UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
Form
10-KSB/A
Amendment
No. 2
(Mark
one)
o Annual
Report Under Section 13 or 15(d) of The Securities Exchange Act of
1934
For
the
fiscal year ended _________________
x Transition
Report Under Section 13 or 15(d) of The Securities Exchange Act of
1934
For
the transition period from October 1, 2004 to June 30, 2005
Commission
File Number: 0-14247
IsoRay,
Inc.
(Exact
name of small business issuer as specified in its charter)
| Minnesota |
41-1458152
|
|
| (State of incorporation) |
(IRS
Employer ID
Number)
|
350
Hills Street, Suite 106, Richland, WA 99354
(Address
of principal executive offices)
(509)
375-1202
(Issuer’s
telephone number)
Securities
registered under Section 12 (b) of the Exchange Act - None
Securities
registered under Section 12(g) of the Exchange Act - Common Stock - $0.001
par
value
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. o
Check
whether the issuer has (1) filed all reports required to be filed by Section
13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period the Company was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes xNo
o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of Company’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to
this Form 10-KSB. o
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
Yes
o No
x
The
issuer’s revenues for the nine month transitional period ended June 30, 2005
were $-0-.
The
aggregate market value of voting common equity held by non-affiliates as of
September 30, 2005 was approximately $34,372,217.
As
of
September 30, 2005, there were 9,060,221 shares of Common Stock issued and
outstanding.
Transitional
Small Business Disclosure Format: Yes o
No
x
2
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
Transitional
Report on Form 10-KSB
for
the period from October 1, 2004 through June 30, 2005
Table
of Contents
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Page
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Part
I
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|
Item
1
|
Description
of Business
|
1
|
|
Item
2
|
Description
of Property
|
29
|
|
Item
3
|
Legal
Proceedings
|
29
|
|
Item
4
|
Submission
of Matters to a Vote of Security Holders
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29
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Part
II
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||
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Item
5
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Market
for Common Equity, Related Stockholders’ Matters,
|
|
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and
Small Business Issuer Purchases of Equity Securities
|
29
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|
|
Item
6
|
Management’s
Discussion and Analysis or Plan of Operation
|
31
|
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Item
7
|
Financial
Statements
|
34
|
|
Item
8
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
|
34
|
|
Item
8A
|
Controls
and Procedures
|
34
|
|
Part
III
|
||
|
Item
9
|
Directors,
Executive Officers, Promoters and Control Persons;
|
|
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Compliance
with Section 16(a) of the Exchange Act
|
34
|
|
|
Item
10
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Executive
Compensation
|
38
|
|
Item
11
|
Security
Ownership of Certain Beneficial Owners and
|
|
|
Management
and Related Stockholder Matters
|
40
|
|
|
Item
12
|
Certain
Relationships and Related Transactions
|
42
|
|
Item
13
|
Exhibits
and Reports on Form 8-K
|
44
|
|
Item
14
|
Principal
Accountant’s Fees and Services
|
48
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|
Signatures
|
49
|
Caution
Regarding Forward-Looking Information
All
statements contained in this Form 10-KSB, other than statements of historical
facts, that address future activities, events or developments are
forward-looking statements, including, but not limited to, statements containing
the words “believe,” “anticipate,” “expect” and words of similar import. These
statements are based on certain assumptions and analyses made by us in light
of
our experience and our assessment of historical trends, current conditions
and
expected future developments as well as other factors we believe are appropriate
under the circumstances. However, whether actual results will conform to the
expectations and predictions of management is subject to a number of risks
and
uncertainties that may cause actual results to differ materially.
Such
risks include, among others, the following: international, national and local
general economic and market conditions: our ability to sustain, manage or
forecast our growth; raw material costs and availability; new product
development and introduction; existing government regulations and changes in,
or
the failure to comply with, government regulations; adverse publicity;
competition; the loss of significant customers or suppliers; fluctuations and
difficulty in forecasting operating results; changes in business strategy or
development plans; business disruptions; the ability to attract and retain
qualified personnel; the ability to protect technology; and other factors
referenced in this and previous filings.
Consequently,
all of the forward-looking statements made in this Form 10-KSB are qualified
by
these cautionary statements and there can be no assurance that the actual
results anticipated by management will be realized or, even if substantially
realized, that they will have the expected consequences to or effects on our
business operations.
As
used
in this Form 10-KSB, unless the context requires otherwise, “we” or “us” or the
“Company” means IsoRay, Inc. (formerly Century Park Pictures
Corporation).
PART
I
ITEM
1 - DESCRIPTION OF BUSINESS
General
The
Company was organized under Minnesota law in 1983.
The
Company had no operations, assets or liabilities since its fiscal year ended
September 30, 1999 through June 30, 2005.
On
May
27, 2005, the Company, a newly-formed, wholly-owned subsidiary, Century Park
Transitory Subsidiary, Inc., a Delaware corporation, Thomas Scallen and Anthony
Silverman, shareholders of the Company, and IsoRay Medical, Inc., a Delaware
corporation entered into a Merger Agreement (“Merger”). On July 28, 2005, the
Merger closed. As a result of the Merger, IsoRay Medical, Inc. became a
wholly-owned subsidiary of the Company. The Company concurrently changed its
name to IsoRay, Inc. In the Merger, the IsoRay stockholders received
approximately 82% of the then outstanding securities of the Company, as
described below.
The
Company issued shares of its common stock and shares of its preferred stock
to
holders of common and preferred stock of IsoRay Medical, Inc. at a rate of
0.842362 share of the Company’s common stock for each share of IsoRay Medical,
Inc. stock. Options and warrants to purchase common and preferred stock of
IsoRay Medical, Inc. were also converted at the same rate into options and
warrants to purchase common and preferred stock of the Company. At the time
of
the Merger and following its recent 1:30 reverse stock split, the Company had
2,498,319 shares of common stock outstanding. Following the Merger, the Company
had 10,237,797 shares of common and preferred stock outstanding. The total
amount of shares outstanding, on a fully-diluted basis, post merger was
13,880,822, which included not only shares of common stock, but also shares
of
preferred stock, warrants, options and convertible debentures that could be
exercised or converted into shares of common stock. Following the Merger, on
a
fully diluted basis, the shareholders of IsoRay Medical, Inc. owned
approximately 82% of the Company’s outstanding securities.
Description
of Former Business Operations
Certain
Defined Terms
The
technical terms defined below are important to understand as they are used
throughout this report and particularly in this discussion of the business
of
IsoRay Medical. When used in this report, 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”
or
“131Cs”
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.
“131Cs
seed”
is the
name by which IsoRay Medical’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.
“Yttrium-90”
or
“90Y”
is a
radioisotope that emits high energy beta particles with a half-life of 2.67
days.
“Zirconium-90”
is a
stable (non-radioactive) decay product of Yttrium-90.
2
Overview
IsoRay
Medical, Inc. was formed on June 15, 2004 as a corporation in the State of
Delaware, and in October 2004 it merged with two predecessor companies to
combine all of the IsoRay operations into one company.
IsoRay
Medical intends to utilize 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 cancer
tumors. IsoRay Medical began production and sales of its initial Food and Drug
Administration (“FDA”) approved product, the IsoRay 131Cs
brachytherapy seed, in October 2004 for the treatment of prostate cancer.
Management believes its technology will allow it to capture a leadership
position in an expanded brachytherapy market. The 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. The second radioisotope, Yttrium-90
(Y-90 or 90Y),
is
currently being used in the treatment of non-Hodgkin’s lymphoma and is in
clinical trials for other applications. Other manufacturers have received FDA
approval for 90Y
and
IsoRay Medical believes production will not require clinical trials or an
extensive FDA application process. Production is expected to begin in 2006.
Brachytherapy
seeds are small devices used in an internal radiation therapy procedure. In
recent years the procedure has become one of the primary treatments for prostate
cancer and is now used more often than surgical removal of the prostate. The
brachytherapy procedure places radioactive seeds as close as possible to (in
or
near) the cancer tumor (the word “brachytherapy” means close therapy). The seeds
deliver therapeutic radiation by
killing
the tumor cells and cells located in the immediate vicinity of the tumor while
minimizing exposure to adjacent healthy tissue.
This
allows doctors to administer a higher dose of radiation at one time than is
possible with external beam radiation. Each seed contains a radioisotope sealed
within a welded titanium capsule. Approximately 85 to 135 seeds are permanently
implanted in the prostate in a 45-minute outpatient procedure. The isotope
decays over time and the seeds become inert. The seeds may be used as a primary
treatment or, in conjunction with other treatment modalities such as external
beam radiation therapy, chemotherapy, or as treatment for residual disease
after
excision of primary tumors.
Management
believes that the IsoRay 131Cs
seed
represents the
first
major advancement in brachytherapy technology in over 18 years with attributes
that could make it the long term “seed of choice” for internal radiation
procedures. The 131Cs
seed
has FDA approval for treatment of malignant disease (e.g. cancers of the head
and neck, brain, liver, lung, breast, prostate, etc.) and may be used in
surface, interstitial, and intracavity applications for tumors with known
radiosensitivity.
The
131Cs
isotope appears to have specific clinical 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 Medical
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 tumors such as breast cancer. The shorter
half-life of 9.7 days for 131Cs
(versus 17.5 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 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
Medical’s second product, Yttrium-90, is also a short-lived (half-life of 64
hrs) radioisotope that is already used in the treatment of non-Hodgkin’s
lymphoma, leukemia, ovarian cancer, prostate cancer, osteosarcomas, and tumors
of the breast, lung, kidney, colon and brain. These applications apply primarily
to metastasized, or spread through the body, cancers. Currently more than 20
clinical trials using 90Y
are
underway in the U.S. Yttrium-90 is also used at multiple treatment centers
in
Europe. Several members of the current IsoRay Medical team developed a process
to produce high-purity 90Y for
medical applications during the mid-1990s. Currently over 90 percent of the
90Y used
in
the U.S. is imported. IsoRay Medical’s management believes there is an immediate
market opportunity for a highly purified 90Y.
3
IsoRay
Medical and its predecessor companies have accomplished the following key
milestones:
| · |
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 131Cs
and 90Y
processes (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 Medical,
allowing initial production of seeds through 2006 at
PNNL (April 2004);
|
| · |
Raised
over $10.3 M in debt and equity funding (September 2003 - July 2005)
|
| · |
Obtained
favorable Medicare reimbursement codes for the Cs-131 brachytherapy
seed
(November 2003);
|
| · |
Obtained
FDA 510(k) approval to market the first product: the 131Cs
brachytherapy seed (March 2003);
|
| · |
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 will be about 232,090 new cases of prostate cancer diagnosed and an
estimated 30,350 deaths associated with the disease in the United States during
2005. Because of early detection techniques (e.g., screening for prostate
specific antigen, or PSA) approximately 70% (162,400) of these cases are
potentially treatable with seed brachytherapy, when the cancers are still
locally confined within the prostate.
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.
4
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, although only one man in thirty-three will die
of
this disease.
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, but this theory has not been confirmed.
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.
|
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.
5
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 (which until protocols are developed,
does not include the Cesium-131 seed).
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 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 development of breasts, and common side effects
of chemotherapy are nausea, hair loss and fatigue.
“Watchful
waiting,” 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 more 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.
6
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
125I
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 Medical.
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 1980’s, 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 are borne 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 20% 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 is estimated
that over 60,000 brachytherapy procedures will be 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 prostrate 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).
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.
7
| · |
A
twelve-year clinical study published in the 2004 Supplement of the
International
Journal of Radiation Oncology, Biology and Physics,
reported that the relative survival rate is 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 the Pd-103 device 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).
|
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 up 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.
8
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 Medical’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 Medical 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 Medical has constructed a state-of- the-art manufacturing
facility
in Richland, Washington in its newly 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, IsoRay plans to construct a permanent
manufacturing facility in another state. Working with leading scientists,
IsoRay Medical 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.
Also
planned is a value-added repackaging service to supply pre-loaded
needles,
stranded seeds and pre-loaded cartridges used in the implant procedure.
IsoRay Medical plans to enter into a long-term program with a leading
brachytherapy seed automation design and engineering company to design
and
build a highly automated manufacturing process to help ensure consistent
quality and improve profitability.
|
| · |
Introduce
Cesium-131 therapies for other solid cancer tumors.
IsoRay Medical intends to partner with other companies to develop
the
appropriate delivery technology and therapeutic delivery systems
for
treatment of other solid cancer tumors such as breast, lung, liver,
pancreas, neck, and brain cancer. IsoRay Medical’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.
|
| · |
Introduce
other isotope products to the U.S. market.
IsoRay Medical plans to introduce its Yttrium-90 radioisotope in
2006.
Currently, FDA approved 90Y
manufactured by other suppliers is used in the treatment of non-Hodgkin’s
lymphoma and is in clinical trials for other applications. Other
products
may be added in the future as they are developed. IsoRay Medical
has the
ability to make several different isotopes for multiple medical and
industrial applications. During 2005 the Company has identified and
prioritized additional market opportunities for these isotopes.
|
| · |
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 Medical 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 Medical’s core
radioisotope technology.
|
9
Management
believes there is a large and growing addressable market for IsoRay Medical’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. Brachytherapy is now more common than surgery
(prostatectomy). 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 October 6, 2005 Cs-131 seed price of $55, this
represents a potential $330 million seed market 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 Medical’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
Medical markets the Cesium-131 seed
and
intends to market Yttrium-90 and 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
Medical’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 case. 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.
10
Figure
1: Cross section of 131Cs
seed
Competitive
Advantages of Cs-131
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
|
|
Energy
|
29
KeV+
|
22
KeV+
|
28
KeV+
|
|
Dose
Delivery
|
90%
in 33 days
|
90%
in 58 days
|
90%
in 204 days
|
|
Total
Dose
|
100
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).
High
energy.
The
Cs-131 isotope decay energy of 29 KeV (versus 22 KeV for Pd-103 and 28 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.
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. This should result in fewer and less
severe side effects and complications than may be incurred
with other conventional therapies.
Figure
2. Cs-131 seed Autoradiograph
11
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.
Yttrium-90
Y-90
and
Cs-131 are short-lived isotopes that are well suited to treatment of tumors
by
cell-directed therapy. The Company plans to introduce its second product,
Yttrium-90, in 2006. Y-90 is already available from other companies. When used
in combination with molecular targeting agents, Y-90 is proving to be an ideal
isotope to provide localized radiation therapy for various types of cancer,
such
as non-Hodgkin’s lymphoma, leukemia, ovarian and prostate cancers,
osteosarcomas, and tumors of the breast, lung, kidney, colon, and brain. Y-90’s
properties of short half-life, high specific activity, high energy and pure
beta-emissions can be chemically attached to targeting agents that are highly
selective for specific tumors. These targeting agents may include monoclonal
antibodies, molecules derived from antibodies, peptides, or other tumor-specific
molecules. Most Y-90 currently used in the U.S. is imported with varying degrees
of quality. IsoRay Medical has developed a proprietary separation process that
produces Y-90 that management believes will meet or exceed the purity and
quality required for clinical trials and medical applications.
Y-90
is a
significant component of several commercially available products. These products
use radiopharmaceutical grade Y-90 derived using manufacturing methods and
techniques that conform to current cGMP (current Good Manufacturing Practices),
allowing them to be used invasively in commercially available healthcare
products.
We
intend
to initially target the clinical trial market. Currently there are several
clinical trials and medical applications involving Y-90 underway around the
world that represent a potential market for Y-90. These customers hold
significant growth potential, as products undergoing successful trials become
approved for general use. Our strategy will be to attempt to develop exclusive
sales arrangements with companies that are close to FDA approval or foreign
companies authorized to commercially sell their products in various overseas
markets.
Y-90
is a
pure-beta particle emitter with a physical half-life of 64.1 hours (2.7 days)
that decays to stable Zirconium-90. The average energy of the beta emissions
from Y-90 is 2.37 MeV, with an effective path-length in tissue of 5.3 mm. This
means that 90% of the energy is absorbed within a 5.3-mm radius.
Y-90
is
manufactured by chemical separation from a long-lived Strontium-90 (Sr-90)
generator stock. We intend to purchase or lease the Sr-90 feedstock from the
U.S. DOE and international suppliers. Due to the radiological characteristics
of
Sr-90, initial processing will occur under stringent radiological controls
in a
highly shielded isolator or “hot cell” using remote manipulators. Following
preliminary separation, the Y-90 may be further purified and converted to
pharmaceutical grade material in a shielded environmentally-controlled glove
box. After completing the separation process every two weeks (e.g., collecting
or “milking” the therapeutic Y-90), the residual Sr-90 generator is recycled for
subsequent separations. In theory, the Sr-90 generator can continue to generate
Y-90 for decades. However, the process periodically requires infusion of new
Sr-90. In addition to acquiring Sr-90, we will need to acquire equipment and
develop manufacturing procedures for the Y-90 isotope that meet cGMP criteria.
While we initially plan to produce solely radiochemical purity Y-90, which
does
not need to meet the more stringent manufacturing standards required for
radiopharmaceutical purity Y-90, we intend to develop our manufacturing methods
to this higher level and produce radiopharmaceutical purity Y-90 in the
future.
12
IsoRay
Medical has identified four principal suppliers of Y-90: MDS Nordion (a division
of MDS, Inc.), Perkin-Elmer, Inc., Amersham (part of General Electric Company)
and Iso-Tex Diagnostics, Inc. If we begin marketing Y-90, these companies will
be our principal competitors within this market.
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 of Cs-131. The 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). IsoRay Medical has evaluated several international nuclear
reactors and a few potential facilities in the United States. Due
to the
short half-life of both the Ba-131 and Cs-131 isotopes, these facilities
must be capable of removing irradiated materials from the reactor
core on
a routine (e.g. weekly) basis. Reactor personnel will ship the irradiated
barium on a pre-determined schedule to our facilities for subsequent
separation, purification and seed assembly. The Company has identified
more than five reactors in the U.S., Europe and the former Soviet
Union
that are capable of meeting these requirements. This routine isotope
generation cycle at supplier reactors will allow significant quantities
of
Ba-131 to be on hand at our facilities for the completion of the
rest of
the manufacturing process. To ensure reliability of supply, we intend
to
seek agreements with multiple facilities to produce Ba-131. As of
the date
of this report, IsoRay Medical has agreements in place with two suppliers
of irradiated Ba-131. The Company’s agreement with Russia’s Institute of
Nuclear Materials for irradiated Ba-131 has a seven year term (ending
August 25, 2012) and 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 irradiated Ba-131
projected to be delivered in the first year. 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.
|
| · |
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 will be incorporated into an internal assembly
that contains a binder, spacer and 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.
|
13
| · |
Seed
Welding. Following
production of the internal core and placement into the titanium capsule,
a
seed is hermetically sealed 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
will
be capable of identifying and classifying these variations for quality
control ensuring a minimal amount of material is wasted. Finally,
the
rapid placement and removal of components from the welding zone will
affect 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 intends to implement a just-in-time production capability 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 to completion of product manufacture can be reduced
to
three to five 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 third party with expertise in seed delivery who
delivers the seeds 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. The Company's historical profit margin on seeds has
been sufficient to justify unusable inventory and management has monitored
the
amount of unused inventory carefully to review its calculations of wastage
in
its business plans.
Automated
Manufacturing Process
IsoRay
Medical has begun discussions with a leading designer and manufacturer of
automated seed manufacturing equipment that developed an automated line in
the
US for manufacturing Iodine-125 that was sold to a competitor in early 2003.
In
addition, IsoRay Medical is engaged in preliminary discussions with another
seed
manufacturer regarding obtaining an existing automated production line. An
automated production line may benefit IsoRay because of potentially reduced
labor costs, and help ensure consistent manufacturing quality.
Manufacturing
Facility
The
initial production of the IsoRay Cs-131 brachytherapy seed commenced at PNNL
in
2004. IsoRay Medical has signed a lease agreement and completed construction
(tenant improvements) of a new interim production facility in Richland,
Washington that received final regulatory approval on October 6, 2005 and
will begin radioactive production operations shortly thereafter. 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 facility. No
agreements have been reached for any possible facilities outside of
Washington.
Repackaging
Services
Most
brachytherapy manufacturers offer their seed product to the end user packaged
in
four principal packing configurations provided in a sterile or non-sterile
package depending on the customer’s preference. These include:
14
| · |
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 (30%),
pre-loaded needles (20%) 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 repackaging 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 Pharmacy. 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.
IsoRay
Medical has held discussions with the major independent radiopharmacies and
determined the shortest achievable turnaround time from delivery of loose seeds
to the radiopharmacy to delivery of the final assayed and packaged seeds to
the
end user is 3 - 4 days. Because of the short half-life of Cs-131, management
believes adding 3 - 4 days to the product delivery schedule is prohibitive
on a
long-term basis. However, to increase sales in the near-term we are using one
of
these services on an interim basis until our own custom preloading operation
comes on-line late in 2005. The Company intends to market its seeds to the
end
user in all four of the commonly used packaging configurations, and has retained
an experienced consultant to assist in the development of this value-added
repacking service.
Prior
to
the establishment of a custom preloading service, IsoRay Medical is offering
loose seeds which will require the implant center to load the seeds into their
preferred implant configuration. IsoRay is currently loading Mick cartridges
in
its new facility for those implant centers using the Mick applicator as their
method of injecting the seeds into the prostate. The Company currently offers
non-sterile, pre-loaded Mick cartridges. As soon as the Company acquires the
proper sterilization equipment, loose seeds and pre-loaded Mick cartridges
will
be offered in a sterile package. When the custom preloading service is
operational, the Company will add pre-loaded needles and strands in sterile
and
non-sterile package configurations. Management believes the custom preloading
service will be operational by the end of 2005.
Independent
radiopharmacies usually provide the final packaging of the product delivered
to
the end user. This reduces an opportunity for reinforcing the “branding” of the
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 realized
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 a custom preloading service in its new,
leased facility to be approximately $250,000. Space for this custom preloading
operation has been reserved in the facility and most of the necessary equipment
has been delivered and installed. Preloading procedures have been drafted,
staff
are being trained, and process validation activities are scheduled for the
4th
quarter
of 2005. One or more technicians will be added to the staff to handle the seed
loading, stranding and assaying operations. Our customer service staff will
provide assistance with shipping, documentation and tracking of all orders
from
the repackaging service to the end user.
15
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 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 barium enrichment device
will result in higher yields of Cs-131. The Company has identified sources
of
enriched barium, including in the former Soviet Union, that we believe we can
use until the barium enrichment device is developed.
Marketing
and Sales
Marketing
Strategy
The
Company intends to position Cs-131 as the isotope of choice for prostate
brachytherapy. Management believes there is no apparent clinical reason to
use
other isotopes when Cesium-131 is available. The advantages associated with
a
high energy and short 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 his 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
intend
to target these competing isotopes as our principal competition rather than
the
various manufacturers and distributors of these products. 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 will focus the purchasing decision on the advantages and functionality
of the Cs-131 isotope while seeking to educate the prostate cancer patient
about
these clinical benefits.
The
professional and patient market segments each play a unique and important role
in the ultimate choice of prostate cancer treatment and the specific isotope
chosen for seed brachytherapy treatment. The Company will tailor its marketing
message to each audience. IsoRay Medical has retained an advertising agency
in
the Seattle area to assist with its marketing communication program. The agency
will coordinate the creation and distribution of all advertising material and
work with the print and visual media.
The
advantages of Cs-131’s unique combination of high energy and short half-life
will be heavily promoted 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 first
implant sites. We will 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.
To
promote our products to the clinical and professional audience, we will use
a
combination of marketing messages to appear in print and visual media. 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 will 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 will emphasize the specific advantages of Cs-131, including fewer side
effects, less total radiation, and shorter period of radiation. The Company
plans to reach 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.
16
Another
key element of our strategy will be 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 2005 and into 2006, IsoRay
Medical 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 will 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
Medical has started to build a direct sales organization to introduce Cs-131
to
radiation oncologists and medical physicists. In August 2004 IsoRay Medical
hired two highly successful sales professionals from the brachytherapy industry
that bring well established relationships with key radiation oncologists and
medical physicists, and in 2005, IsoRay Medical expanded its sales force to
four
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
October 6, 2006, the Company had supplied the 131Cs
seed
to thirteen well-known implant centers strategically located throughout the
U.S.
Implant centers are currently located in the states of Arizona, California,
Illinois, Pennsylvania, Tennessee, New York, Texas, Washington and Wisconsin,
which have implanted our seed into 75 patients as of October 6, 2005. As
production increases, additional centers will be added. Clinical results from
the patients implanted through October 6, 2005, while perhaps not a large enough
group to draw statistically significant conclusions, have been consistent with
the reduced side effects expected from the shorter half-life of Cs-131.
The
Company will expand its U.S. sales force as it increases production capacity
and
expands the customer base. If the Company expands 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 Medical 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 Medical’s predecessor’s filing for an Additional
Device Category, CMS (Centers for Medicare and Medicaid Services) approved
a
HCPCS/CPT code for Cs-131 brachytherapy seeds of $44.67 per seed. This is the
same price as awarded to Pd-103 seeds, and compares favorably to the $37.34
price granted to I-125 seeds. Medicare is the most significant U.S. payor for
prostate brachytherapy services, and is the payor in close to 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
July
31, 2005, the price for our loose seeds was $55 per seed.
17
Prostate
brachytherapy is typically performed in the outpatient setting, and as such,
is
covered by the CMS Outpatient Prospective Payment System. In January 2004,
brachytherapy procedure prices were unbundled by CMS, allowing itemized
invoicing for seeds with no limit on the number of seeds used per procedure,
and
CMS currently reimburses hospitals and clinics for their seed purchases on
a
cost basis. Other insurance companies have followed these CMS changes. With
the
new reimbursement structure and industry consolidation, prices of brachytherapy
seeds are expected to stabilize and increase over the next few years.
Pricing
premiums for pre-loaded needles, strands and pre-loaded Mick cartridges will
be
added as these packaging alternatives are offered to our customers. 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.
Other
Information
Customers
Customers
representing ten percent or more of total Company sales for the twelve months
ended June 30, 2005 include:
| Chicago Prostate Cancer Center | Westmont, IL | 18.5% of revenue |
| Western Cancer Center | San Diego, CA | 30.6% of revenue |
| Texas Cancer Center | San Antonio, TX | 21.8% 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 has been 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 Medical.
IsoRay’s predecessor also filed for patent protection in four European countries
under the Patent Cooperation Treaty. Those patents have been assigned to IsoRay
Medical.
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 Medical’s procedures and documentation. In June and July
of 2004, three patent applications were filed relating to methods of deriving
Cs-131 and Y-90 developed by IsoRay Medical employees. The Company is currently
working on developing and patenting additional methods of deriving Cs-131 and
Y-90, 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 Medical reassigns the Royalty Agreement
to another company, these royalties increase to 2%. The Royalty Agreement has
an
anti-shelving clause which requires IsoRay Medical to return the patent if
IsoRay Medical permanently abandons sales of products using the invention.
18
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 in exchange for a membership interest. The license
agreement was transferred to IsoRay, Inc. (WA domiciled) effective May 1, 2002
in connection with the tax-free reorganization.
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.
Research
And Development
From
inception (December 17, 2001) through June 30, 2005, IsoRay Medical and its
predecessor companies incurred more than $1.8 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 Medical's predecessor obtained FDA 510(k) clearance in March 2003 to
market the IsoRay 131Cs
seed
for the treatment of localized solid tumors. The Company has not applied for
clearance from the FDA to market its second product (currently in development),
Yttrium-90, but management believes that it will not be difficult to obtain
clearance for Y-90, since other manufacturers of this product have already
obtained clearance for it.
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.
19
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 by product 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.
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.
The constitutionality of this initiative has been challenged, but if it were
enforced it could impact our ability to manufacture our seeds, whether at PNNL
or elsewhere in the State of Washington.
Seasonality
The
Company is not aware of any significant seasonal influences on its business.
The
composition of certain products and services changes modestly with shifts in
weather with no material impact on total revenues.
Employees
As
of
September 30, 2005, IsoRay Medical employed twenty-four full-time individuals,
one occasional individual and one part-time individual. 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. Neither the Company's nor IsoRay Medical's employees are
represented by any collective bargaining unit. IsoRay Medical estimates that
successful implementation of its growth plan would result in up to 30 additional
employees by the end of 2006.
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.
20
History
has shown the advantage of being the first to market a new brachytherapy
product. For example, ONCURA, now part of General Electric Company, currently
claims nearly 50% 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 will obtain a similar and significant advantage
by being the first to introduce a Cs-131 seed.
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. Ten
of
those companies represent nearly 100% of annual brachytherapy seed sales
worldwide: ONCURA
(part
of
General Electric Company), Theragenics Corp., North American Scientific, Inc.,
Mentor Corp., Implant Sciences Corp., International Brachytherapy S.A., Cardinal
Health, Inc., C.R. Bard, Inc., DRAXIMAGE
(a
division of DRAXIS
Health,
Inc.) and Best Medical International, Inc. The top three - ONCURA, Theragenics,
and North American Scientific - currently garner nearly 90% of annual sales.
It
is
possible that three or four of the current I-125 or Pd-103 seed manufacturers
(i.e., 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) approval 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 approval 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. In addition to Y-90, 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.
Risk
Factors
Our
Subsidiary’s Independent Accountants Have Expressed Doubt About Its Ability To
Continue As A Going Concern.
IsoRay
Medical has generated material operating losses since inception and has a
shareholders’ deficit. 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 or obtaining loans and grants from various
financial institutions where possible. The doubt expressed by IsoRay Medical’s
auditors about its ability to continue as a going concern increases the
difficulty in meeting such goals. IsoRay Medical began generating revenue in
October 2004, has generated revenue of approximately $410,000 through September
30, 2005, and is in the early stages of marketing its IsoRay 131Cs
seed.
IsoRay Medical and the Company have limited historical, operating or financial
information upon which to evaluate their performance. There can be no assurance
that the Company will attain profitability.
21
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. Currently,
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 will
require ever increasing market share to increase revenues.
We
Have Limited Data On The Clinical Performance Of 131Cs.
As of
October 6, 2005, the IsoRay 131Cs
seed
has been implanted in 75 patients.
While this limited 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 sales executives, entry into capital lease agreements
for
a glove box and a hot cell, and entry into executive contracts requiring
payments upon reaching certain milestones significantly increased IsoRay
Medical’s monthly cash requirements since August 2004. Monthly operating cash
requirements as of the date of this filing were approximately $500,000,
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 related to completing the
recent merger with IsoRay, Inc. and public reporting status have resulted in
greater amounts of short-term cash demands. IsoRay Medical was actively raising
capital prior to the merger and 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 public and private offerings of equity
and debt securities, but also collaborative arrangements, strategic alliances,
or from other sources. We will need to raise at least $5.5 million of additional
capital to fund working capital needs through the end of 2006. IsoRay Medical
has entered into a lease agreement and has constructed a manufacturing and
production facility located in Richland, Washington that its management believes
will provide adequate space to manufacture the 131Cs
seed
product for the prostate and other organ cancer markets until late 2007.
22
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,
including the PNNL, which is where our 131Cs
seed
product has been manufactured to date. We are currently in the process of
transitioning from PNNL to full production in our new, leased facility outside
of PNNL. 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. The U.S. Secretary
of Energy is a party to litigation challenging the constitutionality of
Initiative 297 in U.S. District Court. Due to this litigation, the State of
Washington and the U.S. Justice Department have agreed to delay any
implementation of Initiative 297 for an indefinite period of time. Thus, we
have
the ability to continue manufacturing seeds at PNNL for some period of time
if
needed as a back-up to our new IsoRay production facility, or to conduct further
development activities there. If the State of Washington begins enforcement
of
the initiative, we may be unable to conduct any future activities at PNNL that
would generate mixed radioactive and hazardous wastes.
Management
believes that we will be able to continue our manufacturing operations in the
State of Washington for the foreseeable future, whether at PNNL or at our new
leased facility, which is now operational. 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 Medical and the Company have
experience primarily in research and development of products and our experience
in commercial-scale manufacturing is limited. IsoRay Medical began commercial
production of the 131Cs
seed
in the fourth quarter of 2004 and has completed 45 production-scale 131Cs
separation runs as of October 3, 2005. IsoRay Medical recently demonstrated
production of 90Y
using a
process suitable for weekly production of commercial-scale quantities of this
isotope. Although IsoRay Medical’s 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. IsoRay
Medical has developed and deployed semi-automated laser welding equipment that
can produce seeds faster than a certain fully-automated line of equipment the
Company has reviewed that would cost several million dollars to design and
fabricate. IsoRay Medical believes it 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. We cannot ensure that either IsoRay Medical’s manufacturing processes
or its ability to sustain ongoing production of its products will be able to
meet demand.
Sales
And Marketing Experience.
IsoRay
Medical’s sales and marketing team has extensive experience in successfully
establishing and training domestic and international sales forces as well as
successfully introducing new medical devices to the market, but we have limited
specific experience with commercial sales and marketing of the Cesium-131
radioisotope. IsoRay Medical has employed marketing professionals with extensive
experience selling medical devices, including radioisotopes for large,
international companies. Our initial marketing activities have been targeted
to
a limited number of physicians and treatment centers, and we will need to
recruit additional employees to assist in expanding our customer base. We have
developed in-house customer service, order entry, shipping, billing, and sales
support. In addition, the Company has engaged a nationally recognized
reimbursement specialist Kathy Francisco, of the Pinnacle Health Group, with
over 25 years of healthcare reimbursement experience, to assist with
reimbursement questions and to provide reimbursement guidelines and appropriate
insurance coding numbers needed to obtain reimbursement for seed costs and
the
implant procedure by our customers. This consulting project was completed by
the
spring of 2005 and cost IsoRay approximately $7,500 plus travel-related
expenses. Although, this group and other consultants continue to be available
to
support the Company in its reimbursement and marketing programs, we cannot
be
certain that our products will be marketed and distributed in accordance with
our expectations or that our market research will be accurate. We also cannot
be
certain that we will be able to develop our own sales and marketing capabilities
to the extent anticipated by management. We may choose to add third-party
distribution channels, but we may not be able to maintain satisfactory
arrangements with the third parties upon whom we rely.
23
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 report,
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.
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;
|
| · |
our
manufacturing performance and capacity;
|
| · |
incidents,
if any, that could cause temporary shutdown of our manufacturing
facilities;
|
| · |
the
amount and timing of sales orders;
|
| · |
rate
and success of future product approvals;
|
| · |
timing
of FDA approval, if any, of competitive products and the rate of
market
penetration of competing products;
|
| · |
seasonality
of purchasing behavior in our market;
|
| · |
overall
economic conditions; and
|
| · |
the
successful introduction or market penetration of alternative therapies.
|
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. 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 control and our
suppliers’ control.
24
Future
Production Increases Will Depend on Our Ability to Acquire Larger Quantities
of
131Cs
and Hire More Employees. IsoRay
currently obtains 131Cs
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 an exclusive agreement with the Institute of Nuclear Materials
in the former Soviet Union to provide irradiated barium and 131Cs
in
quantities sufficient to supply a significant percentage of future demand for
131Cs.
IsoRay believes this supplier 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 agreement provides 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.
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,
IsoRay 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). However, since January 1, 2004 hospitals
and clinics ordering brachytherapy seeds have been reimbursed for the cost
of
the seeds plus a fixed mark-up at a rate prescribed by CMS. Reimbursement
amounts are reviewed and revised periodically, and on an ad hoc basis. Although
the Company is not currently aware of any changes to CMS reimbursement rates
that would have a material effect on our ability to maintain our pricing
structure, 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. 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.
25
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 IsoRay
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.
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.
26
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.
We
currently dispose of our radioactive waste through the Battelle managed PNNL
site under a one year renewable agreement. At our new, leased facility we intend
to 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, Inc. has an employment agreement with Roger Girard, its Chief Executive
Officer, and IsoRay Medical 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
90Y
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.
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 contract with the Institute of Nuclear
Materials.
27
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
will
increase our operating costs. We may not reach sufficient business volume to
justify our public reporting status.
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 Pink Sheets, a market with very limited liquidity and
minimal listing standards, under the symbol “ISRY.PK.” 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, and quotations
are limited and sporadic. We have applied for a listing on the Over-the Counter
Bulletin Board, but there can be no assurance that such a listing will be
obtained. Even if we are listed on the Over-the-Counter Bulletin Board,
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.
Our
Common Stock May Be Subject To Penny Stock Regulation. If
the
market price of our shares declines below $5.00 per share, our shares would
be
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 registrant’s net tangible assets; or exempted from the
definition by the SEC. If our shares were deemed to be “penny stocks”, trading
in the shares would be subject to additional sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors.
28
ITEM
2 - DESCRIPTION OF PROPERTY
The
Company leased, prior to July 2005, approximately 1,941 square feet of office
space at 4701 IDS Center, Minneapolis, Minnesota 55402. This space was
sub-leased to a separate company owned by the Company’s then-CEO. The Company
incurred no expense related to this lease during any period reflected in this
Transitional Report on Form 10-KSB.
Subsequent
to June 2005, the Company’s executive offices are now located at 350 Hills
Street, Suite 106, Richland, WA 99354, (509) 375-1202, where IsoRay Medical
currently leases approximately 3,100 square feet of office and laboratory space
for $4,196 per month from Energy Northwest. The lease expires December 31,
2005,
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 2005, 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.
In
April
2004, IsoRay Medical’s predecessor signed a contract with PNNL, permitting
IsoRay Medical to subcontract certain of its manufacturing needs to PNNL, use
PNNL facilities to produce the Cs-131 brachytherapy seeds, and ship them to
customers from the PNNL facilities. Using PNNL’s facilities has reduced the
immediate need for IsoRay Medical to purchase specialized capital-intensive
equipment. The contract allows it to manufacture Cs-131 seeds in PNNL until
it
expires in December 2006. Management believes that IsoRay will have sufficient
time prior to this contract’s expiration to shift production to IsoRay’s new
facility, described below.
We
have
entered into a lease, which commenced as of regulatory licensing approval on
October 6, 2005, for 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. The lease is for a
term
of twelve months following regulatory licensing approval, and payment for the
lease term is the issuance of 25,800 shares of IsoRay Medical (pre-merger)
common stock. The lease may be extended on a month-to-month basis by mutual
agreement of the parties. The lessor is Pacific EcoSolutions Incorporated,
and
the Company is not affiliated with this lessor.
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.
ITEM
3 - LEGAL PROCEEDINGS
The
Company is not involved in any material legal proceedings.
ITEM
4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matter
was submitted to a vote of the Company’s security holders during the fourth
quarter of the fiscal year covered by this Transitional Report.
PART
II
ITEM
5 - MARKET FOR COMMON EQUITY, RELATED STOCKHOLDERS’ MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES
The
Company’s Articles of Incorporation provide that the Company has the authority
to issue 200,000,000 shares of capital stock, which are currently divided into
two classes as follows: 194,000,000 shares of common stock, par value of $0.001
per share; and 6,000,000 shares of preferred stock, par value of $0.001 per
share. Immediately prior to the Merger, and following its recent 30:1 reverse
stock split, the Company had approximately 2,498,000 shares of common stock
outstanding, and no shares of preferred stock outstanding.
29
Our
common stock is quoted on the Pink Sheets under the symbol “ISRY.PK.” We resumed
trading on the Pink Sheets on August 18, 2005, after a period of no trading
activity (under our prior symbol “CPPC.PK”) from February 18, 2005 until August
18, 2005. We also had a period of no trading activity from July 2003 until
February 7, 2005. Prior to August 18, 2005, there was an absence of an
established trading marking for the Company’s common stock, the market was very
limited and sporadic, and no quotations from October 1, 2003 through July 2005
exceeded $0.01 per share.
On
October 3, 2005, the last reported bid price of our common stock as reported
on
the Pink Sheets was $5.50 per share. This quotation represents an inter-dealer
price without retail mark-up, mark-down or commissions, and may not necessarily
represent an actual transaction.
As
of
September 30, 2005, we had approximately 811 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 (the “Option Plan”) and
the 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 1,500,000 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
1,500,000 shares of common stock to officers and key employees of the Company.
Options granted under either Plan 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 Pink Sheets or OTC Bulletin Board) on the
date of the grant, and with varying vesting periods as determined by the Board.
IsoRay Medical, Inc.’s option plans were cancelled and replaced in the merger
with the Plans described above, and new options were issued without any change
in the material terms of the options, other than acceleration of all unvested
options (other than those issued to Mr. Griffiths, Mr. Hrobsky and Mr.
Hutchinson which retained their original vesting terms). As of June 30,
2005, no options had been granted under either plan.
|
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
|
N/A
|
N/A
|
3,000,000
|
|||||||
|
Total
|
N/A
|
N/A
|
3,000,000
|
|||||||
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.
Pursuant
to the Merger Agreement, all rights and privileges granted to IsoRay
shareholders owning common and preferred stock were converted into substantially
similar rights and privileges when the shareholders received IsoRay, Inc. shares
of common and preferred stock subject solely to the differences between Delaware
(IsoRay Medical) and Minnesota (IsoRay) laws.
Preferred
Stock
30
On
May
27, 2005, the Company’s Board of Directors created two series of shares of
Preferred Stock designated as Series A Convertible Preferred Stock and Series
B
Convertible Preferred Stock. The Series A Convertible Preferred Stock (the
Series A Stock) consists of an aggregate of 1,000,000 shares, $0.001 par value,
and the Series B Convertible Preferred Stock (Series B Stock) consists 5,000,000
shares, $0.001 par value (collectively, “Preferred Stock”). The Preferred Stock
has preferences, limitations and relative rights in preference to the holders
of
any other stock of the Company. The Preferred Stock may be converted into common
stock at a rate of one share of common stock for each one share of Preferred
Stock being converted. Holders of Preferred Stock are also entitled to receive
certain annual dividends, and no dividends of any type may be paid on the common
stock unless all dividends to which the holders of Preferred Stock shall have
been entitled shall have been paid or declared and a sum of money sufficient
for
the payment thereof set apart.
Sales
of Unregistered Securities
During
the nine months ended June 30, 2005 the following sales of unregistered
securities were completed by 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
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.
|
| · |
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.
|
| · |
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.
|
| · |
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 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.
|
ITEM
6 - MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Results
of Operations
31
We
have
had no revenue for the nine months ended June 30, 2005 or for either of the
years ended September 30, 2004 and 2003.
Nine
months ended June 30, 2005 compared to the Year ended September 30,
2004
On
July
28, 2005, the Company entered into a reverse merger transaction with IsoRay
Medical, Inc. whereby IsoRay Medical, Inc. became a wholly-owned subsidiary
of
the Company.
The
acquisition of IsoRay Medical on July 28, 2005 by the Company effected a change
in control and was accounted for as a “reverse acquisition” whereby IsoRay is
the accounting acquirer for financial statement purposes. Accordingly, for
all
periods subsequent to July 28, 2005, the financial statements of the Company
reflect the historical financial statements of IsoRay from the inception of
each
respective entity composing IsoRay Medical, Inc. at the July 28, 2005 change
in
control transaction and the operations of the Company subsequent to the July
28,
2005 transaction.
The
Company originally had a September 30 year end. As a result of the July 28,
2005
reverse acquisition transaction, the Company’s Board of Directors changed
IsoRay, Inc.’s (formerly Century Park Pictures Corporation) year-end to
June 30 to correspond to the year end of its newly acquired subsidiary,
IsoRay Medical, Inc.
Accordingly,
the reported financial results of the Company in this Transitional Report on
Form 10-KSB will not be representative of the reported (and/or anticipated)
results of operations in future periods.
General
and administrative expense for the nine months ended June 30, 2005 and the
year
ended September 30, 2003 were $30,128 and $9,095, respectively. The increase
was
directly related to various professional fees incurred in the consummation
of
the July 2005 business combination transaction with IsoRay Medical, Inc. Net
loss for the nine months ended June 30, 2005 was ($30,128) as compared to net
income of $75,757 for the year ended September 30, 2004. The $75,757 income
in
the year ended 2004 was primarily the result of the statutory cancellation
of
notes payable and accrued interest of $86,956.
In
conjunction with a May 2005 sale of equity securities for approximately $85,000,
the Company, the Company’s then-CEO and the purchasing shareholders negotiated a
settlement whereby all outstanding debt owed to the then-CEO in the form of
accrued compensation and working capital advances was settled in full for
approximately $50,000. The Company recognized a reversal of accrued compensation
of approximately $304,500 as a result of this negotiation. This reversal was
included in “additional paid-in-capital” for the nine months ended June 30,
2005.
Year
ended September 30, 2004 compared to Year ended September 30,
2003
General
and administrative expenses for the years ended September 30, 2004 and September
30, 2003 were $9,095 and $19,022, respectively. Net income for the year ended
September 30, 2004 was $75,757 as compared to a net loss of ($60,027) for the
year ended September 30, 2003. The principal components of the loss for the
year
ended September 30, 2004 were the accrual of interest expense of $41,005 on
outstanding notes payable and operating expenses of $19,022 related to
maintaining the Company’s compliance with the Securities Exchange Act of 1934.
Included in interest expense for fiscal 2004 and 2003 is approximately $2,100
and $41,000, respectively, in imputed interest charged to operations as a
component of interest expense with an offset to contributed additional paid-in
capital to recognize the economic effect of the suspended and forgiven interest
on certain notes payable. This accounting is the result of the respective
noteholders agreeing to discontinue their rights to interest subsequent to
July
31, 2002.
The
Company’s expenditures consist solely of items necessary to comply with the
Company’s periodic reporting obligations under the Securities Exchange Act of
1934 and are not necessarily reflective of what may be expected in future
periods when the Company either commences more extensive business operations
or
acquires another operating entity through either acquisition or
merger.
Year
ended September 30, 2003 compared to Year ended September 30,
2002
32
General
and administrative expenses for the years ended September 30, 2002 and 2001
were
approximately $60,000 and $59,000, respectively. The principal component of
these expenditures was the accrual of interest on $400,000 in outstanding notes
payable. Interest expense for the years ended September 30, 2003 and 2002 was
approximately $41,000 and $51,500, respectively. Included in interest expense
is
approximately $41,000 and $8,585 in imputed interest calculated as a result
of
the respective noteholders agreeing to discontinue their rights to interest
subsequent to July 31, 2002.
The
Company’s expenditures consist solely of items necessary to comply with the
Company’s periodic reporting obligations under the Securities Exchange Act of
1934 and are not necessarily reflective of what may be expected in future
periods when the Company either commences more extensive business operations
or
acquires another operating entity through either acquisition or
merger.
Liquidity
and Capital Resources
On
or
about May 2, 2005, the Company sold an aggregate 83,334 post-reverse split
shares of unregistered, restricted common stock (2,500,000 pre-reverse split
shares) for cash proceeds of approximately $85,000 to three (3) separate
individuals, including 4,933 post-reverse split shares to the Company’s former
President. The Company relied upon Section 4(2) of the Securities Act of 1933,
as amended, for an exemption from registration of these shares and no
underwriter was used in this transaction. The Company granted “piggy-back”
registration rights to the holders of the shares of common stock which would
entitle a holder to request that the Company register the common stock if the
Company files a registration statement at any time prior to three years from
the
date the Company sold such shares of common stock. The Company has agreed to
keep such registration statement current for up to 270 days. The Company has
agreed to pay all expenses associated with any registration of the common stock
except any underwriter’s commissions or fees or any fees of others employed by a
selling shareholder, including attorneys' fees, which shall be the
responsibility of the selling shareholder.
Cash
used
by operating activities for the nine months ended June 30, 2005 and for each
of
the respective years ended September 30, 2004 and 2003 was approximately
$59,000, $9,800 and $19,000, respectively. These cash requirements have been
provided by either the proceeds from the May 2005 stock sale or advances from
the Company’s former Chief Executive Officer. For all periods prior to October
1, 2001, these advances have been treated as additional paid-in capital.
Commencing October 1, 2001, the Company’s former Chief Executive Officer made
these advances as working capital advances which were repayable upon demand
at
some undesignated future date and were non-interest bearing. In June 2005,
concurrent with the May 2005 equity sale transaction and the July 2005 reverse
acquisition transaction with IsoRay Medical, the Company’s former Chief
Executive Officer forgave the repayment of these advances and the Company
recognized the forgiveness as additional contributed capital in the Company’s
financial statements.
Going
Concern Issues
IsoRay
Medical, Inc., on the date of the reverse acquisition transaction was classified
as a development stage enterprise, which was in the process of implementing
its
respective business plan to achieve a sustainable revenue stream. As of the
date
of the reverse merger transaction, IsoRay Medical, Inc. had a limited operating
history and its future success was subject to the expenses, risks and
uncertainties frequently encountered by companies in similar stages of
development. These potential risks include failure to acquire adequate financing
to fund further development of its products; failure to obtain and operate
a
production facility; failure to successfully create a market for its products;
and other risks and uncertainties.
Management’s
plans to raise additional financing include the sale of additional equity or
borrowings. Management expects to obtain the necessary financing; however,
no
assurance can be given that such financing will be completed on terms acceptable
to the Company. If the Company is not able to obtain additional financing,
the
development of the Company’s products could be delayed or suspended.
33
Inflation
Inflation
and changing prices are not anticipated to have a significant impact on the
future operations of the Company.
ITEM
7 - FINANCIAL STATEMENTS
The
required accompanying financial statements begin on page F-1 of this
document.
ITEM
8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
8A - CONTROLS AND PROCEDURES
As
required by Rule 13a-15 under the Exchange Act, within the 90 days prior to
the
filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company’s management, including the Company’s Chief
Executive Officer and Chief Financial Officer. Based upon that evaluation,
the
Company’s Chief Executive Officer and Chief Financial Officer concluded that the
Company’s disclosure controls and procedures are effective. There have been no
significant changes in the Company’s internal control over financial reporting
or in other factors, which could significantly affect internal control over
financial reporting subsequent to the date the Company carried out its
evaluation.
Disclosure
controls and procedures are controls and other procedures that are designed
to
ensure that information required to be disclosed in Company reports filed or
submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company’s Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding required disclosure.
PART
III
ITEM
9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
In
conjunction with the Merger, and effective as of July 28, 2005 (the closing
date
of the Merger), Thomas Scallen resigned from his positions as Chief Executive
Officer and Chairman of the Board, Philip Rogers resigned from his position
as
President and a director, and Wally Bietak resigned from his position as a
director of the Registrant.
Effective
as of July 28, 2005, Roger Girard and David Swanberg were appointed as directors
by the resigning Board, and, also effective as of July 28, 2005, they appointed
Robert Kauffman, Thomas LaVoy and Stephen Boatwright to fill the remaining
three
vacant Board positions. The Board has established an Audit Committee consisting
of Thomas LaVoy (Chairman) and Robert Kauffman. No other committees have been
formed.
The
Audit
Committee is responsible for assisting the Board of Directors in monitoring
and
oversight of (1) the integrity of the Company’s financial statements and its
systems of internal accounting and financial controls and (2) the independence
and performance of the Company’s independent auditors. The Board of Directors
has determined that Mr. LaVoy and Mr. Kauffman are each an “audit
committee financial expert” as defined in Item 401 of Regulation S-B promulgated
by the Securities and Exchange Commission, and are each independent. The Board’s
conclusions regarding the qualifications of Mr. LaVoy as an audit committee
financial expert were based on his service as a chief financial officer of
a
public company, his experience as a certified public accountant and his degree
in accounting. The Board’s conclusions regarding the qualifications of
Mr. Kauffman as an audit committee financial expert were based on his
service as a chief executive officer of multiple public companies, his active
supervision of the principal financial and accounting officers of the public
companies for which he served as chief executive officer, and his M.B.A. in
Finance.
34
Further
information about the new Board members may be found below.
Effective
as of July 28, 2005, Roger Girard was appointed as Chief Executive Officer
and
President of the Registrant and Michael Dunlop was appointed as Chief Financial
Officer and Treasurer of the Company. Also effective July 28, 2005, John Hrobsky
was appointed Vice President, Sales and Marketing and David Swanberg was
appointed Secretary and Vice President-Operations. Further information about
these officers may be found below.
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 $180,000, an automatic increase to $220,000
effective January 1, 2006, and an increase to $300,000 effective July 1, 2006
if
certain performance goals set by the Board of Directors are met. Mr. Girard
is also entitled to participate in any benefit plans provided to key executives
of the Company, and to a bonus if certain performance goals set by the Board
of
Directors are met. These performance goals have not yet been set by the Board.
The Registrant has not entered into employment agreements with any other
officers as of the date of this filing.
The
directors and executive officers serving the Company as of October 11, 2005
were
as follows:
|
Name
|
Age
|
Position
Held
|
||
|
Roger
Girard
|
62
|
Chairman,
President, CEO
|
||
|
John
Hrobsky
|
58
|
Vice
President-Marketing
|
||
|
Michael
Dunlop
|
53
|
Chief
Financial Officer-Treasurer
|
||
|
David
J. Swanberg
|
49
|
Vice
President-Operations
Corporate
Secretary, Director
|
||
|
Robert
Kauffman
|
64
|
Director
|
||
|
Thomas
LaVoy
|
45
|
Director
|
||
|
Stephen
Boatwright
|
41
|
Director
|
Roger
E.
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 Medical'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
Medical, 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.
John
Hrobsky - Prior to joining IsoRay’s predecessor company as Executive Vice
President of Sales and Marketing in 2004, Mr. Hrobsky was President, CEO
and a director of Advanced Cochlear Systems, positions he held beginning in
2001. From 1999 to 2001, Mr. Hrobsky served as President, CEO and a
director of Zaxis International, Inc., a biotechnology company. Prior to 1999,
Mr. Hrobsky served as a senior executive with a number of biotech and
medical device companies. Mr. Hrobsky’s sales and marketing experience with
medical devices includes a device for restoring neuro-control after spinal
cord
injury, the worldwide leading cochlear implant as well as various radiology,
imaging and diagnostic equipment products. Notably, Mr. Hrobsky served as
Vice President of Sales for Cochlear Corporation, the U.S. subsidiary of
Cochlear Ltd., an Australian based manufacturer of cochlear implants where
he
was responsible for its introduction to the markets in the US, Canada and South
America. Cochlear Ltd. is the world’s leading provider of cochlear implants
commanding approximately 60% of the market. Mr. Hrobsky earned a Bachelor
of Science in Medical Technology in 1971 from the University of Wisconsin - Eau
Claire, and has earned credits toward an MBA from Regis University, Denver,
CO.
35
Michael
Dunlop - Mr. Dunlop has been responsible for IsoRay Medical and its
predecessor companies’ financial and accounting operations and administrative
services in his position as CFO since April 2001. Mr. Dunlop has over 18
years of financial and administrative experience in the healthcare industry.
As
Director of Contracting and Marketing for Community Choice, PHCO, an organized
healthcare delivery system, from October 1997 to December 2003, he assisted
in
developing the strategic direction and business plan of the PHCO, negotiated
and
maintained contractual relations with state-wide major health insurance plans,
increased compensation for 80+ independent providers and 6 area hospitals,
and
enhanced PHCO provider membership through development of programs that lowered
clinic and hospital operating costs. He was granted the Pentad Industry Council,
Chelan-Douglas Counties’ ’Employer of the Year’ award in 1996, while
administrator of Lake Chelan Clinic. Mr. Dunlop holds an M.B.A. from
California State University and B.M. Education from Walla Walla
College.
David
J.
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. 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 Medical’s
predecessor company in March of 1999 and has held management positions in the
IsoRay companies since 2000. He has been instrumental in development of IsoRay
Medical’s initial product, the Cs-131 brachytherapy seed, including interfaces
with technical, regulatory, and quality assurance requirements. With IsoRay
Medical 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
C.
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.
36
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.
Significant
Employees
Certain
significant employees of our subsidiary, IsoRay Medical, Inc., and their
respective ages as of the date of this report 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 and Tenure
|
||
|
Lane
Bray
|
77
|
Chemist
|
||
|
Garrett
Brown
|
42
|
Chief
Technology Officer
|
||
|
Keith
Welsch
|
58
|
Chief
Quality Officer
|
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 the present, Dr. Brown
has been 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 Medical’s Chief Technical Officer since May of 2000. In March 2004,
Dr. Brown was certified as a Radiological Safety Officer.
Keith
Welsch - Mr. Welsch is a quality control professional with experience in a
wide range of organizations and disciplines including the nuclear, aerospace,
environmental restoration, construction, tubing, steel and aluminum industries.
Mr. Welsch managed the registration of a plant to ISO 9002:1994 and
subsequently transitioned the facility to ISO 9001:2000 and conducted continuous
improvement actions. These included statistical process control, six sigma,
lean
manufacturing, and total preventive maintenance programs. Mr. Welsch’s
other significant achievements include facilitation of quality improvement
and
stand down teams, innovative education training manager, management of records
review for two nuclear sites, management of audit programs and corrective-action
systems, and teaching safety, technical, and quality courses. He has earned
the
Certified Quality Auditor, Certified Quality Technician and Certified Quality
Improvement Associate certifications from the American Society for Quality.
Prior to joining IsoRay in 2004, Mr. Welsch served as Quality Assurance
Manager for Kaiser Aluminum Products of Richland, Washington since 1997.
Mr. Welsch received a BA in Business Administration from Washington State
University.
37
The
Company’s Directors, as named above, will serve until the next annual meeting of
the Company’s stockholders or until their successors are duly elected and have
qualified. Directors will be elected for one-year terms at the annual
stockholders meeting. Officers will hold their positions at the pleasure of
the
board of directors, absent any employment agreement, of which none currently
exists or is contemplated. There is no arrangement or understanding between
any
of the directors or officers of the Company and any other person pursuant to
which any director or officer was or is to be selected as a director or officer,
and there is no arrangement, plan or understanding as to whether non-management
shareholders will exercise their voting rights to continue to elect the current
directors to the Company’s board. There are also no arrangements, agreements or
understandings between non-management shareholders that may directly or
indirectly participate in or influence the management of the Company’s
affairs.
There
are
no agreements or understandings for any officer or director to resign at the
request of another person, and none of the officers or directors are acting
on
behalf of, or will act at the direction of, any other person.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires the
Company’s directors and executive officers, and persons who beneficially own
more than ten percent of a registered class of our equity securities, to file
with the Securities and Exchange Commission (the “Commission”) initial reports
of beneficial ownership and reports of changes in beneficial ownership of our
Common Stock. The rules promulgated by the Commission under Section 16(a) of
the
Exchange Act require those persons to furnish us with copies of all reports
filed with the Commission pursuant to Section 16(a). The information in this
section is based solely upon a review of Forms 3, Forms 4, and Forms 5 received
by us.
During
the transition period ended June 30, 2005, Philip Rogers, our former President
and a former director, failed to file one Form 4. To our knowledge, we believe
that no other reports were required and not filed during the transition period
ended June 30, 2005.
Code
of Ethics
We
have
adopted a Code of Conduct and Ethics that applies to all of our officers,
directors and employees and a separate Code of Ethics for Chief Executive
Officer and Senior Financial Officers that supplements our Code of Conduct
and
Ethics. The Code of Conduct and Ethics was previously filed as Exhibit 14.1
to
this Transition Report, and the Code of Ethics for Chief Executive Officer
and
Senior Financial Officers was previously filed as Exhibit 14.2 to this
Transition Report. Each of these policies comprises written standards that
are
reasonably designed to deter wrongdoing and to promote the behavior described
in
Item 406 of Regulation S-B promulgated by the Securities and Exchange
Commission. Each of these policies was adopted after the end of the transition
period ended June 30, 2005.
ITEM
10 - 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 2005, in
excess of $100,000.
38
|
Long-Term
Compensation Awards
|
||||||||||||||||
|
Name
and Principal Position
|
Fiscal
Year(1)
|
Annual
Compensation Salary
|
Restricted
Stock Awards
|
Securities
Underlying Options
|
All
Other Compensation
|
|||||||||||
|
Thomas
Scallen, Former Chief Executive Officer(2)
|
2005
|
--
|
--
|
--
|
$
|
50,000(3
|
)
|
|||||||||
|
2004
|
--
|
$
|
7,871(4
|
)
|
--
|
--
|
||||||||||
|
2003
|
--
|
--
|
--
|
--
|
||||||||||||
|
Roger
Girard, Chief Executive Officer(5)
|
2005
|
$
|
113,958
|
--
|
--
|
--
|
||||||||||
|
2004
|
$
|
71,031
|
$
|
9,900
|
513,840
|
--
|
||||||||||
|
2003
|
$
|
4,000
|
$
|
49,900
|
--
|
--
|
||||||||||
|
(1)
|
Fiscal
year 2005 consisted of the period from October 1, 2004 through June
30,
2005; fiscal year 2004 consisted of the year ended September 20,
3004; and
fiscal year 2003 consisted of the year ended September 30,
2003.
|
|
(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
$7,781, which was equal to the “fair value” of the Company’s common stock
on the conversion date. The Company relied upon Section 4(2) of the
Securities Act of 1933, as amended, for an exemption from registration
for
this issuance.
|
|
(5)
|
Mr.
Girard did not begin serving as our CEO until July 28, 2005, but
he has
served as CEO of our subsidiary and its predecessor company since
August
2003. The compensation listed was paid to Mr. Girard by IsoRay Medical
or
its predecessor company.
|
Aggregated
Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The
following table sets forth the number of shares covered by unexercised stock
options held by the Executive Officers as of June 30, 2005, and the value of
"in-the-money" stock options, which represents the positive spread between
the
exercise price of a stock option or warrant and the market price of the shares
subject to such option or warrant as of June 30, 2005.
|
Number
of Securities Underlying Unexercised Options at Fiscal
Year-End(#)
|
Value
of Unexercised In-the-Money Options at Fiscal Year-End($)
|
||||||||||||||||||
|
Name
|
Number
of Shares Acquired on Exercise (#)
|
Value
Realized ($)
|
Exercisable
|
Unexercisable
|
Exercisable
|
Unexercisable
|
|||||||||||||
|
Roger
Girard(1)
|
0
|
0
|
513,841
|
0
|
$
|
39,650
|
Nn/a
|
||||||||||||
|
Thomas
Scallen
|
0
|
0
|
0
|
0
|
nn/a
|
nn/a
|
|||||||||||||
(1)Mr.
Girard held options to acquire 513,841 IsoRay Medical, Inc. shares at June
30,
2005. He held no options in the Registrant at June 30, 2005.
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 $180,000, an automatic increase to $220,000
effective January 1, 2006, and an increase to $300,000 effective July 1, 2006
at
the discretion of the Board of Directors. 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.
39
Director
Compensation
The
Company’s Directors have not received any cash compensation during the nine
months ended June 30, 2005 or either of the respective years ended September
30,
2004 or 2003.
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 have also
granted each non-employee director immediately exercisable options to purchase
100,000 shares of our common stock. For the current non-employee members of
the
Board, these options were granted on July 28, 2005 with an exercise price of
$2.00 per share. Our non-employee directors as of the date of this filing were
Robert Kauffman, Thomas LaVoy and Stephen Boatwright.
ITEM
11 - SECURITY 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 September 30,
2005 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 September
30, 2005, the Company had 9,060,221 shares of common stock and 1,260,732 shares
of preferred stock outstanding.
40
Common
Stock Share Ownership as of September 30, 2005
|
Name
and Address of Beneficial Owner (1)
|
Amount
of Common Shares Owned
|
Derivative
Securities Exercisable or Convertible Within 60 Days of September
30,
2005
|
Total
Common Shares Beneficially Owned
|
Percent
of Common Shares Owned(2)
|
|||||||||
|
Roger
Girard
Chief
Executive Officer,
President
and Chairman
|
338,462
|
513,841
|
852,303
|
8.90
|
%
|
||||||||
|
Michael
Dunlop
Chief
Financial Officer
|
136,619
|
150,000
|
286,619
|
3.11
|
%
|
||||||||
|
John
Hrobsky
Vice
President
|
4,296
|
281,349
|
285,645
|
3.06
|
%
|
||||||||
|
David
Swanberg
Vice
President and Director
|
284,609
|
150,000
|
434,609
|
4.72
|
%
|
||||||||
|
Robert
Kauffman
Director
|
43,802
|
100,000
|
143,802
|
1.57
|
%
|
||||||||
|
Thomas
LaVoy
Director
|
8,423
|
100,000
|
108,423
|
1.18
|
%
|
||||||||
|
Stephen
Boatwright
Director
|
-
|
184,236
|
184,236
|
1.99
|
%
|
||||||||
|
Thomas
K. Scallen
Former
Chief Executive
Officer(3)
|
329,942
|
-
|
329,942
|
3.64
|
%
|
||||||||
|
Lawrence
Family Trust(4)
|
888,529
|
-
|
888,529
|
9.81
|
%
|
||||||||
|
Donald
Segna
|
511,214
|
-
|
511,214
|
5.64
|
%
|
||||||||
|
Anthony
Silverman(5)
|
594,771
|
139,391
|
734,162
|
7.98
|
%
|
||||||||
|
All
Officers and Directors
as
a group (7 persons)
|
816,213
|
1,478,726
|
2,294,939
|
25.54
|
%
|
||||||||
|
(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 9,060,211 shares of Common Stock outstanding
on
September 30, 2005. 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 September 30, 2005 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. Scallen’s
address is 4701 IDS Center, Minneapolis, MN
55402.
|
|
(4)
|
The
address of the Lawrence Family Trust is 285 Dondero Way, San Jose,
California 95119.
|
|
(5)
|
Mr. Silverman’s
address is 2747 Paradise Road, #903, Las Vegas, Nevada 98109. 27,376
of
the shares of common stock and 24,067 of the derivative securities
beneficially owned by Mr. Silverman are held of record by Katsinam
Partners, LP, an entity of which Mr. Silverman is a member of the
general partner.
|
41
Preferred
Stock Share Ownership as of September 30, 2005
|
Name
and Address of Beneficial Owner(1)
|
Amount
of Preferred Shares Owned
|
Options
or Warrants Exercisable Within 60 Days of September 30,
2005
|
Total
Preferred Shares Beneficially Owned
|
Percent
of Preferred Shares Owned(2)
|
|||||||||
|
Lebowitz
Living Trust (3)
|
142,819
|
-
|
142,819
|
11.33
|
%
|
||||||||
|
David
Swanberg
Vice
President and Director
|
14,218
|
-
|
14,218
|
1.13
|
%
|
||||||||
|
All
Officers and Directors
as
a group (7 persons)(4)
|
14,218
|
-
|
14,218
|
1.13
|
%
|
||||||||
|
(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 1,260,732 shares of Preferred Stock outstanding
on
September 30, 2005. Shares of Preferred Stock subject to stock options
or
warrants which are currently exercisable or will become exercisable
within
60 days after September 30, 2005 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)
|
The
address of the Lebowitz Living Trust is 16123 Greenwood Road; Monte
Sereno, California 95030.
|
|
(4)
|
No
officers or directors other than Mr. Swanberg beneficially own shares
of Preferred Stock.
|
ITEM
12 - 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 is non-interest bearing
and
is 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.
Through
December 31, 2004, the Company owed the Company’s Chief Executive Officer,
Thomas K. Scallen, approximately $354,500 for cumulative accrued salary. During
the quarter ended March 31, 2005, the Company’s former Chief Executive Officer
forgave approximately $304,500 in accrued salary for prior periods.
Mr. Stephen
Boatwright, a Company director, has been actively involved in providing various
legal services to the Company, IsoRay Medical and IsoRay Medical’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 and its
predecessors. From February 2005 though June 30, 2005, IsoRay Medical, Inc.
paid
Keller Rohrback, PLC approximately $144,000 for legal services. In exchange
for
consulting services including providing advice to IsoRay Medical as to the
structure of organization and compensation arrangements with employees and
also
in connection with developing various policies and procedures, Quatash Ventures,
LLC, an entity controlled by Stephen Boatwight, one of the Company’s directors,
received options to purchase 84,236 shares of our common stock in 2004.
IsoRay
Medical’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.
On
January 16, 2005, in addition to certain other shareholders, the following
officers and directors 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.
42
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, 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 from Anthony
Silverman or his associates of one million dollars as the purchase price of
certain securities of IsoRay Medical before the closing. These conditions were
satisfied prior to the closing of the merger, which occurred on July 28,
2005.
On
July
28, 2005, the Registrant’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. Additionally, 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. 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.
In
September 2003, IsoRay Products LLC issued 100,000 of its Class B member shares,
for services rendered, to Roger Girard, the IsoRay, Inc. President, who was
also
a Director of IsoRay, Inc. Based on an estimate of the fair value of the Class
B
shares, as determined by reference to cash sales of Class A member shares,
IsoRay Products LLC recorded $50,000 of compensation expense in connection
with
the issuance of these shares. The 100,000 Class B member shares were exchanged
for 168,798 IsoRay Medical, Inc. common shares in connection with the merger
transaction, which were subsequently exchanged for 142,189 shares of IsoRay,
Inc. common stock.
In
June
2004, IsoRay Medical, Inc. issued 10,000 of its common shares to Mr. Girard
for
services rendered and $100 cash. The Company recorded $9,900 of compensation
expense in connection with the issuance of these shares. These shares were
subsequently exchanged for 8,423 shares of IsoRay, Inc. common
stock.
During
2003, IsoRay Products LLC granted warrants for the purchase of 100,000 of its
Class A member shares to a financial services company for consulting services.
These warrants were exercisable at $1.00 per share and are set to expire on
October 30, 2006. The financial services company was a shareholder of IsoRay
Products LLC. Because the exercise price was equal to the estimated fair value
at the date of grant, no compensation was recognized associated with these
warrants. In connection with the business combination of the IsoRay companies,
IsoRay Medical, Inc. granted warrants for the purchase of 168,799 of its Series
B Preferred shares, exercisable at $.59 per share, in exchange for the warrants
granted by IsoRay Products LLC. Subsequent to the merger with the Registrant,
these shares were exchanged for 142,189 shares of IsoRay, Inc. common
stock.
During
2003 and 2002, IsoRay, Inc. (WA domiciled) contracted with a consultant. Under
the terms of the agreement, the consultant, who was a director of IsoRay, Inc.
(WA domiciled), was paid a monthly retainer of $1,500 plus out-of-pocket
expenses. During 2003 and 2002, IsoRay, Inc. (WA domiciled) paid the consultant
$15,398 and $12,681, respectively.
During
2003, IsoRay, Inc. (WA domiciled) paid or accrued $17,500 to a consultant,
who
was also an officer of IsoRay, Inc. (WA domiciled), for certain consulting
services.
During
2003, IsoRay, Inc. (WA domiciled) paid or accrued $23,000 to a financial
services company, which has owned by an officer of IsoRay, Inc. (WA domiciled),
for financial consulting services.
43
During
2002, IsoRay, Inc. (WA domiciled) issued 35,200 shares of its common stock
to
certain shareholders, including five directors of that predecessor entity,
as
compensation for their guarantee of notes payable to Benton-Franklin Economic
Development District. The transaction was recorded at the fair value of the
shares, estimated to be $35,200, as management considered it to be more readily
determinable than the value of the guarantees. The following directors of
IsoRay, Inc. (WA domiciled) received shares of common stock, which have been
exchanged for shares of the Company’s common stock: Lane Bray, 4,936 Company
shares; Michael Dunlop, 5,265 Company shares; Karen Thompson, 5,265 Company
shares; Donald Segna, 5,265 Company shares; and David Swanberg, 3,291 Company
shares.
Effective
July 12, 1999, Lane Bray, a Member of IsoRay, LLC (and also a shareholder and
Director 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 in exchange for a membership interest. The license
agreement was transferred to IsoRay, Inc. (WA domiciled) effective May 1, 2002
in connection with the tax-free reorganization.
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.
ITEM
13 - EXHIBITS AND REPORTS ON FORM 8-K
(except
as otherwise indicated, all exhibits were previously filed)
|
Exhibit #
|
|
Description
|
|
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.
|
|
44
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
45
|
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.
|
|
|
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).
|
46
|
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.
|
|
|
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.
|
|
|
31.1
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief
Executive Officer, filed herewith.
|
|
|
31.2
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief
Financial Officer, filed herewith.
|
|
|
32.1
|
Certifications
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed
herewith.
|
Reports
on Form 8-K
On
June
6, 2005, the Company filed a Current Report on Form 8-K announcing its entry
into a Merger Agreement, dated May 27, 2005, by and among the Company, Century
Park Transitory Subsidiary, Inc., IsoRay Medical, Inc., Thomas Scallen and
Anthony Silverman.
On
June
15, 2005, the Company filed a Current Report on Form 8-K announcing the April
29, 2005 reverse stock split of the Company’s common stock.
On
August
3, 2005, the Company filed a Current Report on Form 8-K announcing the closing
of the merger between the Company’s wholly-owned subsidiary, Century Park
Transitory Subsidiary, Inc. and IsoRay Medical, Inc.
On
August
15, 2005, the Company filed an amended Current Report on Form 8-K/A amending
the
Current Report filed on August 3, 2005.
On
August
17, 2005, the Company filed a Current Report on Form 8-K announcing the
Company’s new trading symbol, ISRY, for its common stock on the Pink
Sheets.
ITEM
14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
Company paid or accrued the following fees in each of the prior two fiscal
years
to its principal accountant, S. W. Hatfield, CPA of Dallas, Texas:
47
|
Nine
months ended
June
30, 2005
|
Year
ended
September
30, 2004
|
Year
ended September 30, 2003
|
||||||||
|
1. Audit
fees
|
$
|
4,663
|
$
|
5,512
|
$
|
8,094
|
||||
|
2. Audit-related
fees
|
-
|
-
|
-
|
|||||||
|
3. Tax
fees
|
-
|
-
|
-
|
|||||||
|
4. All
other fees
|
-
|
-
|
-
|
|||||||
|
Totals
|
$
|
4,663
|
$
|
5,512
|
$
|
8,094
|
||||
Through
the July 2005 reverse acquisition transaction date, the Company had no formal
audit committee. However, as defined in Sarbanes-Oxley Act of 2002, the entire
Board of Directors was the Company’s defacto audit committee.
In
discharging its oversight responsibility as to the audit process, the Board
obtained from the independent auditors a formal written statement describing
all
relationships between the auditors and the Company that might bear on the
auditors’ independence. The Board discussed with the auditors any relationships
that may impact their objectivity and independence, including fees for non-audit
services, and satisfied itself as to the auditors’ independence. The Board also
discussed with management and the independent auditors the quality and adequacy
of the Company’s internal controls.
The
Board
and, solely for the period ended June 30, 2005, the recently formed Audit
Committee, reviewed the audited financial statements of the Company as of and
for the respective periods ended June 30, 2005, September 30, 2004 and
2003 with management and the independent auditors. Management has the sole
ultimate responsibility for the preparation of the Company’s financial
statements and the independent auditors have the responsibility for their
examination of those statements.
Based
on
the above-mentioned review and discussions with the independent auditors and
management, the Board of Directors and Audit Committee approved the Company’s
audited financial statements and recommended that they be included in its
Transitional Annual Report on Form 10-KSB for the nine months ended June 30,
2005, for filing with the Securities and Exchange Commission.
The
Company’s principal accountant, S. W. Hatfield, CPA did not engage any other
persons or firms other than the principal accountant’s full-time, permanent
employees.
(Remainder
of this page left blank intentionally)
48
SIGNATURES
In
accord
with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended,
the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
ISORAY,
INC.
(formerly Century Park Pictures
Corporation)
|
||
| |
|
|
| Dated: June 26, 2006 | By: | /s/ Roger E. Girard |
|
Roger E. Girard |
||
| Chief Executive Officer | ||
| |
|
|
| Dated: June 26, 2006 | By: | /s/ Michael Dunlop |
|
Michael Dunlop |
||
| Chief Financial Officer | ||
In
accordance with the Securities Exchange Act of 1934, as amended, this report
has
been signed below by the following persons on behalf of the registrant and
in
the capacities and on the dates indicated.
|
|
||
| |
|
|
| Dated: June 26, 2006 | By: | /s/ Roger E. Girard |
|
Roger E. Girard |
||
| Chief Executive Officer | ||
| |
|
|
| Dated: June 26, 2006 | By: | /s/ Michael Dunlop |
|
Michael Dunlop |
||
| Chief Financial Officer and Treasurer | ||
REPORT
OF REGISTERED INDEPENDENT CERTIFIED PUBLIC ACCOUNTING
FIRM
Board
of
Directors and Stockholders
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
We
have
audited the accompanying balance sheets of IsoRay, Inc. (formerly Century Park
Pictures Corporation) (a Minnesota corporation) as of June 30, 2005, September
30, 2004 and 2003 and the related statements of operations and comprehensive
loss, changes in shareholders' equity and cash flows for the nine months ended
June 30, 2005 and for each of the years ended September 30, 2004 and 2003,
respectively. 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 audits 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 financial position of IsoRay, Inc. (formerly Century
Park
Pictures Corporation) as of June 30, 2005, September 30, 2004 and 2003 and
the
results of its operations and its cash flows for the nine months ended June
30,
2005 and for each of the years ended September 30, 2004 and 2003, respectively,
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 C to the financial
statements, the Company completed a reverse acquisition transaction in July
2005. At the commencement of the reverse acquisition transaction, the target
enterprise was in the process of implementing its respective business plan
to
achieve a sustainable revenue stream. Due to the uncertainty of the ultimate
success of the target enterprise, this circumstance creates substantial doubt
about the Company’s ability to continue as a going concern. The financial
statements do not contain any adjustments that might result from the outcome
of
these uncertainties.
|
/s/
S. W. Hatfield, CPA
|
|
|
S.W.
HATFIELD, CPA
|
Dallas,
Texas
September
16, 2005
F-1
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
Balance
Sheets
June
30,
2005, September 30, 2004 and 2003
|
(Restated)
June
30,
2005
|
September
30,
2004
|
September
30, 2003
|
||||||||
|
Assets
|
||||||||||
|
Current
Assets
|
||||||||||
|
Cash
on hand and in bank
|
$
|
32,587
|
$
|
-
|
$
|
-
|
||||
|
Total current assets
|
32,587
|
-
|
-
|
|||||||
|
Other
Assets
|
-
|
926
|
926
|
|||||||
|
Rent
deposits
|
||||||||||
|
Total
Assets
|
$
|
32,587
|
$
|
926
|
$
|
926
|
||||
|
Liabilities
and Shareholders' Equity
(Deficit)
|
||||||||||
|
Current
Liabilities
|
||||||||||
|
Notes
payable
|
$
|
-
|
$
|
-
|
$
|
100,000
|
||||
|
Accounts
payable - trade
|
21,355
|
395
|
-
|
|||||||
|
Accrued
officer compensation
|
-
|
354,500
|
354,500
|
|||||||
|
Accrued
interest payable
|
-
|
-
|
73,714
|
|||||||
|
Other
accrued expenses
|
-
|
-
|
9,027
|
|||||||
|
Advances
from shareholder
|
-
|
37,744
|
27,887
|
|||||||
|
Total
current liabilities
|
21,355
|
392,639
|
565,128
|
|||||||
| Commitments and contingencies | ||||||||||
|
Shareholders'
Equity (Deficit)
|
||||||||||
|
Preferred
stock - $0.001 par value
|
||||||||||
|
6,000,000
shares authorized
|
||||||||||
|
1,000,000
shares allocated to Series A
|
-
|
-
|
-
|
|||||||
|
5,000,000
shares allocated to Series B
|
-
|
-
|
-
|
|||||||
|
Common
stock - $0.001 par value.
|
||||||||||
|
194,000,000
shares authorized.
|
||||||||||
|
2,498,319,
2,414,985 and 2,099,554 shares issued
and outstanding, respectively
|
2,498
|
2,415
|
2,099
|
|||||||
|
Additional
paid-in capital
|
7,307,600
|
6,874,610
|
6,778,194
|
|||||||
|
Accumulated
deficit
|
(7,298,866
|
)
|
(7,268,738
|
)
|
(7,344,495
|
)
|
||||
|
Total
shareholders' equity (deficit)
|
11,232
|
(391,713
|
)
|
(564,202
|
)
|
|||||
|
Total
Liabilities and Shareholders'
Equity (Deficit)
|
$
|
32,587
|
$
|
926
|
$
|
926
|
||||
The
accompanying notes are an integral part of these financial
statements.
F-2
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
Statements
of Operations and Comprehensive Loss
Nine
months ended June 30, 2005 and
Years
ended September 30, 2004 and 2003
|
(Restated)
Nine
months
ended
June
30,
2005
|
(Restated)
Year
ended
September
30,
2004
|
Year
ended
September
30,
2003
|
||||||||
|
Revenues
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Expenses
|
||||||||||
|
General
and administrative expenses
|
30,128
|
9,095
|
19,022
|
|||||||
|
Statutory
cancellation of notes payable and accrued interest
|
-
|
(86,956
|
)
|
-
|
||||||
|
Total
expenses
|
30,128
|
(77,861
|
)
|
19,022
|
||||||
|
Income
(Loss) from operations
|
(30,128
|
)
|
77,861
|
(19,022
|
)
|
|||||
|
Other
Expense
|
||||||||||
|
Interest
expense
|
-
|
(2,104
|
)
|
(41,005
|
)
|
|||||
|
Income
(Loss) before provision
for
income taxes
|
(30,128
|
)
|
75,757
|
(60,027
|
)
|
|||||
|
Provision
for income taxes
|
-
|
-
|
-
|
|||||||
|
Net
Income (Loss)
|
(30,128
|
)
|
75,757
|
(60,027
|
)
|
|||||
|
Other
Comprehensive Income
|
-
|
-
|
-
|
|||||||
|
Comprehensive
Income (Loss)
|
$
|
(30,128
|
)
|
$
|
75,757
|
$
|
(60,027
|
)
|
||
|
Income
(Loss) per weighted-average
share
of common stock outstanding,
computed
on Net Loss - basic and fully diluted
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
$
|
(0.07
|
)
|
|
Weighted-average
number of shares
of
common stock outstanding
|
2,429,027
|
2,360,690
|
804,619
|
|||||||
The
accompanying notes are an integral part of these financial
statements.
F-3
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
Statement
of Changes in Shareholders' Equity
Nine
months ended June 30, 2005 and
Years
ended September 30, 2004 and 2003
|
Common
Stock
|
||||||||||||||||
|
Shares
|
Amount
|
Additional
paid-in
capital
|
Accumulated
deficit
|
Total
|
||||||||||||
|
Balances
at October 1, 2002
|
9,886,641
|
$
|
9,887
|
$
|
6,191,566
|
$
|
(7,284,468
|
)
|
$
|
(1,083,015
|
)
|
|||||
|
Effect
of April 29, 2005
1-for-30
reverse stock split
|
(9,557,317
|
)
|
(9,558
|
)
|
9,558
|
-
|
-
|
|||||||||
|
Balances
at
October
1, 2002, as reset
|
329,324
|
329
|
6,201,124
|
(7,284,468
|
)
|
(1,083,015
|
)
|
|||||||||
|
Conversion
of notes payable
and
accrued interest payable
to
common stock
|
1,770,230
|
1,770
|
529,299
|
-
|
531,069
|
|||||||||||
|
Forgiveness
of accrued interest
|
-
|
-
|
6,766
|
-
|
6,766
|
|||||||||||
|
Contribution
of imputed interest
on
suspended interest on
notes
payable
|
-
|
-
|
41,005
|
-
|
41,005
|
|||||||||||
|
Net
loss for the year
|
-
|
-
|
-
|
(60,027
|
)
|
(60,027
|
)
|
|||||||||
|
Balances
at
September
30, 2003
|
2,099,554
|
2,099
|
6,778,194
|
(7,344,495
|
)
|
(564,202
|
)
|
|||||||||
|
Conversion
of notes payable
and
accrued interest payable
to
common stock
|
289,194
|
290
|
86,468
|
-
|
86,758
|
|||||||||||
|
Contribution
of imputed interest on
suspended
interest on notes
payable
|
-
|
-
|
2,104
|
-
|
2,104
|
|||||||||||
|
Common
stock issued for
debt
conversion services
|
26,237
|
26
|
7,844
|
-
|
7,870
|
|||||||||||
|
Net
income for the year
|
-
|
-
|
-
|
75,757
|
75,757
|
|||||||||||
|
Balances
at
September
30, 2004
|
2,414,985
|
2,415
|
6,874,610
|
(7,268,738
|
)
|
(391,713
|
)
|
|||||||||
|
Sale
of common stock
for
cash
|
83,334
|
83
|
84,917
|
-
|
85,000
|
|||||||||||
|
Contributed
capital
|
-
|
-
|
43,573
|
-
|
43,573
|
|||||||||||
|
Contribution
of forgiven
accrued
officer's compensation
|
-
|
-
|
304,500
|
-
|
304,500
|
|||||||||||
|
Net
income for the nine months
|
-
|
-
|
-
|
(30,128
|
)
|
(30,128
|
)
|
|||||||||
|
Balances
at
June
30, 2005
|
2,498,319
|
$
|
2,498
|
$
|
7,307,600
|
$
|
(7,298,866
|
)
|
$
|
11,232
|
||||||
The
accompanying notes are an integral part of these financial
statements.
F-4
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
Statements
of Cash Flows
Nine
months ended June 30, 2005 and
Years
ended September 30, 2004 and 2003
|
(Restated)
Nine
months
ended
June
30,
2005
|
Year
ended
September
30,
2004
|
Year
ended
September 30,
2003
|
||||||||
|
Cash
Flows from Operating Activities
|
||||||||||
|
Net
Income (Loss)
|
$
|
(30,128
|
)
|
$
|
75,757
|
$
|
(60,027
|
)
|
||
|
Adjustments
to reconcile net income to net cash
provided
by operating activities
|
||||||||||
|
Extinguishment
of notes payable and accrued interest
|
-
|
(86,956
|
)
|
-
|
||||||
|
Consulting
fees paid with common stock
|
-
|
7,870
|
-
|
|||||||
|
Contribution
of interest expense related to
suspended
interest payable on notes payable
|
-
|
2,104
|
41,005
|
|||||||
|
Increase
(Decrease) in
Accounts
payable and other accrued expenses
|
(29,040
|
)
|
(8,632
|
)
|
-
|
|||||
|
Net
cash used in operating activities
|
(59,168
|
)
|
(9,857
|
)
|
(19,022
|
)
|
||||
|
Cash
Flows from Investing Activities
|
-
|
-
|
-
|
|||||||
|
Cash
Flows from Financing Activities
|
||||||||||
|
Proceeds
from sale of common stock
|
85,000
|
-
|
-
|
|||||||
|
Funds
advanced by officer/shareholder
|
6,735
|
9,857
|
19,022
|
|||||||
|
Net
cash provided by financing activities
|
91,755
|
9,857
|
19,022
|
|||||||
|
Increase
(Decrease) in Cash and Cash Equivalents
|
32,587
|
-
|
-
|
|||||||
|
Cash
and cash equivalents at beginning of period
|
-
|
-
|
-
|
|||||||
|
Cash
and cash equivalents at end of period
|
$
|
32,587
|
$
|
-
|
$
|
-
|
||||
|
Supplemental
Disclosures of Interest and Income
Taxes
Paid
|
||||||||||
|
Interest
paid during the period
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Income
taxes paid (refunded)
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Supplemental
Disclosure of Non-cash Investing
and
Financing Activities
|
||||||||||
|
Conversion
of forgiven unpaid accrued officers
compensation
to accrued capital
|
$
|
304,500
|
$
|
-
|
$
|
-
|
||||
|
Conversion
of advances from shareholder to contributed capital
|
$
|
44,500
|
$
|
-
|
$
|
-
|
||||
The
accompanying notes are an integral part of these financial
statements.
F-5
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
Notes
to Financial Statements
Note
A - Organization and Description of Business
Century
Park Pictures Corporation (Company) was incorporated in 1983 in accordance
with
the Laws of the State of Minnesota.
In
prior
periods, the Company developed, produced and marketed various entertainment
properties, including without limitation, the intellectual product(s) of
entities engaged in the motion picture, television, and theatrical state
productions, such as creative writers, producers and directors, for the motion
picture, pay/cable and commercial television markets.
The
Company had no operations, assets or liabilities since its fiscal year ended
September 30, 1999 through May 27, 2005.
On
May
27, 2005, the Company's Board of Directors reallocated the Company's authorized
capital stock into 2 categories with the designation of preferred stock. The
effect of this action was to allocate the authorized aggregate 200,000,000
shares of capital stock into 194,000,000 shares of $0.001 par value Common
Stock
and 6,000,000 shares of $0.001 par value Preferred Stock. As filed with the
State of Minnesota on June 29, 2005, the Board of Directors allocated the
6,000,000 shares of Preferred Stock as follows: 1,000,000 shares as $0.001
par
value Class A Convertible Preferred Stock and 5,000,000 shares as $0.001 par
value Class B Convertible Preferred Stock. The effect of this action is
reflected in the accompanying financial statements as of the first day of the
first period presented.
On
May
27, 2005, the Company; a newly-formed, wholly-owned subsidiary, Century Park
Transitory Subsidiary, Inc., a Delaware corporation (Merger Subsidiary) , Thomas
Scallen and Anthony Silverman, shareholders of the Company, and IsoRay Medical,
Inc., a Delaware corporation (IsoRay) entered into a Merger Agreement. Pursuant
to the Merger Agreement, the Merger Subsidiary will be merged with and into
IsoRay and IsoRay will become a wholly-owned subsidiary of the Company (Merger).
In the Merger, the IsoRay stockholders are entitled to receive approximately
82%
of the then outstanding shares of common stock of the Company. The Merger
Agreement is subject to the satisfaction of certain conditions, including the
approval of the Merger by stockholders of IsoRay representing a majority of
the
outstanding shares of common stock of IsoRay entitled to vote, which occurred
on
June 28, 2005, the granting of certain "piggy-back" and demand registration
rights to the purchasers of the certain debentures of IsoRay, Anthony Silverman
and certain other affiliates of the Company, the agreements of the officers
and
directors of IsoRay to lock-up the shares of the Company 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 from Anthony Silverman or his associates
of One Million Dollars as the purchase price of certain securities of IsoRay
before the closing.
On
July
28, 2005, the Merger contemplated by the Merger Agreement dated May 27, 2005
was
completed with the filing of a Certificate of Merger with the Secretary of
State
of Delaware, merging Century Park Transitory Subsidiary, Inc. into IsoRay
Medical, Inc. As a result of the Merger and pursuant to the Merger Agreement,
IsoRay Medical, Inc. became a wholly-owned subsidiary of the Company. The
Company concurrently changed its name to IsoRay, Inc.
F-6
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
Notes
to Financial Statements - Continued
Note
A - Organization and Description of Business - Continued
The
Company issued shares of its common stock and shares of its preferred stock
to
holders of common and preferred stock of IsoRay Medical, Inc. at a rate of
0.842362 share of the Company's common stock for each share of IsoRay Medical,
Inc. stock. Options and warrants to purchase common and preferred stock of
IsoRay Medical, Inc. will also be converted at the same rate into options and
warrants to purchase common and preferred stock of the Company. At the time
of
the Merger and following its recent 1:30 reverse stock split, the Company had
2,498,319 shares of common stock outstanding. Following the Merger, the Company
has approximately 10,237,797 shares of common and preferred stock outstanding.
The total amount of shares outstanding, on a fully-diluted basis, post merger
will be 13,880,822, which includes not only shares of common stock, but also
shares of preferred stock, warrants, options and convertible debentures that
could be exercised or converted into shares of common stock. Following the
Merger, on a fully diluted basis, the shareholders of IsoRay Medical, Inc.
own
82% of the Company's outstanding securities.
Note
B - Preparation of Financial Statements
The
acquisition of IsoRay on July 28, 2005, by the Company effected a change in
control and was accounted for as a "reverse acquisition" whereby IsoRay is
the
accounting acquirer for financial statement purposes. Accordingly, for all
periods subsequent to July 28, 2005, the financial statements of the Company
reflect the historical financial statements of IsoRay from the inception of
each
respective entity composing IsoRay Medical, Inc. at the July 28, 2005 change
in
control transaction and the operations of the Company subsequent to the July
28,
2005 transaction.
The
Company originally had a September 30 year-end. As a result of the July 28,
2005
reverse acquisition transaction, the Company's Board of Directors changed
IsoRay, Inc.'s (formerly Century Park Pictures Corporation) year-end to
June 30 to correspond to the year end of its then-newly acquired
subsidiary, IsoRay Medical, Inc.
The
Company and its subsidiaries follow the accrual basis of accounting in
accordance with accounting principles generally accepted in the United States
of
America.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Management
further acknowledges that it is solely responsible for adopting sound accounting
practices, establishing and maintaining a system of internal accounting control
and preventing and detecting fraud. The Company's system of internal accounting
control is designed to assure, among other items, that 1) recorded transactions
are valid; 2) valid transactions are recorded; and 3) transactions are recorded
in the proper period in a timely manner to produce financial statements which
present fairly the financial condition, results of operations and cash flows
of
the Company for the respective periods being presented.
For
segment reporting purposes, the Company operated in only one industry segment
during the periods represented in the accompanying financial statements and
makes all operating decisions and allocates resources based on the best benefit
to the Company as a whole.
Note
C - Going Concern Uncertainty
The
Company has effectively had no operations, assets or liabilities since its
fiscal year ended September 30, 1999.
F-7
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
Notes
to Financial Statements - Continued
Note
C - Going Concern Uncertainty - Continued
The
Company had no operations, assets or liabilities since its fiscal year ended
September 30, 1999 through June 28, 2005.
The
Company formed a new wholly-owned subsidiary, Century Park Transitory
Subsidiary, Inc., (a Delaware corporation) (Merger Corporation) to function
as a
merger subsidiary for the reverse acquisition of IsoRay Medical, Inc., a
Delaware corporation (IsoRay). On May 27, 2005, the Company, the Merger
Subsidiary and IsoRay entered into a Merger Agreement, dated May 27, 2005.
On
July 28, 2005, the May 27, 2005 Merger Agreement was consummated with the filing
of a Certificate of Merger with the Secretary of State of Delaware, merging
Century Park Transitory Subsidiary, Inc. into IsoRay Medical, Inc. As a result
of the Merger and pursuant to the Merger Agreement, IsoRay Medical, Inc. became
a wholly-owned subsidiary of the Company.
IsoRay
Medical, Inc., on the date of the reverse acquisition transaction was classified
as a development stage enterprise which was in the process of implementing
its
respective business plan to achieve a sustainable revenue stream. At the date
of
the reverse merger transaction, IsoRay Medical, Inc. has a limited operating
history and its future success was subject to the expenses, risks and
uncertainties frequently encountered by companies in similar stages of
development. These potential risks include failure to acquire adequate financing
to fund further development of its products; failure to obtain and operate
a
production facility; failure to successfully create a market for its products;
and other risks and uncertainties.
Management's
plans to raise additional financing include the sale of additional equity or
borrowings. Management expects to obtain the necessary financing, however,
no
assurance can be given that such financing will be completed on terms acceptable
to the Company. If the Company is not able to obtain additional financing,
the
development of the Company's products could be delayed or suspended.
Note
D - Summary of Significant Accounting Policies
1. Cash
and cash equivalents
For
Statement of Cash Flows purposes, the Company considers all cash on hand and
in
banks, certificates of deposit and other highly-liquid investments with
maturities of three months or less, when purchased, to be cash and cash
equivalents.
2. Property
and equipment
Property
and equipment consists of furniture and fixtures and is stated at the lower
of
depreciated cost or net realizable value.
3. Income
Taxes
The
Company uses the asset and liability method of accounting for income taxes.
At
June 30, 2005, September 30, 2004 and 2003, respectively, the deferred tax
asset
and deferred tax liability accounts, as recorded when material to the financial
statements, are entirely the result of temporary differences. Temporary
differences represent differences in the recognition of assets and liabilities
for tax and financial reporting purposes, primarily accumulated depreciation
and
amortization, allowance for doubtful accounts and vacation
accruals.
F-8
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
Notes
to Financial Statements - Continued
Note
D - Summary of Significant Accounting Policies - Continued
As
of
June 30, 2005, September 30, 2004 and 2003, the deferred tax asset related
to
the Company's net operating loss carryforward is fully reserved. Due to the
provisions of Internal Revenue Code Section 338, the Company may have limited
net operating loss carryforwards available to offset financial statement or
tax
return taxable income in future periods as a result of any future change in
control involving 50 percentage points or more of the issued and outstanding
securities of the Company.
4. Income
(Loss) per share
Basic
earnings (loss) per share is computed by dividing the net income (loss)
available to common shareholders by the weighted-average number of common shares
outstanding during the respective period presented in our accompanying financial
statements.
Fully
diluted earnings (loss) per share is computed similar to basic income (loss)
per
share except that the denominator is increased to include the number of common
stock equivalents (primarily outstanding options and warrants).
Common
stock equivalents represent the dilutive effect of the assumed exercise of
the
outstanding stock options and warrants, using the treasury stock method, at
either the beginning of the respective period presented or the date of issuance,
whichever is later, and only if the common stock equivalents are considered
dilutive based upon the Company's net income (loss) position at the calculation
date.
At
June
30, 2005, September 30, 2004 and 2003, the Company has no outstanding stock
warrants, options or convertible securities which could be considered as
dilutive for purposes of the loss per share calculation.
Note
E - Correction of an Error and
Financial Statement Restatement
In
April
2002, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 145 “Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections(SFAS
145”). FAS 145 amended Accounting Principles Board Opinion No. 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (APB 30), by deleting the phrase, “(1) Classifications of gains or
losses from extinguishment of debt pursuant to paragraph 8 of FASB Statement
No.
4, Reporting Gains and Losses from Extinguishment of Debt. In deleting this
phrase, the FASB obviated the customary classification of material aggregations
of extinguishment of debt as extraordinary items. However Paragraph 4 of the
SFAS 145 Summary, leaves open the possibility of classifying the extinguishment
of debt as an extraordinary item if these items meet the criteria in APB
30.
During
the three-month period ended December 31, 2003, the Company was in the process
of converting all outstanding debt into shares of the Company's common stock,
and had continually attempted to contact specific noteholders. Certain specific
noteholders were unresponsive to the Company's continued inquiries related
to
the conversion of the debts into common stock, as discussed in detail in the
Company's contemporaneously filed financial statements, and the Company’s Board
of Directors, relying on legal counsel, at the time, acted to create a
“technical forgiveness” of the notes and accrued interest. It was the
then-management's position and interpretation, after reviewing the requirements
of both APB 30 and FAS 145 that the failure to timely convert or post a timely
claim for repayment by these specific noteholders, with concurrence of the
Company's then-legal counsel, and independent auditor, met both of the required
criteria of “unusual nature” (it is extraordinary that a note holder
F-9
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
Notes
to Financial Statements - Continued
Note
E - Correction of an Error and
Financial Statement Restatement - Continued
would
not
respond to numerous requests to change the nature of an investment), and
“infrequency of occurrence (as no similar event had occurred previously, and
none has occurred subsequently, including the redirection of the Company with
the July 28, 2005 aforementioned reverse merger transaction) and should be
stated as an “extraordinary item.”
The
SEC
staff has taken recent exception to former management's interpretation, and
requested reclassification of this item from “extraordinary item” to a component
of operating income, and the Company is restating the accompanying financial
statements to comply with that request.
Additionally,
we have also revised our treatment of the forgiveness of debt owed to our former
CEO in the amount of $304,500 revising it from a reduction of operating expenses
to a contribution of capital.
The
effect of any and all changes are reflected in the accompanying restated
financial statements as of the respective date of the transaction and the effect
of the corrections are summarized below by fiscal period and cumulatively.
|
Nine
months
|
Year
|
Year
|
|||||||||||
|
ended
|
ended
|
ended
|
Cumulative
|
||||||||||
|
June
30,
|
September
30,
|
September
30,
|
effect
of
|
||||||||||
|
2005
|
2004
|
2003
|
changes
|
||||||||||
|
Net
Income (Loss),
|
|||||||||||||
|
as
previously reported
|
$
|
274,372
|
$
|
75,757
|
$
|
(60,027
|
)
|
||||||
|
Effect
of the correction of an error
|
|||||||||||||
|
Reclassification
of statutory
|
|||||||||||||
|
cancellation
of notes payable
|
|||||||||||||
|
and
accrued interest from
|
|||||||||||||
|
extraordinary
item to
|
|||||||||||||
|
“ordinary”
expense
|
-
|
-
|
-
|
-
|
|||||||||
|
Contribution
of forgiven
|
|||||||||||||
|
accrued
officer’s compensation
|
|||||||||||||
|
as
contributed capital
|
(304,500
|
)
|
-
|
-
|
(304,500
|
)
|
|||||||
|
Total
effect of changes
|
|||||||||||||
|
on
Income (Loss) from
|
|||||||||||||
|
Operations
and Net
|
|||||||||||||
|
Income
(Loss)
|
(304,500
|
)
|
-
|
-
|
$
|
(304,500
|
)
|
||||||
|
Net
Income (Loss), as restated
|
$
|
(30,128
|
)
|
$
|
75,757
|
$
|
(60,027
|
)
|
|||||
F-10
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
Notes
to Financial Statements - Continued
Note
E - Correction of an Error and
Financial Statement Restatement - Continued
|
Nine
months
|
Year
|
Year
|
|||||||||||
|
ended
|
ended
|
ended
|
Cumulative
|
||||||||||
|
June
30,
|
September
30,
|
September
30,
|
effect
of
|
||||||||||
|
2005
|
2004
|
2003
|
changes
|
||||||||||
|
Earnings
per share,
|
|||||||||||||
|
as
previously reported
|
$
|
(0.11
|
)
|
$
|
0.03
|
$
|
(0.07
|
)
|
|||||
|
Total
effect of changes
|
0.10
|
-
|
-
|
||||||||||
|
Earnings
per share, as restated
|
$
|
(0.01
|
)
|
$
|
0.03
|
$
|
(0.07
|
)
|
|||||
Note
F - Fair Value of Financial Instruments
The
carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature
of
these items and/or the current interest rates payable in relation to current
market conditions.
Interest
rate risk is the risk that the Company's earnings are subject to fluctuations
in
interest rates on either investments or on debt and is fully dependent upon
the
volatility of these rates. The Company does not use derivative instruments
to
moderate its exposure to interest rate risk, if any.
Financial
risk is the risk that the Company's earnings are subject to fluctuations in
interest rates or foreign exchange rates and are fully dependent upon the
volatility of these rates. The company does not use derivative instruments
to
moderate its exposure to financial risk, if any.
Note
G - Notes Payable
On
July
31, 2002, the Company's Board of Directors and the respective noteholders
approved the extension of the ultimate maturity date of the notes through
December 3, 2003. In conjunction with the extension, the noteholders agreed
to
discontinue the accrual of interest subsequent to July 31, 2002.
The
effect of the discontinuance of interest accruals subsequent to July 31, 2002
will be charged to operations as a component of interest expense with an offset
to contributed additional paid-in capital to recognize the economic effect
of
the suspended and forgiven interest on these notes in the respective future
period.
On
June
25, 2003, noteholders aggregating $300,000 in outstanding principal and $231,900
in accrued interest payable exercised their respective conversion rights and
received an aggregate 53,106,900 pre-reverse split shares of restricted, common
stock upon conversion.
On
December 3, 2003, the final ultimate maturity date, one remaining noteholder
exercised his conversion rights and converted approximately $50,000 in principal
and $36,758 in accrued interest payable into 8,675,800 pre-reverse split shares
of restricted, unregistered common stock.
On
December 3, 2003, upon the failure to timely convert or post a timely claim
for
repayment, the Company's Board of Directors, acting upon the advice of legal
counsel, voided the remaining outstanding unconverted notes payable of
approximately $50,000 and the associated accrued interest of approximately
$36,956 and recognized a one-time gain on the technical cancellation of these
debts.
For
the
respective years ended September 30, 2004 and 2003, the Company has recognized
approximately $2,104 and $41,005 in additional paid-in capital for imputation
of
suspended interest on these notes.
F-11
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
Notes
to Financial Statements - Continued
Note
H - Related Party Transactions
Through
June 30, 2005, the Company's former Chief Executive Officer advanced the Company
approximately $44,500 to support operations, settle outstanding trade accounts
payable and provide working capital. The advance
was
repayable upon demand and is non-interest bearing and is 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.
Through
December 31, 2004, the Company owed the Company's Chief Executive Officer
approximately $354,500 for accrued salary incurred during the Company’s
operational periods prior to September 30, 1999. In periods subsequent to
September 30, 1999, management of the Company required significantly less time
than in prior periods due to a lessening of the Company's operations. As the
Company's officer and directors did not devote a significant portion of their
time to the Company, no officer or director compensation was accrued subsequent
to September 30, 1999.
During
the quarter ended March 31, 2005, the Company's former Chief Executive Officer
forgave approximately $304,500 in accrued salary for prior periods and this
forgiveness was credited as "additional paid-in capital" to reflect the
contribution effect of this action.
Note
I - Income Taxes
The
components of income tax (benefit) expense for the nine months ended June 30,
2005 and for each of the years ended September 30, 2004 and 2003, respectively,
are as follows:
|
Nine
months
ended
June 30,
2005
|
Year
ended
September
30,
2004
|
Year
ended
September
30,
2003
|
||||||||
|
Federal:
|
||||||||||
|
Current
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Deferred
|
-
|
-
|
-
|
|||||||
|
-
|
-
|
-
|
||||||||
|
State:
|
||||||||||
|
Current
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Deferred
|
-
|
-
|
-
|
|||||||
|
-
|
-
|
-
|
||||||||
|
Total
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
As
of
June 30, 2005, the Company has a Federal net operating loss carryforward of
approximately $3,900,000 and a State net operating loss carryforward of
approximately $1,200,000 to offset future taxable income. Subject to current
regulations, these carryforwards expire, if unused, through 2015. Due to the
July 2005 business combination transaction, the utilization of these
carryforwards, if any, will be governed by the appropriate Federal and State
statutes.
F-12
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
Notes
to Financial Statements - Continued
Note
I - Income Taxes - Continued
The
Company's income tax expense (benefit) for the nine months ended June 30, 2005
and for each of the years ended September 30, 2004 and 2003, respectively,
differed from the statutory federal rate of 34 percent as follows:
|
Nine
months
ended
June 30,
2005
|
Year
ended
September
30,
2004
|
Year
ended
September
30,
2003
|
||||||||
|
Statutory
rate applied to earnings (loss) before income taxes
|
$
|
10,200
|
$
|
25,750
|
$
|
(20,400
|
)
|
|||
|
Increase
(decrease) in income taxes resulting from:
|
||||||||||
|
State
income taxes
|
-
|
-
|
-
|
|||||||
|
Other,
including reserve for deferred tax asset
|
(10,200
|
)
|
(25,750
|
)
|
20,400
|
|||||
|
Income
tax expense
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
Temporary
differences, consisting primarily of statutory differences between the financial
statement carrying amounts and tax bases of assets and liabilities give rise
to
deferred tax assets and liabilities as of the nine months ended June 30, 2005
and each of the respective years ended September 30, 2004 and 2003.
|
Nine
months ended June 30, 2005
|
||||||||||
|
Federal
|
State
|
Total
|
||||||||
|
Deferred
tax assets:
|
||||||||||
|
Other
(current)
|
$
|
96,000
|
$
|
35,000
|
$
|
131,000
|
||||
|
Net
operating loss carryforwards (non-current)
|
932,000
|
77,000
|
1,009,000
|
|||||||
|
1,028,000
|
112,000
|
1,140,000
|
||||||||
|
Valuation
allowance
|
(1,028,000
|
)
|
(112,000
|
)
|
(1,140,000
|
)
|
||||
|
Net
Deferred tax asset
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Deferred
tax liabilities
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
|
Year
ended September 30, 2004
|
|||||||||
|
|
Federal
|
State
|
|
|
Total
|
|||||
|
Deferred
tax assets:
|
||||||||||
|
Other
(current)
|
$
|
96,000
|
$
|
35,000
|
$
|
131,000
|
||||
|
Net
operating loss carryforwards (non-current)
|
932,000
|
77,000
|
1,009,000
|
|||||||
|
1,028,000
|
112,000
|
1,140,000
|
||||||||
|
Valuation
allowance
|
(1,028,000
|
)
|
(112,000
|
)
|
(1,140,000
|
)
|
||||
|
Net
Deferred tax asset
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Deferred
tax liabilities
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Year
ended September 30, 2003
|
||||||||||
|
Federal
|
State
|
Total
|
||||||||
|
Deferred
tax assets:
|
||||||||||
|
Other
(current)
|
$
|
96,000
|
$
|
35,000
|
$
|
131,000
|
||||
|
Net
operating loss carryforwards (non-current)
|
932,000
|
77,000
|
1,009,000
|
|||||||
|
1,028,000
|
112,000
|
1,140,000
|
||||||||
|
Valuation
allowance
|
(1,028,000
|
)
|
(112,000
|
)
|
(1,140,000
|
)
|
||||
|
Net
Deferred tax asset
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Deferred
tax liabilities
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
F-13
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
Notes
to Financial Statements - Continued
Note
I - Income Taxes - Continued
During
the nine months ended June 30, 2005 and for each of the years ended September
30, 2004 and 2003, respectively, the valuation allowance increased (decreased)
by approximately $-0-, $-0- and $-0-. Realization of deferred tax assets is
dependent upon sufficient future taxable income during the period that
deductible temporary differences and carryforwards are expected to be available
to reduce taxable income.
Note
J - Preferred Stock Transactions
On
May
27, 2005, and filed with the State of Minnesota on July 27, 2005, the Company's
Board of Directors created two series of shares of Preferred Stock designated
as
Series A Convertible Preferred Stock and Series B Convertible Preferred Stock.
The Series A Convertible Preferred Stock (the Series A Stock) consists of an
aggregate of 1,000,000 shares, $0.001 par value, and the Series B Convertible
Preferred Stock (Series B Stock) consists 5,000,000 shares, $0.001 par value
(collectively, Preferred Stock). The Preferred Stock has preferences,
limitations and relative rights in preference to the holders of any other stock
of the Company (Junior Stock).
Dividends
Dividends
shall be paid, out of funds legally available for that purpose, with respect
to
all outstanding shares of Series A Stock in an amount equal to ten percent
(10%)
per annum of the stated value per share of the Series A Stock, which shall
be
$1.20 per share. Such dividends shall only be paid or accrue through March
31,
2007. Beginning April 1, 2007, no dividends shall be paid with respect to the
outstanding shares of Series A Stock.
Dividends
shall be paid, out of funds legally available for that purpose, with respect
to
all outstanding shares of Series B Stock in an amount equal to fifteen percent
(15%) per annum of the stated value per share of the Series B Stock, which
shall
be $1.20 per share (Dividend Payment Amount). Such dividends shall be payable
in
full on or before December 31st of each year the Series B Stock is outstanding
(Dividend Payment Date). Each such dividend shall be paid to the holders of
record of the Series B Stock as their names appear on the share register of
the
Company on the date which is fifty (50) days preceding December 31st
of each
year (Record Date). If, on the Dividend Payment Date, the holders of the Series
B Stock shall not have received the full dividends provided for, then such
dividends shall cumulate, at the rate of 15% per annum on the Dividend Payment
Amount, beginning to accrue on the Dividend Payment Date whether or not earned
or declared, with additional dividends thereon for each succeeding year during
which dividends shall remain unpaid. Unpaid dividends for any period less than
a
full year shall cumulate on a day-to-day basis and shall be computed on the
basis of a 360-day year.
The
Company shall not declare or pay on any Junior Stock any dividend whatsoever,
whether in cash, property or otherwise (other than dividends payable in shares
of the class or series upon which such dividends are declared or paid), nor
shall the Company make any distribution on any Junior Stock, unless all
dividends to which the holders of Preferred Stock shall have been entitled
shall
have been paid or declared and a sum of money sufficient for the payment thereof
set apart.
F-14
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
Notes
to Financial Statements - Continued
Note
J - Preferred Stock Transactions - Continued
Voting
Rights
Except
as
otherwise provided herein or by contract, or as required by law, the Preferred
Stock shall be voted equally with the shares of the Common Stock and not as
a
separate class, at any annual or special meeting of stockholders of the Company,
and may act by written consent in the same manner as the Common Stock, in either
case upon the following basis: each share of Preferred Stock shall be entitled
to such number of votes as shall be equal to the voting power of one (1) share
of Common Stock at the time of the vote.
Notwithstanding
anything to the contrary in the Company's Articles of Incorporation or Bylaws,
for so long as any shares of Preferred Stock remain outstanding, in addition
to
any other vote or consent required herein or by law, the
vote
or
written consent of the holders of at least fifty percent (50%) of the
outstanding Preferred Stock shall be necessary for effecting or validating
the
following actions:
(i) Any
amendment, alteration, waiver or repeal of any provision of the Articles of
Incorporation or the Bylaws of the Company (including any filing of a
Certificate of Designation); or
(ii) Any
bankruptcy, insolvency, dissolution or liquidation of the Company.
In
addition to the vote or consent required above, the Company may not amend,
alter, waive or repeal any provisions of the Articles of Incorporation or
Certificate of Designation which would have a material adverse effect on the
rights, privileges or preferences granted to either the Series A Stock or the
Series B Stock without the vote or written consent of the holders of at least
fifty percent (50%) of the outstanding affected shares.
Liquidation
Rights
Upon
any
liquidation, dissolution, or winding up of the Company, whether voluntary or
involuntary, the assets of the Company legally available for distribution,
if
any, shall be distributed ratably first, to the holders of the Series A Stock,
second, to the holders of the Series B Stock and third, to the holders of the
Common Stock.
The
following events shall be considered a liquidation under this
Section:
(i) any
consolidation or merger of the Company with or into any other corporation or
other entity or person, or any other corporate reorganization, in which the
stockholders of the Company immediately prior to such consolidation, merger
or
reorganization, own less than 50% of the Company's voting power immediately
after such consolidation, merger or reorganization, or any transaction or series
of related transactions to which the Company is a party in which in excess
of
fifty percent (50%) of the Company's voting power is transferred, excluding
any
consolidation or merger effected exclusively to change the domicile of the
Company (Acquisition); or
(ii) a
sale,
lease or other disposition of all or substantially all of the assets of the
Company (Asset Transfer).
In
the
event of any liquidation event as defined, if the consideration received by
the
Company is other than cash, its value will be deemed its fair market value
as
determined in good faith by the Board. Any securities shall be valued as
follows:
(i) Securities
not subject to investment letter or other similar restrictions on free
marketability:
(A) If
traded
on a securities exchange or through the NASDAQ National Market, the value shall
be deemed to be the average closing price of the securities on such quotation
system for the ten days prior to and including the date of closing;
(B) If
actively traded over-the-counter, the value shall be deemed to be the closing
bid or sale price (whichever is applicable) as of the date of closing;
and
F-15
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
Notes
to Financial Statements - Continued
Note
J - Preferred Stock Transactions - Continued
(C) If
there
is no active public market, the value shall be the fair market value thereof,
as
determined by the Board.
(ii) The
method of valuation of securities subject to investment letter or other
restrictions on free marketability (other than restrictions arising solely
by
virtue of a stockholder's status as an affiliate or former affiliate) shall
be
to make an appropriate discount from the market value determined, as defined
above, to reflect the approximate fair market value thereof, as determined
by
the Board.
Conversion
The
holders of the Preferred Stock shall have the following rights with respect
to
the conversion of the Preferred Stock into shares of Common Stock (Conversion
Rights):
Optional
Conversion
Any
outstanding shares of Preferred Stock may, at the option of the holder, be
converted at any time into fully-paid and nonassessable shares of Common Stock.
The number of shares of Common Stock to which a holder of Preferred Stock shall
be entitled upon conversion shall be one (1) share of Common Stock for each
share of Preferred Stock being converted (Preferred Stock Conversion Rate).
Such
initial Preferred Stock Conversion Rate shall be adjusted from time to time
as
defined in the Certificate of Designation.
Automatic
Conversion
Each
share of Preferred Stock shall automatically be converted into shares of Common
Stock, based on the then-effective Preferred Stock Conversion Rate, immediately
upon the closing of a firmly underwritten public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
covering the offer and sale of Common Stock for the account of the Company
in
which the gross proceeds to the Company are at least $4,000,000. Upon such
automatic conversion, any declared and unpaid dividends shall be paid in
accordance with the appropriate provisions of Certificate of
Designation.
No
fractional shares of Common Stock shall be issued upon conversion of Preferred
Stock. All shares of Common Stock (including fractions thereof) issuable upon
conversion of more than one share of Preferred Stock by a holder thereof shall
be aggregated for purposes of determining whether the conversion would result
in
the issuance of any fractional share. If, after the aforementioned aggregation,
the conversion would result in the issuance of any fractional share, the Company
shall, in lieu of issuing any fractional share, pay cash equal to the product
of
such fraction multiplied by the Common Stock's fair market value (as determined
by the Board) on the date of conversion.
Reservation
of Stock Issuable Upon Conversion
The
Company shall at all times reserve and keep available out of its authorized
but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Preferred Stock, such number of its shares
of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of the Preferred Stock. If at any time the number
of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of the Preferred Stock, the
Company will take such corporate action as may, in the opinion of its counsel,
be necessary to increase its authorized but unissued shares of Common Stock
to
such number of shares as shall be sufficient for such purpose.
F-16
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
Notes
to Financial Statements - Continued
Note
J - Preferred Stock Transactions - Continued
Adjustment
for Stock Splits and Combinations
If
the
Company shall at any time or from time to time after the filing date of the
Certificate of Designation (the Original Issue Date) effect a subdivision of
the
outstanding Common Stock without a corresponding subdivision of the Preferred
Stock, the Preferred Stock Conversion Rate in effect immediately before that
subdivision shall be proportionately adjusted. Conversely, if the Company shall
at any time or from time to time after the Original Issue Date combine the
outstanding shares of Common Stock into a smaller number of shares without
a
corresponding combination of the Preferred Stock, the Preferred Stock Conversion
Rate in effect immediately before the combination shall be proportionately
adjusted. Any adjustment shall become effective at the close of business on
the
date the subdivision or combination becomes effective.
Adjustment
for Reclassification, Exchange and Substitution
If
at any
time or from time to time after the Original Issue Date, the Common Stock
issuable upon the conversion of the Preferred Stock is changed into the same
or
a different number of shares of any class or classes of stock, whether by
recapitalization, reclassification or otherwise (other than an Acquisition
or
Asset Transfer as defined or a subdivision or combination of shares or stock
dividend or a reorganization, merger, consolidation or sale of assets as
otherwise provided for), in any such event each holder of Preferred Stock shall
have the right thereafter to convert such stock into the kind and amount of
stock and other securities and property receivable upon such recapitalization,
reclassification or other change by holders of the maximum number of shares
of
Common Stock into which such shares of Preferred Stock could have been converted
immediately prior to such recapitalization, reclassification or change, all
subject to further adjustment as provided herein or with respect to such other
securities or property by the terms thereof.
Reorganizations,
Mergers or Consolidations
If
at any
time or from time to time after the Original Issue Date, there is a capital
reorganization of the Common Stock or the merger or consolidation of the Company
with or into another corporation or another entity or person (other than an
Acquisition or Asset Transfer or a recapitalization, subdivision, combination,
reclassification, exchange or substitution of shares as otherwise provided
for),
as a part of such capital reorganization, provision shall be made so that the
holders of the Preferred Stock shall thereafter be entitled to receive upon
conversion of the Preferred Stock the number of shares of stock or other
securities or property of the Company to which a holder of the number of shares
of Common Stock deliverable upon conversion would have been entitled on such
capital reorganization, subject to adjustment in respect of such stock or
securities by the terms thereof. In any such case, appropriate adjustment shall
be made in the application of the appropriate provisions with respect to the
rights of the holders of Preferred Stock after the capital reorganization to
the
end that the various conversion provisions (including adjustment of the
Preferred Stock Conversion Rate then in effect and the number of shares issuable
upon conversion of the Preferred Stock) shall be applicable after that event
and
be as nearly equivalent as practicable.
Certificate
of Adjustment
In
each
case of an adjustment or readjustment of the Preferred Stock Conversion Rate
or
the number of shares of Common Stock or other securities issuable upon
conversion of the Preferred Stock, if the Preferred Stock is then convertible,
as previously defined, the Company, at its expense, shall compute such
adjustment or readjustment in accordance with the provisions hereof and prepare
a certificate showing such adjustment or readjustment, and shall mail such
certificate, by first class mail, postage prepaid, to each registered holder
of
Preferred Stock at the holder's address as shown in the Company's books. The
certificate shall set forth such adjustment or readjustment, showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (I) the Preferred Stock Conversion Rate at the time in effect,
and
(ii) the type and amount, if any, of other property which at the time would
be
received upon conversion of the Preferred Stock.
F-17
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
Notes
to Financial Statements - Continued
Note
J - Preferred Stock Transactions - Continued
Notices
of Record Date
Upon
(i)
any taking by the Company of a record of the holders of any class of securities
for the purpose of determining the holders thereof who are entitled to receive
any dividend or other distribution, or (ii) any Acquisition (as defined) or
other capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, any merger or
consolidation of the Company with or into any other corporation, or any Asset
Transfer (as defined), or any voluntary or involuntary dissolution, liquidation
or winding up of the Company, the Company shall mail to each holder of Preferred
Stock at least ten (10) days prior to the record date specified therein (or
such
shorter period approved by a majority of the outstanding Preferred Stock) a
notice specifying (A) the date on which any such record is to be taken for
the
purpose of such dividend or distribution and a description of such dividend
or
distribution, (B) the date on which any such Acquisition, reorganization,
reclassification, transfer, consolidation, merger, Asset Transfer, dissolution,
liquidation or winding up is expected to become effective, and (C) the date,
if
any, that is to be fixed as to when the holders of record of Common Stock (or
other securities) shall be entitled to exchange their shares of Common Stock
(or
other securities) for securities or other property deliverable upon such
Acquisition, reorganization, reclassification, transfer, consolidation, merger,
Asset Transfer, dissolution, liquidation or winding up.
No
Dilution or Impairment
Without
the consent of the holders of then outstanding Preferred Stock, as required,
the
Company shall not amend its Articles of Incorporation or participate in any
reorganization, transfer of assets, consolidation, merger, dissolution, issue
or
sale of securities or take any other voluntary action, for the purpose of
avoiding or seeking to avoid the observance or performance of any of the terms
to be observed or performed hereunder by the Company, but shall at all times
in
good faith assist in carrying out all such action as may be reasonably necessary
or appropriate in order to protect the conversion rights of the holders of
the
Preferred Stock against dilution or other impairment.
Note
K - Common Stock Transactions
On
April
29, 2005, the Company's Board of Directors approved and authorized a 1-for-30
reverse split of the then issued and outstanding common stock of the Company.
The reverse stock split did not change the number of authorized shares of common
stock or the par value of the Company's common stock. Except for any changes
as
a result of the treatment of fractional shares, each shareholder holds the
same
percentage of common stock outstanding immediately following the reverse stock
split as such shareholder did immediately prior to the reverse stock split.
The
effect of this action is reflected in the accompanying financial statements
as
of the first day of the first period presented.
On
June
25, 2003, the Company issued an aggregate 1,770,230 post-reverse split shares
of
restricted, unregistered common stock (53,106,900 pre-reverse split shares)
in
redemption of various outstanding notes payable in the face amount of
approximately $300,000 and accrued interest payable of approximately $237,835,
pursuant to the conversion terms of the respective notes. The valuation of
this
transaction was equal to the "fair value" of the Company's common stock on
the
conversion date.
F-18
IsoRay,
Inc.
(formerly
Century Park Pictures Corporation)
Notes
to Financial Statements - Continued
Note
K - Common Stock Transactions - Continued
On
December 3, 2003, the Company issued 289,194 post-reverse split shares of
restricted, unregistered common stock (8,675,800 pre-reverse split shares)
in
redemption of two (2) notes payable in the face amount of approximately $50,000
and accrued interest payable of approximately $36,758, pursuant to the
conversion terms of the respective notes. The valuation of this transaction
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 of these shares and no underwriter was used
in this transaction.
On
December 3, 2003, the Company issued 26,237 post-reverse split shares of
restricted, unregistered common stock (787,100 pre-reverse split shares) as
compensation for fees associated with the conversion of the outstanding notes
payable and accrued interest payable. This transaction was valued at
approximately $7,871, 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 of these
shares and no underwriter was used in this transaction.
On
or
about May 2, 2005, the Company sold an aggregate 83,334 post-reverse split
shares of unregistered, restricted common stock (2,500,000 pre-reverse split
shares) for cash proceeds of approximately $85,000 to three (3) separate
individuals, including 148,000 shares to the Company's former President. The
Company relied upon Section 4(2) of The Securities Act of 1933, as amended,
for
an exemption from registration of these shares and no underwriter was used
in
this transaction. The Company granted "piggy-back" registration rights to the
holders of the shares of common stock which would entitle a holder to request
that the Company register the common stock if the Company files a registration
statement at any time prior to three years from the date the Company sold such
shares of common stock. The Company has agreed to keep such registration
statement current for up to 270 days. The Company has agreed to pay all expenses
associated with any registration of the common stock except any underwriter's
commissions or fees or any fees of others employed by a selling shareholder,
including attorneys' fees; which shall be the responsibility of the selling
shareholder.
On
July
28, 2005, the Company issued approximately 7,739,478 post-reverse split shares
of restricted, unregistered common stock for 100.0% of the issued and
outstanding shares of IsoRay Medical, Inc. This transaction made IsoRay a
wholly-owned subsidiary of the Company.
Note
L - Commitments and Contingencies
The
Company, prior to the July 2005 change in control transaction, leased office
space under a noncancellable operating lease that expired on August 31, 2002.
The space was sub-leased to a separate company owned by the Company's then-CEO.
The Company incurred no expense related to this lease during any period
reflected in the accompanying financial statements.
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F-19