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ISORAY, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[September 29, 2014]

ISORAY, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(Edgar Glimpses Via Acquire Media NewsEdge) Critical Accounting Policies and Estimates Management's discussion and analysis of the Company's financial condition and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent liabilities. On an on-going basis, management evaluates past judgments and estimates, including those related to bad debts, inventories, accrued liabilities, and contingencies. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



42 The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Accounts Receivable Accounts receivable are stated at the amount that management of the Company expects to collect from outstanding balances. Management provides for probable uncollectible amounts through an allowance for doubtful accounts. Additions to the allowance for doubtful accounts are based on management's judgment, considering historical write-offs, collections and current credit conditions.


Balances which remain outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and a credit to the applicable accounts receivable. Payments received subsequent to the time that an account is written off are considered bad debt recoveries.

Inventory Inventory is reported at the lower of cost or market. Cost of raw materials is determined using the weighted average method. Cost of work in process and finished goods is computed using standard cost, which approximates actual cost, on a first-in, first-out basis.

Licenses Amortization of licenses is computed using the straight-line method over the estimated economic useful lives of the assets.

Amortization of licenses was $11,721 and $11,721 for the years ended June 30, 2014 and 2013, respectively. Based on the licenses recorded at June 30, 2014, and assuming no subsequent impairment of the underlying assets, the annual amortization expense for each fiscal year ending June 30 is expected to be as follows: $11,721 for 2014, $0 for all years thereafter.

Revenue Recognition The Company applies the provisions of ASC Topic 605, Revenue Recognition. ASC 605 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. ASC 605 outlines the basic criteria that must be met to recognize revenue and provides guidance for the disclosure of revenue recognition policies. The Company recognizes revenue related to product sales when (i) persuasive evidence of an arrangement exists, (ii) shipment has occurred, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured.

Revenue for the fiscal years ended June 30, 2014 and 2013 was derived primarily from sales of the Proxcelan® Cs-131 brachytherapy seed, which is used in the treatment of cancer. The Company also had sales from the GliaSite® RTS, which is used in the treatment of brain cancer, in the fiscal years ended June 30, 2014 and 2013. The Company recognizes revenue once the product has been shipped to the customer. Prepayments, if any, received from customers prior to the time that products are shipped are recorded as deferred revenue. In these cases, when the related products are shipped, the amount recorded as deferred revenue is then recognized as revenue. The Company accrues for sales returns and other allowances at the time of shipment. Although the Company does not have an extensive operating history upon which to develop sales returns estimates, we have used the expertise of our management team, particularly those with extensive industry experience and knowledge, to develop a proper methodology.

43 Product Returns and Allowances The Company as part of normal operations allows for customers to receive credit for patient procedures cancelled after shipping to the customer for a variety of criteria. These criteria include but are not limited to a physical symptom on the date of procedure that interferes with the patient's ability to go forward with the procedure, discovery that a patient's condition is beyond treatment during surgery and other criteria as determined acceptable by management.

Stock-Based Compensation The Company measures and recognizes expense for all share-based payments at fair value. The Company uses the Black-Scholes option valuation model to estimate fair value for all stock options on the date of grant. For stock options that vest over time, the Company recognizes compensation cost on a straight-line basis over the requisite service period for the entire award.

Research and Development Costs Research and development costs, including salaries, research materials, administrative expenses and contractor fees, are charged to operations as incurred. The cost of equipment used in research and development activities which has alternative uses is capitalized as part of fixed assets and not treated as an expense in the period acquired. Depreciation of capitalized equipment used to perform research and development is classified as research and development expense in the year recognized.

Legal Contingencies In the ordinary course of business, the Company is involved in legal proceedings involving contractual and employment relationships, product liability claims, patent rights, environmental matters, and a variety of other matters. The Company is also subject to various local, state, and federal environmental regulations and laws due to the isotopes used to produce the Company's product.

As part of normal operations, amounts are expended to ensure that the Company is in compliance with these laws and regulations. While there have been no reportable incidents or compliance issues, the Company believes that if it relocates its current production facilities then certain decommissioning expenses will be incurred and has recorded an asset retirement obligation for these expenses.

The Company records contingent liabilities resulting from asserted and unasserted claims against it, when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Estimating probable losses requires analysis of multiple factors, in some cases including judgments about the potential actions of third-party claimants and courts. Therefore, actual losses in any future period are inherently uncertain. Currently, the Company does not believe any probable legal proceedings or claims will have a material adverse effect on its financial position or results of operations.

However, if actual or estimated probable future losses exceed the Company's recorded liability for such claims, it would record additional charges as other expense during the period in which the actual loss or change in estimate occurred.

Income Taxes Income taxes are accounted for under the liability method. Under this method, the Company provides deferred income taxes for temporary differences that will result in taxable or deductible amounts in future years based on the reporting of certain costs in different periods for financial statement and income tax purposes. This method also requires the recognition of future tax benefits such as net operating loss carry-forwards, to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment of the change. Management has determined that the Company, its subsidiary Medical, and its predecessors are subject to examination of their income tax filings in the United States and state jurisdictions for the 2011 through 2014 tax years.

In the event that the Company is assessed penalties and/or interest, penalties will be charged to other operating expense and interest will be charged tointerest expense.

44 Income (Loss) Per Common Share Basic earnings per share is calculated by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding, and does not include the impact of any potentially dilutive common stock equivalents, including preferred stock, common stock warrants or options that are potentially convertible into common stock as those would be anti-dilutive due to the Company's net loss position.

Securities that could be dilutive in the future as of June 30, 2014 and 2013 were as follows: 2014 2013 Preferred stock 59,065 59,065 Common stock warrants 444,747 1,957,033 Common stock options 2,314,422 2,305,072 Total potential dilutive securities 2,818,234 4,321,170 Subsequent Events Effective April 1, 2009, the Company adopted ASC 855 Subsequent Events. This Statement establishes the accounting for, and disclosure of, material events that occur after the balance sheet date, but before the financial statements are issued. In general, these events will be recognized if the condition existed at the date of the balance sheet, and will not be recognized if the condition did not exist at the balance sheet date. Disclosure is required for non-recognized events if required to keep the financial statements from being misleading. The guidance in this Statement is very similar to current guidance provided in accounting literature and, therefore, will not result in significant changes in practice. Subsequent events have been evaluated through the date our financial statements were issued-the filing time and date of our 2014 Annual Report on Form 10-K.

Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management of the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Accordingly, actual results could differ from those estimates and affect the amounts reported in the financial statements.

Results of Operations Financial Presentation The following sets forth a discussion and analysis of the Company's financial condition and results of operations for the two years ended June 30, 2014 and 2013. This discussion and analysis should be read in conjunction with our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements. Our actual results may differ significantly from the results discussed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Item 1A - Risk Factors," beginning on page 31 of this Annual Report on Form 10-K.

Year ended June 30, 2014 compared to year ended June 30, 2013 Product sales.

Prostate Brachytherapy.

Revenue generated from treatment with prostate brachytherapy increased from 82% of total revenue in the fiscal year ended June 30, 2013 to 84% of total revenue in the fiscal year ended June 30, 2014. Prostate brachytherapy revenue decreased at a slower rate than revenue classified as other product sales which resulted in the increase from 82% to 84% of the decreased total revenue during fiscal year 2014 compared to fiscal year 2013. Management believes that the continuing decrease in sales for non-prostate applications has resulted from key physicians being assigned to new roles within their facilities, moving to new facilities that are not licensed for Cesium-131 and the ongoing incentive to recover capital investments in treatment equipment and the required facilities to house the equipment for competing treatment methods by those facilities. Management believes that the overall market for prostate brachytherapy has continued to receive increased pressure from other treatment options with higher reimbursement rates such as Intensity-Modulated Radiation Therapy (IMRT) and robotic-assisted surgery. Although combination treatments incorporating brachytherapy with other modalities in the prostate and treatment of other body sites with brachytherapy have increased, these increases are insufficient to offset the overall decrease in use of prostate brachytherapy.

45 Other Brachytherapy.

The strategy implemented by management in the prior year in diversifying the number of body sites being actively treated with the Proxcelan®Cs-131 brachytherapy seed has continued to partially mitigate the lost revenue from the prostate brachytherapy segment. The timeline of developing and bringing new products from concept to revenue production in the pharmaceutical/medical device segment is lengthy and is typically measured in years. The probability of any new cancer treatment product reaching the stage at which it produces revenue is very low.

Company management has been investing in development of alternative uses for the Company's brachytherapy seed that management believes have the ability to generate revenue in the near-term to offset development costs. New treatments such as those being initiated by the Company typically experience a staged entry to market in which primary adopters demonstrate the suitability of a treatment, after which wider adoption is possible. The non-prostate products are very dependent on first adopters as a source of revenue. While there may be a steep growth in revenue, it often plateaus due to capacity constraints until the mainstream adoption occurs, when and if there is favorable publication of the experiences and treatment outcomes of the first adopters. To date the Company has only experienced minimal sales to first adopters.

In the fiscal year ended June 30, 2014, there were over seven hundred and eighty cases treated with the Company's Cs-131 brachytherapy seeds, with approximately 12% of the cases being non-prostate applications. Management's strategy includes soliciting the use of other applications for the Company's brachytherapy seeds at major medical institutions that are more likely to publish their outcomes and that are training the next generation of decision makers. Company management intends to actively pursue alternative uses for the Company's brachytherapy seeds in treatments consistent with the FDA clearance granted permitting the Company to utilize other FDA cleared application methods as a means of administering the treatments.

During the year ended June 30, 2014, the revenue from other brachytherapy treatments decreased 13% over the year ended June 30, 2013. While revenue for the GliaSite® RTS increased 33%, gynecological increased 70% and head and neck increased 56%, these areas of growth were offset by a 15% decrease in revenue from the treatment of brain cancer and a 41% decrease in revenue from the treatment of lung cancer. Management believes the decreases in brain and long treatments were caused by two physicians that were significant early adopters who were on extended leave during the fiscal year.

GliaSite® Radiation Therapy System.

During the fiscal year ended June 30, 2014, revenue from the GliaSite®RTS increased by approximately 33% or $57,000 compared to the fiscal year ended June 30, 2013. All product sales are generated by the brachytherapy seeds and the related methods of application except for the revenue generated by the sales of GliaSite® RTS which come from sale of the liquid isotope, catheter trays and access trays.

The conversion of prospects to new GliaSite® RTS customers has been a longer process than originally anticipated by the Company. The Company has experienced lengthy timelines in the internal processes of the medical facilities in reviewing and approving the use of the product at the request of their physician(s). These longer than anticipated internal processes are compounded by uncertain timelines and delays in receiving the approval for the requested modification of each facility's nuclear materials license, which is required to begin using GliaSite® RTS and is dependent on external government regulators. On December 17, 2013, the Company received clearance from the US Food and Drug Administration to market Cesitrex®(Cs-131 in liquid form) with the GliaSite® RTS.

46 Description June 30, 2014 June 30, 2013 Variance ($) Variance (%)Product sales (Prostate) $ 3,525,869 $ 3,730,129 $ (204,260 ) (5 )% Product sales (Other1) 693,289 795,104 (101,815 ) (13 )% Total product sales $ 4,219,158 $ 4,525,233 $ (306,075 ) (7 )% 1 - Other sales include brachytherapy seed treatment of brain cancer, lung cancer, head and neck cancer, colorectal cancer, gynecological cancer, ocular cancer and other body site cancers that have been treated previously with the Company's Cs-131 brachytherapy seeds as well as the sale of GliaSite® RTS and its related components for use.

Cost of product sales.

Cost of product sales overall have remained materially unchanged during the fiscal year ended June 30, 2014 compared to the fiscal year ended June 30, 2013 with the exception of two categories of cost, the medical device tax expense and GliaSite® RTS cost of product sold. The additional medical device tax of approximately $41,500 during the twelve months ended June 30, 2014 was the result of the medical device tax being applicable to only two quarters during the fiscal year ended June 30, 2013 as compared to all four quarters during the fiscal year ended June 30, 2014. The additional cost of product sales related to the GliaSite®RTS of approximately $34,000 were from the additional cost of the Iotrex® solution ordered and produced to satisfy the increased volume orders of approximately $14,000 and a minimum royalty obligation related to the licensing of intellectual property utilized in the GliaSite® RTS system of approximately $15,000.

Description June 30, 2014 June 30, 2013 Variance ($) Variance (%)Medical Device Tax $ 96,115 $ 54,624 $ 41,491 76 % GliaSite® RTS 143,789 109,774 34,015 31 % Other expense 4,175,725 4,210,659 (34,934 ) (1 )% Total COGS expense $ 4,415,629 $ 4,375,057 $ 40,572 1 % Gross margin.

Gross margin for the fiscal year ended June 30, 2014 decreased substantially when compared to the fiscal year ended June 30, 2013. The change in gross margin was primarily as a result of the previously discussed reduction in sales in the prostate market when combined with the additional cost of the medical device tax, increased cost of isotope to meet the increased number of GliaSite® RTS orders and fixed contractual minimums related to isotope purchases that were lost to decay, partially offset by cost savings in other areas during the fiscal year ended June 30, 2014 when compared to June 30, 2013.

Description June 30, 2014 June 30, 2013 Variance ($) Variance (%) Gross margin $ (196,471 ) $ 150,176 $ (346,647 ) (231 )% Research and development expenses.

Research and development costs for fiscal year ended June 30, 2014 were increased due to the protocol expense which increased as the Company reinstated an investment in the brain study at Weill Medical College. The Company continued to invest in protocols in support of products that have been developed and sales have begun in support of gaining general acceptance in the market. During the fiscal year ended June 30, 2014, the Company accrued protocol costs in accordance with its agreements with participating facilities.

Description June 30, 2014 June 30, 2013 Variance ($) Variance (%) Protocol expense $ 163,259 $ 106,362 $ 56,897 53 % Other expense 505,544 520,745 (15,201 ) (3 )% Total R&D expense $ 668,803 $ 627,107 $ 41,696 7 % 47 Sales and marketing expenses.

Sales and marketing expenses decreased during the fiscal year ended June 30, 2014 when compared to the fiscal year ended June 30, 2013 primarily as a result of the decreased hiring costs due to the reduction in the use of outside agencies to hire additional sales staff and the reduction in costs associated with travel and specifically a reduction in meals expense.

Description June 30, 2014 June 30, 2013 Variance ($) Variance (%) Hiring expense $ 1,411 $ 16,645 $ (15,234 ) (92 )% Travel expense 234,001 274,002 (40,001 ) (15 )% Other expense 999,313 1,005,502 (6,189 ) (1 )% Total sales & marketing expense $ 1,234,725 $ 1,296,149 $ (61,424 ) (5 )% General and administrative expenses.

General and administrative expenses increased during the fiscal year ended June 30, 2014 when compared to the fiscal year ended June 30, 2013 primarily as the result of increased legal costs year over year and increased share-based compensation, which was the result of fully vested options to purchase 100,000 shares of common stock awarded to Dwight Babcock, CEO, valued at $116,000 at various grant dates.

Description June 30, 2014 June 30, 2013 Variance ($) Variance (%) Legal expense $ 218,561 $ 153,663 $ 64,898 42 % Share-based compensation 151,096 32,328 118,768 367 % Other expense 2,118,562 2,108,182 10,380 - % Total general & administrative expense $ 2,488,219 $ 2,294,173 $ 194,046 8 % Operating loss.

Operating loss for the year ended June 30, 2014 compared to the year ended June 30, 2013 increased as a result of decreased revenue generated from the sales of brachytherapy seeds for the treatment of prostate cancer; which was not offset by a sufficient increase in product sales from other seed brachytherapy and sales of GliaSite® RTS; coupled with cost of product sales which failed to decrease commensurate with the decrease in revenues.

Description June 30, 2014 June 30, 2013 Variance ($) Variance (%) Operating loss $ (4,588,218 ) $ (4,067,253 ) $ (520,965 ) 13 % Change in fair value of warrant derivative liabilities.

During the years ended June 30, 2014 and June 30, 2013, there were changes in the fair value of the warrant derivative liabilities established upon issuance of the warrants during October 2011 and December 2011 to the purchasers and underwriters in the Company's registered public offering. Per ASC 820, the warrant derivative liability requires periodic evaluation for changes in fair value. As required at June 30, 2014 and June 30, 2013, the Company evaluated the fair value of the warrant derivative liability using the Black-Scholes option pricing model on which the original warrant derivative liability was based and applied updated inputs as of those dates. The resulting change in fair value was recorded as of June 30, 2014 and 2013, respectively.

Description June 30, 2014 June 30, 2013 Variance ($) Variance (%) Change in fair value of warrant derivative liability $ (1,382,134 ) $ 210,000 $ 1,582,134 758 % Liquidity and capital resources. The Company has historically financed its operations through the sale of common stock and the issuance of related common stock warrants. During fiscal year 2014, the Company used existing cash reserves and cash received through sales of common stock of approximately $3.2 million and in 2013 of approximately $3 million to fund its operations and capitalexpenditures.

48 Cash flows from operating activities Cash used by operating activities is the net loss adjusted for non-cash items and changes in operating assets and liabilities.

The increase in net cash used in operating activities for the year ended June 30, 2014 when compared to the year ended June 30, 2013 is primarily the result of the increased net loss that is primarily the result of decreased revenues and increase in fair value of the warrant derivative liability. Management has continued to maintain prior reductions of expenses that consumed cash in operating activities through a combination of cost reductions and operational efficiencies that were previously identified and implemented in operations. The remaining increase in cash used by operating activities is the net of an increase from the changes in operating assets and liabilities partially reduced by the decrease in non-cash operating expenses.

Key operating factor Fiscal year Fiscal year Description ended 06-30-14 ended 06-30-13 Variance ($) Variance (%) Net loss $ (5,959,122 ) $ (3,856,596 ) $ (2,102,526 ) 55 % Non-cash items 2,344,032 731,738 1,612,294 220 % Non-cash changes in operating assets and liabilities 386,869 68,591 318,278 464 % Net cash used by operating activities $ (3,228,221 ) $ (3,056,267 ) $ (171,954 ) 6 % Cash flows from investing activities Cash used by investing activities during the year ended June 30, 2014 was primarily related to the purchase of short term and long term investments and in the year ended June 30, 2013 was primarily related to the capitalization of costs related to other assets.

Key operating factor Fiscal year Fiscal year Description ended 06-30-14 ended 06-30-13 Variance ($) Variance (%) Purchases of fixed assets $ (19,029 ) $ (6,576 ) $ (12,453 ) 189 % Additions to licenses and other assets (17,758 ) (6,118 ) (11,640 ) 190 % Purchases of short-term investments (10,002,912 ) - (10,002,912 ) (100 )% Purchases of investments - other (5,401,398 ) - (5,401,398 ) (100 )% Change in restricted cash (59 ) (122 ) 63 52 % Net cash used by investing activities $ (15,441,156 ) $ (12,816 ) $ (15,428,340 ) (120,383 )% Cash flows from financing activities Cash provided by financing activities in the year ended June 30, 2014 and June 30, 2013 was the result of sales of common stock in a registered direct offering and through warrant exercises and option exercises. Cash used during the fiscal years ended June 30, 2014 and June 30, 2013 was the result of dividend payments to the preferred shareholders.

49 Key operating factor Fiscal year Fiscal year Description ended 06-30-14 ended 06-30-13 Variance ($) Variance (%) Preferred dividend payments $ (10,632 ) $ (10,632 ) $ - - % Proceeds from sales of preferred stock, pursuant to underwritten offering 1,478,703 - 1,478,703 100 % Proceeds from sale of common stock pursuant to underwritten offering 1,800,589 - 1,800,589 100 % Proceeds from sale of common stock pursuant to registered public offering 13,814,742 3,291,977 10,522,765 320 % Proceeds from sale of common stock, pursuant to exercise of warrants 6,099,807 1,825 6,097,982 334,136 % Proceeds from sale of common stock pursuant to exercise of options 266,314 13,129 253,185 1,928 % Net cash provided by financing activities $ 23,449,523 $ 3,296,299 $ 20,153,224 609 % Projected 2014 Liquidity and Capital Resources The Company had approximately $2.01 million of cash and cash equivalents, short-term investments of $10.02 million and investments - other of $10.04 million which are fully insured by the Federal Depository Insurance Company (FDIC) as of September 19, 2014. The Company's monthly required cash operating expenditures were approximately $269,000 during the fiscal year ended June 30, 2014, which represents a 5% increase or approximately $14,000 from average monthly cash operating expenditures of $255,000 during the year ended June30, 2013.

The increased use of cash in operating activities of approximately $172 thousand is primarily the result of the increased net loss of approximately $2.1 million which was driven primarily by a non-cash increase of the change in fair value of warrant derivative liability of $1.6 million and an increase of approximately $319 thousand in non-cash changes in operating assets and liabilities.

Management believes that the Company will need to replace aging pieces of information technology equipment including servers, individual computers and other office equipment as they either reach or have exceeded their useful lives.

The Company may also have to invest in systems and equipment in order to continue to meet regulatory requirements as the compliance environment changes.

The overall expenditure is not expected to exceed $100,000 during fiscal 2015, of which some costs will be capitalized and depreciated while others will be expensed in the period incurred. There is no assurance that unanticipated needs for capital equipment or other needs may not arise.

Balances as of: 09-19-14 06-30-14 06-30-13 Cash and cash equivalents $ 2,004,951 $ 7,680,073 $ 2,899,927 Short-term investments 10,022,630 10,002,912 - Investments 10,040,489 5,401,398 - Total $ 22,068,070 $ 23,084,383 $ 2,899,927 Key operating factor Fiscal year Fiscal year Description ended 06-30-14 ended06-30-13 Variance ($) Variance (%) Net cash used by operating activities $ (3,228,221 ) $ (3,056,267 ) $ (171,954 ) 6 % Number of months to calculate 12 12 Average monthly cash required for operating expense $ (269,000 ) $ (255,000 ) $ (14,000 ) 5 % During fiscal year 2015, the Company intends to continue its existing protocol studies and to begin new protocol studies on lung and inter-cranial cancer treatments using Cesium-131 brachytherapy seeds and the GliaSite® RTS. The Company believes that no more than $250,000 in expense will be incurred during fiscal year 2015 related to protocol expenses relating to lung cancer, inter-cranial cancer and both dual therapy and mono therapy prostate cancerprotocols.

50 Based on the foregoing assumptions, management believes cash and cash equivalents on hand at June 30, 2014 should be sufficient to meet our anticipated cash requirements for operations and capital expenditure requirements through at least the next twelve months and at our present rate of monthly expenses for at least the next five years.

Management plans to attain breakeven and generate additional cash flows by increasing revenues from the Company's existing treatment applications of the Cs-131 brachytherapy seed to both new and existing customers (through our direct sales channels and through our distributors), while expanding into new market applications for Cs-131 and continuing to maintain the Company's focus on cost control.

Additionally, management plans to increase revenue through expanding the sale of the FDA cleared and ISO 13845:2003 certified GliaSite®RTS to current customers, adding new customers in the United States through the Company's direct sales force, through international sales with the existing distribution agreements which cover Germany, Austria, Switzerland, Italy, Luxembourg, Greece, Russia and Peru, and the addition of other distribution channels to European Union countries covered by the ISO certifications.

Management believes the Company will reach breakeven with revenues of approximately $750,000 per month with cashflow breakeven from operations being reached at approximately $700,000. However, there can be no assurance that the Company will attain profitability or that the Company will be able to attain its revenue targets. Sales in the prostate market have continued to shrink, which has not allowed breakeven to be reached during the past three fiscal years and these sales continued to decline during the year ended June 30, 2014. Sales of other applications and of the GliaSite® RTS have been nominal and historically have not been a substantial contributor to total revenue.

On March 21, 2014, the Company entered into a Securities Purchase Agreement with certain investors providing for the sale of a total of 5,644,300 shares of common stock for an aggregate purchase price of $14,675,180 at a price per share of $2.60 (the Registered Direct Offering). The Company received net proceeds from the offering of approximately $13,814,742 from the Registered Direct Offering which will be used to meet the Company's working capital needs and general corporate purposes.

On August 29, 2013, the Company entered into an agreement to sell 3,800,985 common units, each consisting of 1 share of the Company's common stock and a warrant to purchase 0.816 shares of common stock (the Common Units), and 1,670 preferred units, each consisting of 1 share of Series D Convertible Preferred Stock and a warrant to purchase 1,525.23 shares of common stock (the Preferred Units) on a firm commitment underwritten basis. The Common Units were sold at an initial per unit purchase price of $0.535 and the Preferred Units were sold at an initial per unit purchase price of $1,000. The warrants are all exercisable at $0.72 per share and have a twenty-four month term. Each share of the Series D Convertible Preferred Stock is convertible into 1,869.15 shares of common stock at any time at the option of the holder, subject to adjustment, provided that the holder will be prohibited from converting Series D Convertible Preferred Stock into shares of the Company's common stock if, as a result of such conversion, the holder, together with affiliates, would own more than 9.99% of the total shares of the Company's common stock then issued and outstanding. The offering yielded approximately $3,279,292 in cash after expenses.

On July 16, 2012, the Company entered into a Securities Purchase Agreement with Ladenberg Thalmann & Co., Inc. as placement agent for the sale of $3.5 million of shares of common stock at a per share price of $0.965. On July 19, 2012, the Company received net proceeds of $3.296 million after offering costs of $204,000. These shares were issued pursuant to the Company's Form S-3 shelf registration statement filed in 2009 and a prospectus supplement filed on July 17, 2012.

Series C warrant exercises in September and November of 2012 resulted in proceeds of less than $2,000.

There was no material change in the use of proceeds from our public offerings as described in our final prospectus supplements filed with the SEC pursuant to Rule 424(b) on July 17, 2012, August 29, 2013 and March 24, 2014. Through June 30, 2014, the Company had used the net proceeds raised through the July 2012, August 2013 and March 2014 offerings as described in the table below and held the remaining net proceeds in cash and cash equivalents, short-term investments and investments. No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of our equity securities or to any other affiliates.

51 Offering description Period Net proceeds Remaining net proceeds Registered direct offering July 2012 3,291,977 - Underwritten offering August 2013 3,279,292 2,899,210 Registered direct offering March 2014 13,814,742 13,814,742 Total $ 20,386,011 $ 16,713,952 Proceeds used in the year ended June 30, 2014: Indirect payments to directors and officers for database development $ 27,720 Direct payments for services to directors 125,500 Direct payments of salaries to officers 623,929 Working capital 2,501,035 Total proceeds used in the year ended June 30, 2014 $ 3,278,184 As a result of these recent capital raises, management does not anticipate needing to raise financing during fiscal 2015. If financing is required and obtained, it may be dilutive to shareholders. Of course, needed funding may not be available to the Company on acceptable terms, or at all.

Other Commitments and Contingencies In April 2013, Medical exercised the second of two options to renew the original lease that was entered into on May 2, 2007 with Energy Northwest, the owner of the Applied Process Engineering Laboratory (the APEL lease), for an additional 3 years with a new lease expiration date of April 30, 2016. The Company agreed to modification number 14 which became effective on May 1, 2014. The lease modification provided for a contractually permitted rent increase based on a CPI index which was 1.1%. The modification also provided the Company with an additional (third) three year option to extend its tenancy beyond the current expiration date of April 30, 2016. The rent contained in lease modification number 15 beginning on May 1, 2014 is $22,850.

Future minimum lease payments under operating leases, including the one remaining three-year renewal of the APEL lease, are as follows: Year ending June 30, 2015 $ 277,224 2016 277,224 2017 277,224 2018 277,224 2019 231,020 $ 1,339,916 The Company is subject to various local, state, and federal environmental regulations and laws due to the isotopes used to produce the Company's products.

As part of normal operations, amounts are expended to ensure that the Company is in compliance with these laws and regulations. While there have been no reportable incidents or compliance issues, the Company believes that if it relocates its current production facilities then certain decommissioning expenses will be incurred. An asset retirement obligation was established in the first quarter of fiscal year 2008 for the Company's obligations at its new production facility. This asset retirement obligation will be for obligations to remove any residual radioactive materials and to remove all leasehold improvements.

The industry that the Company operates in is subject to product liability litigation. Through its production and quality assurance procedures, the Company works to mitigate the risk of any lawsuits concerning its products. The Company also carries product liability insurance to help protect it from this risk.

The Company received a Qualifying Therapeutic Discovery Project (QTDP) grant in lieu of a QTDP credit for the Company tax years 2010 and 2011. The costs of the Company associated with these grants are subject to examination as are the tax returns of the Company. While there is no indication that the Internal Revenue Service intends to examine these returns or the costs utilized as the underlying basis for the receipt of the grant funds, these grant funds are subject to recapture if the associated costs are determined by the Service to not meet the definition of a "Qualified Investment" during an examination.

52 The Company has no off-balance sheet arrangements.

Inflation Management does not believe that the current levels of inflation in the United States have had a significant impact on the operations of the Company. If current levels of inflation hold steady, management does not believe future operations will be negatively impacted.

New Accounting Standards In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, "Revenue from Contracts with Customers" (ASU 2014-09), which supersedes the revenue recognition requirements in FASB Accounting Standards Codification (ASC) Topic 605, "Revenue Recognition". The guidance requires that an entity recognize revenue in a way that depicts the transfer of promised goods or services to customers in the amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. The guidance will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. The Company is currently evaluating the new standard and its impact on the Company's consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15-Presentation of Financial Statements-Going Concern. The guidance requires an entity's management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). If conditions or events exist that raise substantial doubt about an entity's ability to continue as a going concern, the guidance requires disclosure in the financial statements. The guidance will be effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company is currently evaluating the new standard and its impact on the Company's consolidated financial statements.

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