Edited Transcript of ISR earnings conference call or presentation 12-May-20 8:30pm GMT

Record revenue for the third quarter increased 50% versus the year ago quarter. This quarter comprised the top-3 single highest revenue months in the company’s history.

We continued to see substantial operational improvements in this quarter as gross margin expanded to a record 59.2%. Combined that with the moderate operating expense growth and we significantly decreased our operating loss, which was half of what it was in the fiscal third quarter of 2019.

A central factor in driving the strong momentum that is manifested in our financial results is our growing leadership role within the brachytherapy industry.

We continue to expand our role as a trusted, valuable partner, enabling more practitioners to better treat their patients. This is evidenced again this quarter by yet another increase in new customers. As of the trailing 12 months ending March 31, our net new physician customer count increased 33% versus the previous 12-month period. We continue to gain traction by highlighting the unique benefits of Cesium Blu and our supporting delivery devices. In addition, our best-in-class customer service and support and our expanding digital presence should allow us to continue to grow our leadership position. As we ended the quarter in March, the world saw a significant shift from the unfortunate implications of the COVID-19 global health pandemic. I am proud to report that from the onset, IsoRay has been proactive in implementing plans to ensure the health and well-being of our employees while remaining focused on providing uninterrupted product flow to the physicians and patients who count on us.

We seamlessly transitioned many employees to work from home and made other adjustments to ensure the continuity of our business through this time. At the beginning of the pandemic, we moved quickly to ensure that our inventory of non-isotope supplies were appropriate in case our supply chain was disrupted.

In addition, we set in motion our strategy to maintain a continuous and uninterrupted supply of isotope from our suppliers in Russia. Our partners, at nuclear facilities in Russia, have worked hard to adjust to our needs, going above and beyond to support us, which we appreciate immensely.

Fortunately, we have not experienced any material supply chain issues to date. As we think about how COVID-19 is impacting IsoRay’s business, it is important to remember the demographics of the patient’s cancer our customers commonly treat. The majority of the cancers are in prostate.

In general, prostate cancer is a relatively slow progressing form of cancer and does not often present an imminent life-threatening emergency for many of our customers’ patients.

As COVID-19 began to spread, many states implemented new guidelines in an attempt to mitigate spread of the virus and to conserve certain medical supplies such as PPEs. Those guidelines led to the cancellation or postponement of elective and nonemergency surgical procedures, including prostate brachytherapy procedures.

Consequently, at the very end of March, we saw some procedures begin to be postponed in many markets we serve. This resulted in preliminary revenue for the month of April declining about 20% versus April in 2019. In the recent weeks, as states begin to lift restrictions on nonessential surgeries, we’ve received an increasing amount of customer feedback that those implants that had been canceled in March and April were beginning to be rescheduled. Our order growth has been accelerating since the last week of April. We firmly believe that most, if not all, treatments in process prior to the outbreak will take place over the next few months.

In the meantime, we continue to tightly manage our expenses and make fluid adjustments to isotope orders to meet potential increased treatment demands as restrictions lift. The COVID-19 pandemic has impacted the sourcing of parts associated with the assembly of our proprietary disposable delivery device, Blu Build. This was due to our parts manufacturer temporarily converting their production capacity to making critical PPE for the battle against the pandemic.

We have enough inventory to support our current customers and new customers in the pipeline until our parts manufacturer is back online. We support their decision, and as a result, now anticipate Blu Build will see a slower-than-expected release through the remainder of fiscal 2020. With the expectation that Blu Build will continue contributing revenue in the fiscal fourth quarter of 2020 and gain traction in fiscal 2021.

Turning to GammaTile and our partners, GT Medical Technologies. GT Medical Technologies launched their full market release of GammaTile Therapy in January. In support of this launch, they have extended beyond their current distribution partners to include a direct GT Medical Technology sales team. For those of you who are not aware of our relationship with GT Medical Technologies, we have a 10-year manufacturing and supply agreement to manufacture GammaTiles with Cesium-131 seeds in the tiles to treat both recurrent and primary brain cancers. We remain optimistic about the prospects for GammaTile and the benefit it can offer to many brain cancer patients and are looking forward to how the sales force expansion proceeds. Revenue from the sales of GT Medical Technologies

were again nominal to IsoRay’s overall revenue in the fiscal third quarter ended March 31.

On another front, we continue to remain actively engaged with policymakers in Washington, D.C. on a number of key items. I am very pleased to report that there is a new development to share with you. Yesterday evening, we were notified that we had received 64 ICD-10-PCS codes for reimbursement in the in-patient DRG setting. These codes allow hospitals to build Medicare for specific surgical procedures that would benefit from the addition of Cesium-131.

You will recall that the ICD-10-PCS codes are important for the growing surgical applications of Cesium-131 in treating hard-to-treat cancers. Just a few of the codes include lung, head and neck, brain, GYN, pelvic and many others. These codes will take effect on October 1, 2020.

Another important matter is one you may recall from our fiscal 2019 year-end earnings call back in September. I shared with you that CMS had proposed a significant change to the way Medicare currently pays for radiation oncology services in the outpatient setting. The proposed radiation oncology alternative payment method, or RO-APM, would provide a single bundled payment for a 90-day episode of radiation therapy, including LDR brachytherapy, IMRT, SBRT, proton therapy and HDR brachytherapy.

17 disease sites, including the prostate, are included in this proposal. The comment period ended September 16. And after an initial delay this past fall, the final CMS ruling was rescheduled for release on April 1, 2020. However, with the onslaught of the pandemic in the U.S. in March, the RO-APM was not released on April 1 and a due date has not been set. We continue to watch for new developments in this matter because we believe that the implementation of this bundle may further level the playing field for brachytherapy over time, given the various radiation treatments available to patients.

We have also been working with policymakers to help them understand the importance of Cesium-131, as they turn their attention to ensuring that everyone can safely access the health care services necessary to diagnose and treat life-threatening diseases beyond COVID-19. We believe that many aspects of brachytherapy using Cesium-131 supports this process. The procedure is a onetime hospital visit, reducing the risk of exposure to life-threatening diseases like COVID-19 and is supported by long-term clinical evidence demonstrating positive patient outcomes. This one-and-done advantage means vulnerable cancer patients do not need to keep returning for multiple in-hospital treatments as typically required by other forms of radiation therapy. This also lowers the overall use of personal protective equipment and even the aggregate cost of the treatment is lower.

We look forward to continuing our dialogue with policymakers and their staff to ensure that cancer patients have meaningful and timely access to brachytherapy. Before I turn the call over to Jonathan, I want to take this opportunity to thank all IsoRay employees. Words seem inadequate to describe how proud I am of this incredibly dedicated team. They remained

singularly focused on the company mission even as this unprecedented time of uncertainty has impacted all of us.

Seeing this latest demonstration of commitment and how successfully we adapted during this pandemic gives me even more confidence in the future success of IsoRay. Now I will turn the call over to Jonathan to review the results of our fiscal third quarter.

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Jonathan R. Hunt, IsoRay, Inc. – CFO & Co-Principal Financial Officer [4]

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Thank you, Lori. I’m going to discuss some of the financial information that was contained in our press release for the fiscal third quarter ended March 31, 2020, that we released a short while ago. We anticipate that our Form 10-Q will be filed with the SEC on or around May 14. Revenue for the third quarter ended March 31, 2020, grew 50% to $2.9 million versus $1.9 million for the same period last year. The third quarter revenue was comprised of 84% for prostate brachytherapy, which grew 42% versus the fiscal third quarter of 2019, with the balance or 16% of revenue attributed to other brachytherapy primarily sells to treat brain, which included nominal revenue from GammaTile-related sales to GT Medical Technologies. Gross profit as a percentage of revenues for the third quarter ended March 31, 2020, increased to a record 59.2% compared to 45.7% for the quarter ended March 31, 2019. The gross margin increase was primarily driven by higher sales and lower isotope unit costs when compared to the prior year comparable period.

Third quarter gross profit dollars of $1.7 million increased 94% when compared to the same period of last year. Total operating expenses, consisting of research and development, sales and marketing and general and administrative increased 10% from the prior year comparable period to $2.3 million on third quarter 2020 revenue growth of 50%. Total R&D expense decreased slightly to $294,000 compared to $299,000 in the comparable prior year quarter. Going forward, we continue to expect proprietary R&D expense to increase back to or above levels in prior recent quarters or to roughly $300,000 to $400,000 per quarter, as we are continuing to have discussions with institutions looking at the expanded use of Cesium-131.

Sales and marketing expenses increased 25% versus the comparable prior year quarter to $805,000. The increase in sales and marketing expenses was driven primarily by increased incentive compensation related to the 50% increase in revenue as well as an increase in physician-led training expenses. These increases were partially offset by a decrease in travel costs due to COVID-19. G&A expenses of $1.16 million represented an increase of 5% versus $1.1 million in the fiscal third quarter 2019. The year-over-year increase was driven primarily by increased incentive compensation related to the 50% year-over-year increase in revenue and company financial performance, headcount, insurance premiums and public company-related expenses. These increases were partially offset by a decrease in our Washington State Hazardous Substance Tax and reduced legal, travel and employee hiring expenses.

IsoRay posted a net loss of $545,000 for the third quarter ended March 31, 2020, a significant

improvement compared to a net loss of $1.1 million for the quarter ended March 31, 2019. The net loss per basic and diluted share was $0.01 versus the net loss of $0.02 for the quarter ended March 31, 2019. Basic and diluted share results are based on weighted average shares outstanding of approximately 67.6 million for fiscal third quarter 2020 versus 67.3 million for the prior year period. As of March 31, 2020, the company had cash, cash equivalents and certificates of deposit that totaled $2.4 million compared to $5.3 million at the end of fiscal 2019 ended June 30, 2019. The company has 0 long-term debt. Shareholders’ equity at the end of fiscal third quarter 2020 totaled $5.8 million versus $7.7 million at the end of fiscal 2019. I will now turn the call over to the operator to take questions from our analysts and institutional investors.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

We’ll go first to Jason Kolbert at Dawson James.

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Jason Howard Kolbert, Dawson James Securities, Inc., Research Division – Director of Research [2]

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Well, congratulations. I know there’s a lot of chaos going on across the United States, but you did put up great numbers. I think the best numbers I’ve seen since I’m following IsoRay. So that really is a great accomplishment. And if I understand what you said, Lori, the majority of those revenues were driven by prostate cancer. But you’re beginning to have a glimmer of hope that GT Medical will come online as GammaTile and their sales force engages. Is that right?

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Lori A. Holmes-Woods, IsoRay, Inc. – CEO & Director [3]

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Yes, that’s correct, Jason. And thank you. We’re very excited about what we did this last quarter.

To your question, yes, most of it was from prostate, and then we are hopeful that GammaTile will be gaining traction and moving forward now that they’ve done their full market release. .

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Jason Howard Kolbert, Dawson James Securities, Inc., Research Division – Director of Research [4]

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Okay. And I just want to make sure I understood a couple of things. You mentioned that there is going to be some interruptions in COVID, both in terms of Blu Build, the device and just a lot of other factors. But at the end of the day, procedures that were being lined up are going to be rescheduled. So while we might see a dip in April, that might come back to an increase in May or June and the quarter may end up being somewhat in line with kind of prior expectations. Is that fair to say?

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Lori A. Holmes-Woods, IsoRay, Inc. – CEO & Director [5]

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Well, I think it is fair to say that we’ve gotten a lot of feedback from our customers that indicate that those cases that were canceled toward the end of March maybe didn’t get scheduled at the beginning of April. And they all believe that those cases will be back and be scheduled. And so I can’t speak to exactly how next quarter will turn out, but we’re very hopeful that over the next few months, we’ll get them all back and take it (inaudible).

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Jason Howard Kolbert, Dawson James Securities, Inc., Research Division – Director of Research [6]

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Sure. Of course. And one last question too. I wanted to make sure I understood the acronym RO-APM. The single bundle payment, multiple cancers but levels the playing field for brachytherapy. But what does RO-APM stand for?

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Lori A. Holmes-Woods, IsoRay, Inc. – CEO & Director [7]

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It’s the radiation oncology, Jonathan, help me out here.

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Jason Howard Kolbert, Dawson James Securities, Inc., Research Division – Director of Research [8]

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Yes. But I did get it right. It is ROPAN, right?

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Lori A. Holmes-Woods, IsoRay, Inc. – CEO & Director [9]

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It’s RO-APM. So it’s radiation oncology…

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Jonathan R. Hunt, IsoRay, Inc. – CFO & Co-Principal Financial Officer [10]

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Alternative payment method.

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Jason Howard Kolbert, Dawson James Securities, Inc., Research Division – Director of Research [11]

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Got it. Alternative payment. So I just wanted to get it right so that we go in print. Listen, one last question, Lori. Cash is starting to get tight. Do you have any thoughts about how you’re going to handle the — your cash capital needs?

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Lori A. Holmes-Woods, IsoRay, Inc. – CEO & Director [12]

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I’m going to turn that question over to Jonathan.

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Jonathan R. Hunt, IsoRay, Inc. – CFO & Co-Principal Financial Officer [13]

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Jason, so — we continue to believe that at our current cash levels and based on our current burn rate that we have sufficient cash to last us throughout the remainder of this calendar year.

And as you probably know, we do have an ATM in place, which — although it’s not an immediate financing, it does give us the flexibility to sell stock at the current market price into the market from time to time at our discretion. So we’ll continue…

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Jason Howard Kolbert, Dawson James Securities, Inc., Research Division – Director of Research [14]

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Preservation of the balance sheet through an ATM that makes sense?

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Jonathan R. Hunt, IsoRay, Inc. – CFO & Co-Principal Financial Officer [15]

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Yes.

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Jason Howard Kolbert, Dawson James Securities, Inc., Research Division – Director of Research [16]

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Okay. Right. Sounds good. And so Lori, any particular events or catalysts that we should look at? I mean you and I have been doing this a long time and IsoRay is the turtle slow and steady, but you’re really showing some nice progress. Is there — but we all love catalysts and events, is there a catalyst or an event that I could hang my hat on?

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Lori A. Holmes-Woods, IsoRay, Inc. – CEO & Director [17]

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I might have answered that question differently if we weren’t in the middle of a pandemic. But I think right now, really, it’s important that we stay focused on our core strategy, which is growing our prostate market. And getting new patients in the door, organic growth for those customers that we already have and keep that moving forward. And as things clear out in this whole thing with COVID-19, I think, we’ll be able to talk to you more about relationships we’re developing with research centers and some other ongoing things. We’re just with this popping up in the middle here the last couple of months, we’re just not ready to have those discussions.

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Jason Howard Kolbert, Dawson James Securities, Inc., Research Division – Director of Research [18]

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It sounds very reasonable. I guess if I was going to ask one last thing it was, at what point do you start to see your ability to expand manufacturing margins or get more leverage out of the cyclotrons that are producing the seeds?

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Lori A. Holmes-Woods, IsoRay, Inc. – CEO & Director [19]

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Actually, we buy our radioisotope from facilities in Russia, and they constantly work on refining how we’re going to get our isotope. And one of the reasons, we’re very pleased to partner with them as they’ve done a fantastic job of that, and they ship is very, very pure isotope, so it has been one of the things that has helped drive our gross margins up is the fact that we don’t have to refine the isotope once we get it. We don’t have to spend time and money doing that. We get very, very pure isotope from Russia. So that’s been very helpful for us.

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Operator [20]

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We’ll go next to Ed Woo with Ascendiant Capital.

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Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division – Director of Research and Senior Research Analyst of Internet & Digital Media [21]

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Yes. I also like to say congratulations. It’s a very great quarter, especially in this environment. My question is — congratulations also on getting the additional billing codes from Medicare.

But just to walk you through some of the details, does that mean that you have — now have approval for hospitals to bill Medicare for these additional procedures? And what is the reimbursement rate?

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Lori A. Holmes-Woods, IsoRay, Inc. – CEO & Director [22]

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So — the reason you want to have ICD-10-PCS codes is because they play a really important role in communicating claims information. And that really helps ensure the establishment of appropriate grouping. So in the in-patient setting, it’s going to be a group of codes around a specific type of treatment. While there’s never been able to be a Cesium portion of that, and so it’s been very difficult to set payment levels in relationship to using Cesium. So it’s very key for us to get these ICD-10-PCS codes because now that really helps ensure that we get the appropriate groupings and levels of payments for hospitals in the inpatient setting.

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Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division – Director of Research and Senior Research Analyst of Internet & Digital Media [23]

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So does that mean the hospital today can now use Cesium-131 and get reimbursed for it, whereas yesterday, they wouldn’t be able to?

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Lori A. Holmes-Woods, IsoRay, Inc. – CEO & Director [24]

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Well, many hospitals have been using Cesium-131 to date, and they just didn’t have a code to tell Medicare that they were actually using it.

And so as of today, they have a code that they will use when they use Cesium-131 to tell Medicare and by extension other insurers that they are using Cesium in this particular type of surgery and that it justifies additional payment for that procedure.

And they’ll gather data over time to help determine what the appropriate reimbursement rates will be. But it’s a big step toward working for a strong reimbursement for Cesium in the inpatient setting, where we’ve always just been in the outpatient setting before.

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Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division – Director of Research and Senior Research Analyst of Internet & Digital Media [25]

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Great. So the reimbursement rate for in-setting is still a work in process?

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Lori A. Holmes-Woods, IsoRay, Inc. – CEO & Director [26]

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Exactly. And this was a key milestone to really make that move forward.

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Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division – Director of Research and Senior Research Analyst of Internet & Digital Media [27]

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Great. Is there any time line on when the next step would be?

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Lori A. Holmes-Woods, IsoRay, Inc. – CEO & Director [28]

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So that’s something that CMS works on and each year as they set new reimbursement rates, they will take us into account. So now it’s an evolving process from year-to-year as to how they’re going to set those rates. And we don’t have any control over that. So there’s not a next step for us to take. We’ve taken the step of making sure we got these codes in place and now Medicare pulls that into their system.

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Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division – Director of Research and Senior Research Analyst of Internet & Digital Media [29]

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Okay. But this is definitely a good positive first step or milestone?

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Lori A. Holmes-Woods, IsoRay, Inc. – CEO & Director [30]

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Yes. (inaudible) all happen.

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Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division – Director of Research and Senior Research Analyst of Internet & Digital Media [31]

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Great. And another question I have is, obviously, fortunately, luckily, your business hasn’t been affected relatively. What about outreach to physicians and getting the word out on Cesium-131, has that been slowed as well with shelter-in-place? Or do you still see good outreach to new physicians?

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Lori A. Holmes-Woods, IsoRay, Inc. – CEO & Director [32]

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That’s a great question, Ed. And it’s been very interesting because, of course, our sales force loves being right in front of the physicians and talking to them. So it has been an adjustment.

It’s been one that we found has been working better than we thought it was going to. We have new patients that have come — sorry, new physicians who have come on board, and we also have had some really great interactions with physicians on conference calls, multiple physicians on conference calls, lots of things that I think we’re all adjusting to, seeing each other on video camera and working day in and day out that way. We’re finding that works with physicians, and the feedback we’ve gotten is that in many ways they like that because it allows them to manage their time better, and they can still have good communications with us. So it’s an adjustment like I think it is for mini businesses across mini sectors. But so far, it’s been going very well.

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Operator [33]

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We’ll go next to Bill Urschel and Accord Partners.

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William Urschel, [34]

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Well, I’d like to echo my congratulations, guys, but my questions were answered by — in the earlier answers. So I’m good to go.

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Operator [35]

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(Operator Instructions) I have no other questions holding at this time. So I’ll turn the conference back to Ms. Woods for any additional or closing comments.

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Lori A. Holmes-Woods, IsoRay, Inc. – CEO & Director [36]

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Thank you, everyone, for joining us today. We’re really excited about what we’ve been able to share with you today, and we’re going to work hard to ensure that we get this very valuable treatment out to physicians and their patients and that we really help work with our policymakers in Washington, D.C. to understand how important it is that cancer patients have access to treatment during this difficult time and what a great treatment brachytherapy is doing this time as well. Thank you for your time today, and have a great evening.

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Operator [37]

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Ladies and gentlemen, that will conclude today’s conference. We thank you for your participation. You may disconnect at this time, and have a great day.