to enter into substantially identical agreements
with
any officers and directors who take office in the future. The purpose of
the
Indemnification Agreements is to provide all officers and directors with
indemnification to the fullest extent permitted under the Minnesota Business
Corporations Act.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
|
Item 25.
|
Other
Expenses of Issuance and Distribution
|
|
Securities
and Exchange Commission registration fee
|
$
|
4,423
|
||
|
Transfer
agent fees
|
$
|
2,000
|
||
|
Accounting
fees and expenses
|
$
|
5,000
|
||
|
Legal
fees and expenses
|
$
|
75,000
|
||
|
Blue
sky fees and expenses
|
$
|
10,000
|
||
|
|
||||
|
Total
|
$
|
96,423
|
All
amounts are estimates, other than the Commission's registration fee. We are
paying all expenses of the offering listed above. No portion of these expenses
will be borne by the selling shareholders. The selling shareholders, however,
will pay any other expenses incurred in selling their common stock, including
any brokerage commissions or costs of sale.
|
Item 26.
|
Recent
Sales of Unregistered Securities
|
During
the past three years the following sales of unregistered securities were
completed by the Registrant:
|
·
|
On
August 17, 2006, the Registrant sold certain shares of its common
stock
and warrants to purchase common stock pursuant to a Common Stock
and
Warrant Purchase Agreement (the "Purchase Agreement") dated. The
securities were issued to 25 accredited investors pursuant to the
exemption from registration provided by Section 4(2) of the Securities
Act
of 1933, as amended. MicroCapital, LLC acted as the lead investor
for the
transaction. A total of $5,158,000 in cash proceeds (less 6% commissions
to registered broker-dealers) was received by the Registrant in
exchange
for the issuance of 2,063,200 shares of common stock and warrants
to
purchase 2,063,200 shares of common stock. In addition, brokers
assisting
the Registrant with the capital raise were issued warrants to purchase
206,300 shares of common stock on identical terms as the warrants
issued
to investors. If all warrants were exercised, the Registrant would
receive
$6,808,500.
|
II-1
|
·
|
On
January 2, 2006 the Registrant issued 5,000 shares of common stock
in
exchange for consulting services by Rockberry LLC pursuant to the
exemption from registration provided by Section 4(2) of the Securities
Act.
|
|
·
|
In
February 2006, the Registrant sold 268,899 shares of common stock,
and
issued an equal number of warrants to purchase common stock, for
cash
proceeds of $1,210,000. These sales 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. None of these shares or warrants are included
in this registration statement. In connection with this sale, 12,889
warrants were issued as compensation to certain NASD registered
broker-dealers. None of these warrants or shares of common stock
which
would be issued pursuant to the exercise of these warrants are
included in
this registration.
|
|
·
|
Between
October 17, 2005 and January 31, 2006, the Registrant sold 1,500,000
shares of common stock, and issued an equal number of warrants
to purchase
common stock, for cash proceeds of $6,000,000 (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 effected pursuant
to the
exemption from registration provided by Regulation D promulgated
under the
Securities Act, and Section 4(2) of the Securities Act. None of
the shares
or warrants are included in this registration statement. In connection
with this sale, 92,159 warrants were issued as compensation to
certain
NASD registered broker-dealers. None of these warrants are included
in
this registration.
|
|
·
|
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”). The Purchase Agreements
permitted Mercatus 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, subject to receipt of funding. 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.
On May
18, 2006, the Company requested that the certificates representing
these
shares be returned immediately. On August 8, 2006, the share certificates
were cancelled and the Purchase Agreements were terminated.
|
|
·
|
On
November 18, 2005, the Registrant issued 10,000 shares of common
stock 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. None of these shares is included
in
this registration.
|
|
·
|
On
October 6, 2005, the Registrant 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. None of these shares is included in this registration.
|
|
·
|
On
July 28, 2005, pursuant to the Merger, the Registrant issued 6,401,081
shares of its common stock, 1,338,167 shares of its Series B preferred
stock, options to purchase 2,069,337 shares of its common stock,
warrants
to purchase 344,792 shares of its common stock, and warrants to
purchase
233,014 shares of its preferred stock. These securities were issued
by the
Registrant in reliance upon an exemption from registration under
Section
4(2) and Regulation D of the Securities Act of 1933, as
amended.
|
|
·
|
In
April 2005, the Registrant sold an aggregate of approximately 83,334
shares for cash proceeds of $85,000. These shares were sold to
three
purchasers - Andrew Ecclestone (48,999 shares), Gary Boster (29,399
shares) and Philip and Stephanie Rogers (4,934 shares) - in reliance
on
the exemption from registration provided by Section 4(2) of the
Securities
Act. All of these shares are included in this
registration.
|
II-2
|
·
|
On
December 3, 2003, the Registrant issued 26,236 shares of restricted
common
to Thomas Scallen, its former CEO, as compensation valued at $7,871,
in
reliance on the exemption from registration provided by Section
4(2) of
the Securities Act. All of these shares are included in this
registration.
|
|
·
|
On
December 3, 2003, the Registrant issued 289,193 shares of restricted
common stock to Mark Rosenberg in redemption of two notes payable
of
approximately $36,758, pursuant to the conversion terms of the
two notes
and in reliance on the exemption from registration provided by
Section
4(2) of the Securities Act. None of these shares are included in
this
registration.
|
Additionally,
during the past three years the following sales of unregistered securities
were
completed by IsoRay Medical, Inc. and predecessor IsoRay companies as
noted:
IsoRay
Medical, Inc.
|
·
|
Between
January 31, 2005 and July 10, 2005, IsoRay Medical, Inc. sold
approximately $4,137,875 in principal amount of 8% convertible
debentures
(less commissions of ten percent (10%) on securities placed by
broker/dealers), in reliance on the exemption from registration
provided
by Rule 506 of Regulation D of the Securities Act, that subsequent
to the
merger between the Registrant and IsoRay Medical, Inc. were convertible
into 995,882 shares of common stock of the Registrant. On December
13,
2005, the Board of Directors of the Registrant announced a short-term
conversion inducement to current holders of these convertible
debentures.
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 include the newly issued shares in this
registration
statement, or 2) convert under terms essentially identical to
those
offered to purchasers of Units in the Registrant’s 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 May 5, 2006, holders of $3,682,875
of
debentures had converted to common stock of the Registrant. As
of that
date, the Registrant had issued 911,276 shares of common stock,
and
659,469 warrants to purchase shares of common stock, exercisable
at $6.00
per share, leaving $455,000 in principal amount of debentures
unconverted.
Of the 911,276 shares of common stock issued pursuant to conversion
of the
debentures, 251,800 shares are included in this registration.
|
|
·
|
On
March 31, 2005, IsoRay Medical, Inc. issued, in reliance on the
exemption
from registration provided by Section 4(2) of the Securities
Act, 30,303
shares of its common stock and paid $40,000 of cash to Intellegration
LLC
in full satisfaction of the $90,000 purchase price of three laser
welding
stations. Pursuant to the merger with the Registrant, these 30,303
shares
were converted into 25,526 shares of the Registrant’s common stock, of
which all 25,526 are included in this
registration.
|
|
·
|
In
January, 2005, IsoRay Medical, Inc. issued, in reliance on the
exemption
from registration provided by Section 4(2) of the Securities
Act, 211,140
shares of its common stock under §83(b) (subject to a substantial risk of
forfeiture) to certain shareholders as an inducement for their
guarantee
of the Columbia River Bank line of credit and the note payable
to
Benton-Franklin Economic Development District. The transactions
were
recorded at the fair value of the shares, estimated to be $348,381.
Pursuant to the merger with the Registrant, these 211,140 shares
were
converted into 177,854 shares of the Registrant’s common stock, of which
none are included in this
registration.
|
II-3
|
·
|
Between
October 15, 2004 and January 21, 2005, IsoRay Medical, Inc. sold
765,500
shares of common stock and issued 229,650 warrants to purchase
shares of
common stock for $.50 per share, for a total of $1,531,000 to
accredited
individual investors, (less commissions of ten percent (10%)
on securities
placed by broker/dealers), in reliance on Rule 506 of Regulation
D of the
Securities Act. All 229,650 warrants were subsequently exercised
prior to
the completion of the merger on July 28, 2005. Pursuant to the
merger, all
995,150 shares of IsoRay Medical, Inc. were converted into 838,230
shares
of the Registrant. All of these shares are included in this
registration.
|
|
·
|
In
connection with the October 15, 2004 private placement, IsoRay
Medical,
Inc. granted, in reliance on the exemption from registration
provided by
Section 4(2) of the Securities Act, the selling broker-dealers
warrants to
purchase 4.23 units at $20,000 per unit. These units represented
42,300
shares of IsoRay Medical, Inc. common stock and warrants to purchase
12,690 common shares at $.50 per share. These units were converted
into
35,631 shares of the Registrant’s common stock and warrants to purchase
10,689 shares of the Registrant’s common stock at $.59 per share. A total
of 46,320 shares of common stock representing the number of shares
which
would be issued pursuant to exercising the warrants in these
units are
include in this registration.
|
|
·
|
In
June 2004, IsoRay Medical, Inc. issued 10,000 of its common shares
to Mr.
Girard primarily for services rendered and for $100 cash pursuant
to
Section 4(2) of the Securities Act. The Company recorded $9,900
of
compensation expense in connection with the issuance of these
shares.
During the merger with the Registrant, these 10,000 shares were
converted
into 8,423 shares of the Registrant’s common stock, of which 1,684 are
included in this
registration.
|
IsoRay
Products LLC
|
·
|
Between
October 15, 2003, and September 30, 2004, in reliance on the
exemption
from registration provided by Section 4(2) of the Securities
Act and Rule
506 of Regulation D of the Securities Act, in a three-phase
private equity
offering prior to the October 1, 2004 business combination
of IsoRay,
Inc., IsoRay Products LLC, and IsoRay Medical, Inc., IsoRay
Products LLC
sold 879,014 Class A shares, 241,500 Class C shares, and issued
127,750
warrants to debt unit investors, to purchase Class A or Class
C shares at
exercise prices ranging from $1.00 to $2.00 for a total of
$1,541,417,
less offering costs.
|
Class
A Shares.
The
Class A shareholders were entitled to a 15% annual, cumulative dividend payable
quarterly. In connection with the business combination, the 879,014 IsoRay
Products LLC Class A shares were converted into approximately 1,483,723 IsoRay
Medical, Inc. Series B preferred shares. Subsequent to the merger with the
Registrant, these 1,483,723 IsoRay Medical, Inc. Series B preferred shares
were
converted into approximately 1,249,809 shares of the Registrant’s Series B
preferred stock. Subsequent to the merger with the Registrant, most Series
B
preferred shareholders converted their preferred stock into common stock,
and as
of May 5, of the initial 1,249,809 shares of the Registrant’s Series B preferred
stock issued, only 181,248 shares of Series B preferred stock remain issued
and
outstanding; the balance having been exchanged for shares of the Registrant’s
common stock. Approximately 36,252 shares of common stock to be received
upon
conversion of the preferred stock are included in this registration.
Class
B and Class C Shares.
The
IsoRay Products LLC Class B and Class C shareholders were not entitled to
a
dividend as were the IsoRay Products LLC Class A shareholders. Class B
Shareholders, in the aggregate, were the holders 2,896,305 shares of common
stock of the parent company, IsoRay, Inc. (WA domiciled). In connection with
the
business combination, these 2,896,305 IsoRay, Inc. (WA domiciled) shares
of
common stock, 100,000 shares of additional Class B shares of IsoRay Products
LLC
issued to Roger Girard and 241,500 IsoRay Products LLC Class C shares were
converted into 6,167,470 replacement IsoRay Medical, Inc. shares of common
stock. Subsequent to the merger with the Registrant, these 6,167,470 IsoRay
Medical, Inc. common shares were converted into approximately 5,195,180 shares
of the Registrant’s common stock. Approximately 1,023,401 of these shares are
included in this registration.
II-4
Debt
Units.
|
·
|
Each
debt unit consisted of a $5,000 secured note payable and two warrants.
The
notes payable were secured by the Company's patents, patents pending
and
current patent applications, accrued interest at 10%, payable quarterly,
and matured three years from their issue date. Each warrant entitled
the
holder to purchase 875 IsoRay Products LLC Class A shares. One
of the
warrants was exercisable through July 1, 2005, and the second warrant
is
exercisable through February 28, 2007. The warrant exercise prices
ranged
from $1.00 to $2.00 per share, depending on the IsoRay Products
LLC Class
A share price at the time of the debt unit
sale.
|
In
connection with the business combination between IsoRay Medical, Inc., IsoRay,
Inc. and IsoRay Products LLC, the note holders were issued IsoRay Medical,
Inc.
notes payable with substantially the same terms and conditions as their IsoRay
Products LLC notes, and the IsoRay Products LLC warrants were exchanged for
warrants to purchase 215,640 IsoRay Medical, Inc. Series B Preferred shares.
Subsequent to the merger with the Registrant, these warrants to purchase
215,640
IsoRay Medical, Inc. Series B Preferred shares were exchanged for approximately
181,647 warrants to purchase Series B Preferred shares of the Registrant.
As of
May 5, 2006, only 34,836 of the 181,647 warrants remained unexercised, of
which
6,967 underlying shares are included in this registration. The entire $365,000
outstanding secured notes payable, received in the IsoRay Products LLC private
placement, have now been repaid, and the balance of 146,811 warrants which
have
been exercised for Series B Preferred shares have been exchanged for an equal
number of shares of common stock, of which 20%, or approximately 29,362 shares
are included in this registration.
|
·
|
In
connection with the private placement of October 15, 2003, IsoRay
Products
LLC granted warrants for the purchase of 100,000 of its Class A
member
shares to Pinnacle International Holdings, LLC, a financial services
company, pursuant to Section 4(2) of the Securities Act. These
warrants
were exercisable at $1.00 per share. Subsequent to the business
combination of the IsoRay companies, these warrants were exchanged
for
168,799 warrants to purchase IsoRay Medical, Inc. shares of Series
B
Preferred stock at $.59 per share. Pursuant to the merger with
the
registrant, these 168,799 warrants were exchanged for warrants
to purchase
142,190 shares of the Registrant’s common stock at $.70 per share. Of
these 142,190 warrants, 24,438 of the underlying shares of common
stock
are included in this registration.
|
|
·
|
In
September 2003, Roger Girard, President of IsoRay, Inc., was issued
100,000 IsoRay Products LLC Class B shares primarily for services
rendered
and in reliance on the exemption from registration provided by
Section
4(2) of the Securities Act. IsoRay Products LLC recorded $50,000
of
compensation expense in connection with the issuance of these shares.
Subsequent to the business combination among IsoRay companies,
these
shares were exchanged for 168,798 shares of IsoRay Medical, Inc.,
which
were subsequently exchanged in connection with the merger with
the
Registrant for 142,189 shares of the Registrant’s common stock, of which
28,437 are included in this registration
statement.
|
IsoRay,
Inc. (WA domicile)
|
·
|
During
March 2004, IsoRay, Inc. issued 80,000 shares of its common stock
in full
satisfaction of the $80,000 purchase price of a prototype laser
welding
station and in reliance on the exemption from registration provided
by
Section 4(2) of the Securities Act. Subsequent to the business
combination
among IsoRay companies, these 80,000 shares were exchanged for
154,431
shares of IsoRay Medical, Inc. common stock, which were subsequently
exchanged for 130,088 shares of common stock of the Registrant
pursuant to
the Merger. Of those 130,088 shares of common stock, 26,018 are
included
in this registration.
|
|
·
|
As
of December 2003 IsoRay, Inc. sold 80,000 shares of its common
stock for
$80,000 cash and
in reliance on the exemption from registration provided by
Section 4(2) of
the Securities Act. These
80,000 shares of IsoRay, Inc. common stock were exchanged for
154,431
shares of common stock of IsoRay Medical, Inc. This shareholder
sold
92,800 shares of common stock of IsoRay Medical, Inc. at the
time of the
merger. The remaining 61,631 shares of IsoRay Medical, Inc.
common stock
held by this investor were exchanged for 51,915 shares of common
stock of
the Registrant at the time of the Merger, of which 10,382 are
included in
this registration.
|
II-5
Other
than investors (this term excludes those who received shares for services)
who
purchased Class A or C shares, certain employee investors in IsoRay, Inc.,
and
purchasers of debt units, all of the investors were accredited. Regardless
of
status, all investors signed subscription agreements acknowledging their
accredited or non-accredited status and received a private placement memorandum
explaining the business of the Company and the related risks. None of the
offerings were underwritten or conducted by underwriters but were all conducted
on a best efforts basis.
|
Item 27.
|
Exhibits.
|
(except
as otherwise indicated, all exhibits were previously filed)
|
Exhibit #
|
|
Description
|
|
1.1
|
Form
of Underwriting Agreement, if any, incorporated by reference to
the Form
S-3 filed on January 26, 2007 (to
be filed by an amendment to the Form S-3 registration statement
or as an
exhibit to a Current Report on Form 8-K under the Exchange Act,
subsequent
to effectiveness, if necessary).
|
|
|
2.1
|
Merger
Agreement dated as of May 27, 2005, by and among Century Park Pictures
Corporation, Century Park Transitory Subsidiary, Inc., certain
shareholders and IsoRay Medical, Inc., incorporated by reference
to the
Form 8-K filed on August 3, 2005.
|
|
|
2.2
|
Certificate
of Merger, filed with the Delaware Secretary of State on July 28,
2005,
incorporated by reference to the Form 8-K filed on August 3, 2005.
|
|
|
3.1
|
Articles
of Incorporation and By-Laws are incorporated by reference to the
Exhibits
to the Registrant's Registration Statement of September 15,
1983.
|
|
|
3.2
|
Certificate
of Designation of Rights, Preferences and Privileges of Series
A and B
Convertible Preferred Stock, filed with the Minnesota Secretary
of State
on June 29, 2005, incorporated by reference to the Form 8-K filed
on
August 3, 2005.
|
|
|
3.3
|
Restated
and Amended Articles of Incorporation, incorporated by reference
to the
Form 10-KSB filed on October 11, 2005.
|
|
|
3.4
|
Text
of Amendments to the Amended and Restated By-Laws of the Company,
incorporated by reference to the Form 8-K filed on February 7,
2007.
|
|
|
4.2
|
Form
of Lock-Up Agreement for Certain IsoRay Medical, Inc. Shareholders,
incorporated by reference to the Form 8-K filed on August 3,
2005.
|
|
|
4.3
|
Form
of Lock-Up Agreement for Anthony Silverman, incorporated by reference
to
the Form 8-K filed on August 3, 2005.
|
|
|
4.4
|
Form
of Registration Rights Agreement among IsoRay Medical, Inc., Century
Park
Pictures Corporation and the other signatories thereto, incorporated
by
reference to the Form 8-K filed on August 3,
2005.
|
|
II-6
|
4.5
|
Form
of Escrow Agreement among Century Park Pictures Corporation, IsoRay
Medical, Inc. and Anthony Silverman, incorporated by reference
to the Form
8-K filed on August 3, 2005.
|
|
|
4.6
|
Form
of Escrow Agreement among Century Park Pictures Corporation, IsoRay
Medical, Inc. and Thomas Scallen, incorporated by reference to
the Form
8-K filed on August 3, 2005.
|
|
|
4.7
|
Amended
and Restated 2005 Stock Option Plan, incorporated by reference
to the Form
S-8 filed on August 19, 2005.
|
|
|
4.8
|
Amended
and Restated 2005 Employee Stock Option Plan, incorporated by reference
to
the Form S-8 filed on August 19, 2005.
|
|
|
4.9
|
Form
of Registration Right Agreement among IsoRay Medical, Inc., Meyers
Associates, L.P. and the other signatories thereto, dated October
15,
2004, incorporated by reference to the Form SB-2 filed on November
10,
2005.
|
|
|
4.10
|
Form
of Registration Rights Agreement among IsoRay, Inc., Meyers Associates,
L.P. and the other signatories thereto, dated February 1, 2006,
incorporated by reference to the Form SB-2/A1 filed on March 24,
2006.
|
|
|
4.11
|
Form
of IsoRay, Inc. Common Stock Purchase Warrant, incorporated by
reference
to the Form SB-2/A1 filed on March 24, 2006.
|
|
|
4.12
|
2006
Director Stock Option Plan, incorporated by reference to the Form
S-8
filed on August 18, 2006.
|
|
|
4.13
|
Form
of Registration Rights Agreement among IsoRay, Inc. and the other
signatories thereto, dated August 9, 2006, incorporated by reference
to
the Form 8-K filed on August 18, 2006.
|
|
|
4.14
|
Form
of IsoRay, Inc. Common Stock Purchase Warrant, dated August 9,
2006,
incorporated by reference to the Form 8-K filed on August 18, 2006.
|
|
|
4.15
|
Form
of Registration Rights Agreement among IsoRay, Inc., Meyers Associates,
L.P. and the other signatories thereto, dated October 17, 2005,
incorporated by reference to the Form SB-2 filed on October 16,
2006.
|
|
|
4.16
|
Amended
and Restated 2006 Director Stock Option Plan, incorporated by reference
to
the Form S-8/A1 filed on December 18, 2006.
|
|
|
4.17
|
Amended
and Restated 2005 Stock Option Plan, incorporated by reference
to the Form
S-8/A1 filed on December 18, 2006.
|
|
|
4.18
|
Form
of Warrant Agreement, if any, including form of Warrant, incorporated
by
reference to the Form S-3 filed on January 26, 2007 (to be filed
by an
amendment to the Form S-3 registration statement or as an exhibit
to a
Current Report on Form 8-K under the Exchange Act, subsequent to
effectiveness, if necessary).
|
|
|
4.19
|
Rights
Agreement, dated as of February 1, 2007, between the Computershare
Trust
Company N.A., as Rights Agent, incorporated by reference to Exhibit
1 to
the Company’s Registration Statement on Form 8-A filed on February 7,
2007.
|
|
|
4.20
|
Certificate
of Designation of Rights, Preferences and Privileges of Series
C Junior
Participating Preferred Stock, incorporated by reference to Exhibit
2 to
the Company’s Registration Statement on Form 8-A filed on February 7,
2007.
|
II-7
|
5.1
|
Opinion
of Keller Rohrback, P.L.C., filed herewith.
|
|
|
10.2
|
Universal
License Agreement, dated November 26, 1997 between Donald C. Lawrence
and
William J. Stokes of Pacific Management Associates Corporation,
incorporated by reference to the Form SB-2 filed on November 10,
2005.
|
|
|
10.3
|
Royalty
Agreement of Invention and Patent Application, dated July 12, 1999
between
Lane A. Bray and IsoRay LLC, incorporated by reference to the Form
SB-2
filed on November 10, 2005.
|
|
|
10.4
|
Tri-City
Industrial Development Council Promissory Note, dated July 22, 2002,
incorporated by reference to the Form SB-2/A2 filed on April 27,
2006.
|
|
|
10.5
|
Section
510(k) Clearance from the Food and Drug Administration to market
Lawrence
CSERION Model CS-1, dated March 28, 2003, incorporated by reference
to the
Form SB-2 filed on November 10, 2005.
|
|
|
10.6
|
Battelle
Project No. 45836 dated June 20, 2003, incorporated by reference
to the
Form SB-2/A2 filed on April 27, 2006.
|
|
|
10.7
|
Applied
Process Engineering Laboratory Apel Tenant Lease Agreement, dated
April
23, 2001 between Energy Northwest and IsoRay, LLC, incorporated by
reference to the Form SB-2/A2 filed on April 27, 2006.
|
|
|
10.8
|
Work
for Others Agreement No. 45658, R2, dated April 27, 2004 between
Battelle
Memorial Institute, Pacific Northwest Division and IsoRay Products
LLC,
incorporated by reference to the Form SB-2/A2 filed on April 27,
2006.
|
|
|
10.9
|
Development
Loan Agreement for $230,000, dated September 15, 2004 between
Benton-Franklin Economic Development District and IsoRay Medical,
Inc.,
incorporated by reference to the Form SB-2/A2 filed on April 27,
2006.
|
|
|
10.10
|
Registry
of Radioactive Sealed Sources and Devices Safety Evaluation of Sealed
Source, dated September 17, 2004, incorporated by reference to the
Form
SB-2/A2 filed on April 27, 2006.
|
|
|
10.11
|
CRADA
PNNL/245, "Y-90 Process Testing for IsoRay", dated December 22, 2004
between Pacific Northwest National Laboratory and IsoRay Medical
Inc.,
including Amendment No. 1, incorporated by reference to the Form
SB-2/A2
filed on April 27, 2006.
|
|
|
10.12
|
Intentionally
Omitted
|
|
|
10.13
|
Amendment
1 to Agreement 45658, dated February 23, 2005 between Battelle Memorial
Institute Pacific Northwest Division and IsoRay Medical, Inc.,
incorporated by reference to the Form SB-2/A2 filed on April 27,
2006.
|
|
|
10.14
|
Equipment
Lease Agreement dated April 14, 2005 between IsoRay Medical, Inc.
and
Nationwide Funding, LLC, incorporated by reference to the Form SB-2/A2
filed on April 27, 2006.
|
|
|
10.15
|
Lease
Agreement, Rev. 2, dated November 1, 2005 between Pacific EcoSolutions,
Inc. and IsoRay Medical, Inc., incorporated by reference to the Form
SB-2/A2 filed on April 27, 2006.
|
|
|
10.16
|
Master
Lease Agreement Number 5209, dated May 7, 2005 between VenCore Solutions
LLC and IsoRay Medical, Inc., incorporated by reference to the Form
SB-2/A2 filed on April 27, 2006.
|
|
|
10.17
|
Contract
#840/08624332/04031 dated August 25, 2005 between IsoRay, Inc. and
the
Federal State Unitary Enterprise << Institute of Nuclear Materials
>>, Russia, incorporated by reference to the Form SB-2 filed on
November 10, 2005.
|
II-8
|
10.18
|
State
of Washington Radioactive Materials License dated October 6, 2005,
incorporated by reference to the Form SB-2 filed on November 10,
2005.
|
|
|
10.19
|
Express
Pricing Agreement Number 219889, dated October 5, 2005 between FedEx
and
IsoRay Medical, Inc., incorporated by reference to the Form 10-QSB
filed
on November 21, 2005.
|
|
|
10.20
|
Girard
Employment Agreement, dated October 6, 2005 between Roger E. Girard
and
IsoRay, Inc., incorporated by reference to the Form 10-QSB filed
on
November 21, 2005.
|
|
|
10.21
|
Contract
Modification Quality Class G, dated October 25, 2005 to Contract
Number
X40224 between Energy Northwest and IsoRay, Inc., incorporated by
reference to the Form 10-QSB filed on November 21,
2005.
|
|
|
10.22
|
Agreement
dated August 9, 2005 between the Curators of the University of Missouri
and IsoRay Medical, Inc., incorporated by reference to the Form SB-2/A2
filed on April 27, 2006 (confidential treatment
requested).
|
|
|
10.23
|
SICAV
ONE Securities Purchase Agreement, dated December 7, 2005, by and
between
IsoRay, Inc. and Mercatus & Partners, Ltd., incorporated by reference
to the Form 8-K filed on December 12, 2005.
|
|
|
10.24
|
SICAV
TWO Securities Purchase Agreement, dated December 7, 2005, by and
between
IsoRay, Inc. and Mercatus & Partners, Ltd., incorporated by reference
to the Form 8-K filed on December 12, 2005.
|
|
|
10.25
|
Economic
Development Agreement, dated December 14, 2005, by and between IsoRay,
Inc. and the Pocatello Development Authority, incorporated by reference
to
the Form 8-K filed on December 20, 2005.
|
|
|
10.26
|
License
Agreement, dated February 2, 2006, by and between IsoRay Medical,
Inc. and
IBt SA, incorporated by reference to the Form 8-K filed on March
24, 2006
(confidential treatment requested).
|
|
|
10.27
|
Benton
Franklin Economic Development District Loan Covenant Waiver Letter,
dated
as of March 31, 2005, incorporated by reference to the Form SB-2/A3
filed
on May 12, 2006.
|
|
|
10.28
|
Service
Agreement between IsoRay, Inc. and Advanced Care Medical, Inc., dated
March 1, 2006, incorporated by reference to the Form SB-2/A2 filed
on
April 27, 2006.
|
|
|
10.29
|
Business
Loan Agreement between IsoRay Medical, Inc. and Columbia River Bank,
dated
March 1, 2006, incorporated by reference to the Form SB-2/A4 filed
on May
26, 2006.
|
|
|
10.30
|
Letter
from HAEIFC to IsoRay Medical, Inc. dated April 26, 2006, incorporated
by
reference to the Form SB-2/A5 filed on June 6, 2006.
|
|
|
10.31
|
Loan
Agreement, dated June 15, 2006, by and between IsoRay Medical, Inc.
and
the Hanford Area Economic Investment Fund Committee, incorporated
by
reference to the Form 8-K filed on June 21, 2006.
|
|
|
10.32
|
Commercial
Security Agreement, dated June 15, 2006, by and between IsoRay Medical,
Inc. and the Hanford Area Economic Investment Fund Committee, incorporated
by reference to the Form 8-K filed on June 21,
2006.
|
II-9
|
10.33
|
Common
Stock and Warrant Purchase Agreement among IsoRay, Inc. and the other
signatories thereto, dated August 9, 2006, incorporated by reference
to
the Form 8-K filed on August 18, 2006.
|
|
|
10.34
|
Benton
Franklin Economic Development District Loan Covenant Waiver Letter,
dated
September 26, 2006, incorporated by reference to the Form 10-KSB
filed on
September 28, 2006.
|
|
|
10.35
|
Form
of Officer and Director Indemnification Agreement, incorporated by
reference to the Form SB-2 Post Effective Amendment No. 2 filed on
October
13, 2006.
|
|
|
10.36
|
Contract
No. 840/20553876/11806-32, dated October 6, 2006, by and between
IsoRay
Medical, Inc. and FSUE “SSC-Research Institute of Atomic Reactors,”
incorporated by reference to the Form 8-K filed on November 6, 2006
(confidential treatment requested for redacted
portions)
|
|
|
10.37
|
Agreement
for Exclusive Right to Buy, dated October 6, 2006, by and between
IsoRay
Medical, Inc. and FSUE “SSC-Research Institute of Atomic Reactors,”
incorporated by reference to the Form 8-K filed on November 6, 2006
(confidential treatment requested for redacted
portions)
|
|
|
16.1
|
Letter
from S.W. Hatfield, CPA to the SEC dated December 13, 2005, incorporated
by reference to the Form 8-K filed on December 14,
2005.
|
|
|
21.1
|
Subsidiaries
of the Registrant, incorporated by reference to the Form 10-KSB filed
on
October 11, 2005.
|
|
|
23.1
|
Consent
of Keller Rohrback, P.L.C. (included in Exhibit 5.1)
|
|
|
23.2
|
Consent
of DeCoria, Maichel & Teague, P.S., filed herewith.
|
|
|
Item 28.
|
Undertakings.
|
The
undersigned Registrant hereby undertakes:
1. To
file,
during any period in which offers or sales are being made, a post-effective
amendment to this registration statement to:
(a)
include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(b)
reflect
in the prospectus any facts or events which, individually or, together,
represent a fundamental change in the information in the registration statement.
Notwithstanding the forgoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in the volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(c) include
any additional or changed material information on the plan of distribution.
2.
For
determining liability under the Securities Act, to treat each such
post-effective amendment as a new registration statement of the securities
offered, and the offering of such securities at that time to be the initial
bona
fide offering.
II-10
3.
To
file a
post-effective amendment to remove from registration any of the securities
that
remain unsold at the end of the offering.
4. For
determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities,
that in a primary offering of securities of the undersigned small business
issuer pursuant to this registration statement, regardless of the underwriting
method used to sell the securities to the purchaser, if the securities are
offered or sold to such purchaser by means of any of the following
communications, the undersigned small business issuer will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
|
i.
|
Any
preliminary prospectus or prospectus of the undersigned small business
issuer relating to the offering required to be filed pursuant to
Rule
424;
|
|
ii.
|
Any
free writing prospectus relating to the offering prepared by or on
behalf
of the undersigned small business issuer or used or referred to by
the
undersigned small business issuer;
|
|
iii.
|
The
portion of any other free writing prospectus relating to the offering
containing material information about the undersigned small business
issuer or its securities provided by or on behalf of the undersigned
small
business issuer; and
|
|
iv.
|
Any
other communication that is an offer in the offering made by the
undersigned small business issuer to the
purchaser.
|
5. For
the
purpose of determining liability under the Securities Act to any
purchaser each
prospectus filed pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements relying on Rule
430B
or other than prospectus filed in reliance on Rule 430A, shall be deemed to
be
part of and included in the registration statement as of the date it is first
used after effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into
the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such first
use,
supersede or modify any statement that was made in the registration statement
or
prospectus that was part of the registration statement or made in any such
document immediately prior to such date of first use.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
provisions above, or otherwise, we have been advised that in the opinion of
the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable.
In
the
event that a claim for indemnification against such liabilities, other than
the
payment by us of expenses incurred or paid by one of our directors, officers,
or
controlling persons in the successful defense of any action, suit or proceeding,
is asserted by one of our directors, officers, or controlling persons in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit
to a
court of appropriate jurisdiction the question whether such indemnification
is
against public policy as expressed in the Securities Act, and we will be
governed by the final adjudication of such issue.
II-11
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of
the
requirements for filing on Form SB-2 and authorized this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized,
in the
City of Richland, Washington on this 14th
day of
February, 2007.
|
ISORAY,
INC.
|
||
|
By:
|
/s/
Roger E. Girard
|
|
|
Roger
E. Girard, Chairman and Chief Executive
Officer
|
||
In
accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
and
on the dates stated:
|
Signature
|
Title
|
Date
|
|
|
/s/
Roger E. Girard
Roger
E. Girard
|
Chief
Executive Officer and Chairman
|
February
14, 2007
|
|
|
/s/
Jonathan Hunt
Jonathan
Hunt
|
Chief
Financial Officer and Principal Accounting Officer
|
February
14, 2007
|
|
|
/s/
Dwight
Babcock
Dwight
Babcock
|
Director
|
February
14, 2007
|
|
|
/s/
Stephen R. Boatwright
Stephen
R. Boatwright
|
Director
|
February
14, 2007
|
|
|
/s/
Robert R. Kauffman
Robert
R. Kauffman
|
Director
|
February
14, 2007
|
|
|
/s/
Thomas C. Lavoy
Thomas
C. Lavoy
|
Director
|
February
14, 2007
|
|
|
/s/
Albert Smith
Albert
Smith
|
Director
|
February
14, 2007
|
|
|
/s/
David J. Swanberg
David
J. Swanberg
|
Director
|
February
14, 2007
|
II-12