10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑ QUARTERLY Report PURSUANT TO Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2018

or

☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from __________ to ____________

Commission File No. 001-33407

ISORAY, INC.

(Exact name of registrant as specified in its charter)

Minnesota	41-1458152
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
350 Hills St., Suite 106, Richland, Washington	99354
(Address of principal executive offices)	(Zip Code)

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

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

Yes ☒ No ☐

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

Yes ☒ No ☐

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

Large accelerated filer ☐        Accelerated filer ☐        Non-accelerated filer ☐

Smaller reporting company ☒       Emerging growth company ☐

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

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

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

Class	Outstanding as of May 2, 2018
Common stock, $0.001 par value	55,100,229

ISORAY, INC.

Table of Contents

PART I	FINANCIAL INFORMATION
Item 1	Consolidated Unaudited Financial Statements	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations (Unaudited)	2
	Consolidated Statements of Cash Flows (Unaudited)	3
	Notes to the Consolidated Unaudited Financial Statements	4
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4	Controls and Procedures	17
PART II	OTHER INFORMATION
Item 1	Legal Proceedings	18
Item 1A	Risk Factors	18
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3	Defaults Upon Senior Securities	19
Item 4	Mine Safety Disclosures	19
Item 5	Other Information	19
Item 6	Exhibits	19
Signatures		20

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

IsoRay, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except shares)

	March 31,			June 30,
	2018			2017
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,365		$	5,932
Certificates of deposit (Note 3)		2,150			3,039
Accounts receivable, net of allowance for doubtful accounts of $26 and $26, respectively		970			726
Inventory		458			323
Prepaid expenses and other current assets		382			271
Total current assets		6,325			10,291
Property and equipment, net		1,229			1,054
Restricted cash		181			181
Inventory, non-current		395			513
Other assets, net of accumulated amortization		192			230
Total assets	$	8,322		$	12,269
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	773		$	630
Accrued protocol expense		77			75
Accrued radioactive waste disposal		28			125
Accrued payroll and related taxes		105			138
Accrued vacation		140			138
Total current liabilities		1,123			1,106
Long-term liabilities:
Asset retirement obligation		583			561
Total liabilities		1,706			1,667
Commitments and contingencies (Note 8)
Shareholders' equity:
Preferred stock, $.001 par value; 7,001,671 shares authorized:
Series A: 1,000,000 shares allocated; no shares issued and outstanding		-			-
Series B: 5,000,000 shares allocated; 59,065 shares issued and outstanding		-			-
Series C: 1,000,000 shares allocated; no shares issued and outstanding		-			-
Series D: 1,671 shares allocated; no shares issued and outstanding		-			-
Common stock, $.001 par value; 192,998,329 shares authorized; 55,100,229 and 55,017,419 shares issued and outstanding		55			55
Additional paid-in capital		83,507			83,151
Accumulated deficit		(76,946	)		(72,604	)
Total shareholders' equity		6,616			10,602
Total liabilities and shareholders' equity	$	8,322		$	12,269

The accompanying notes are an integral part of these consolidated financial statements.

1

IsoRay, Inc. and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(Dollars and shares in thousands, except for per-share amounts)

	Three months ended						Nine months ended
	March 31,						March 31,
	2018			2017			2018			2017
Product sales, net	$	1,573		$	1,282		$	4,320		$	3,391
Cost of product sales		964			989			2,915			3,051
Gross profit		609			293			1,405			340
Operating expenses:
Research and development
Proprietary research and development		317			166			914			488
Collaboration arrangement, net of reimbursement (Note 8)		156			161			260			161
Total research and development		473			327			1,174			649
Sales and marketing		692			530			1,980			1,550
General and administrative		783			825			2,610			2,632
Change in estimate of asset retirement obligation		-			-			-			(48	)
Total operating expenses		1,948			1,682			5,764			4,783
Operating loss		(1,339	)		(1,389	)		(4,359	)		(4,443	)
Non-operating income:
Interest income, net		7			29			17			89
Change in fair value of warrant derivative liability		-			-			-			27
Other income		-			-			-			20
Non-operating income, net		7			29			17			136
Net loss		(1,332	)		(1,360	)		(4,342	)		(4,307	)
Preferred stock dividends		(3	)		(3	)		(8	)		(8	)
Net loss applicable to common shareholders	$	(1,335	)	$	(1,363	)	$	(4,350	)	$	(4,315	)
Basic and diluted loss per share	$	(0.02	)	$	(0.02	)	$	(0.08	)	$	(0.08	)
Weighted average shares used in computing net loss per share:
Basic and diluted		55,100			55,017			55,058			55,015

The accompanying notes are an integral part of these consolidated financial statements.

2

IsoRay, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Nine months ended March 31,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(4,342	)	$	(4,307	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation expense		56			50
Loss on equipment disposals		-			5
Amortization of other assets		37			35
Change in fair value of warrant derivative liability		-			(27	)
Accretion of asset retirement obligation		22			22
Change in estimate of asset retirement obligation		-			(48	)
Share-based compensation		317			162
Changes in operating assets and liabilities:
Accounts receivable, gross		(250	)		(249	)
Inventory		(16	)		54
Prepaid expenses and other current assets		(58	)		(44	)
Accounts payable and accrued expenses		96			(104	)
Accrued protocol expense		2			(38	)
Accrued radioactive waste disposal		(97	)		26
Accrued payroll and related taxes		(33	)		(47	)
Accrued vacation		2			11
Net cash used by operating activities		(4,264	)		(4,499	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment		(231	)		(293	)
Additions to other assets		-			(151	)
Proceeds from maturity of certificates of deposit		4,943			-
Purchases of and interest from certificates of deposit		(4,054	)		(87	)
Net cash provided (used) by investing activities		658			(531	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred dividends paid		(11	)		(11	)
Proceeds from sales of common stock, pursuant to exercise of options		50			2
Net cash provided (used) by financing activities		39			(9	)
Net decrease in cash and cash equivalents		(3,567	)		(5,039	)
Cash and cash equivalents, beginning of period		5,932			10,139
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	2,365		$	5,100
Non-cash investing and financing activities:
Land acquired with accounts payable	$	-		$	198

The accompanying notes are an integral part of these consolidated financial statements.

3

IsoRay, Inc.

Notes to the Unaudited Consolidated Financial Statements

For the nine months ended March 31, 2018 and 2017

1. Basis of Presentation

The accompanying unaudited interim consolidated financial statements are those of IsoRay, Inc., and its wholly-owned subsidiaries referred to herein as “IsoRay” or the “Company”. All significant intercompany accounts and transactions have been eliminated in the consolidation. In the opinion of management, all adjustments necessary for the fair presentation of the consolidated financial statements have been included. These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes as set forth in the Company’s annual report filed on Form 10-K for the year ended June 30, 2017.

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

Certain prior period amounts have been reclassified to conform to the current period’s presentation. The results of operations for the periods presented may not be indicative of those which may be expected for a full year.  The Company anticipates that as the result of continuing operating losses and the significant net operating losses available from prior fiscal years, its effective income tax rate for fiscal year 2018 will be 0%.

2. New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09   Revenue Recognition, replacing guidance currently codified in Subtopic 605-10 Revenue Recognition-Overall with various SEC Staff Accounting Bulletins providing interpretive guidance. The guidance establishes a new five step principle-based framework in an effort to significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The standard will be effective for the Company in the first quarter of its fiscal year 2019, but early adoption is permitted starting in the first quarter of fiscal year 2018. The Company intends to adopt the new standard in the first quarter of fiscal year 2019 and expects to use the modified retrospective method. The Company has evaluated the impact of the future adoption of ASU 2014-09 on its consolidated financial statements and does not currently expect significant changes in the timing of revenue recognition compared to the existing methodology. 

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

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

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

4

In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update provides guidance on classification for cash receipts and payments related to eight specific issues. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of implementing this update on the consolidated financial statements.

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

3. Certificates of Deposit

Certificate of Deposit Account Registry Service (CDARS) is a system that allows the Company to invest in certificates of deposit through a single financial institution that exceed the $250,000 limit to be fully insured by the Federal Deposit Insurance Corporation (FDIC). That institution utilizes the CDARS system to purchase certificates of deposit at other financial institutions while keeping the investment at each institution fully insured by the FDIC. CDARS held by the Company as of March 31, 2018 and June 30, 2017 are as follows (in thousands):

	As of March 31, 2018
	Under 90		91 days to		Six months to		Greater
	Days		six months		1 year		than 1 year
CDARS	$	1,325	$	825	$	-	$	-

	As of June 30, 2017
	Under 90		91 days to		Six months to		Greater
	Days		six months		1 year		than 1 year
CDARS	$	3,039	$	-	$	-	$	-

4. Loss per Share

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

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

	March 31,
	2018		2017
Series B preferred stock		59		59
Common stock warrants		250		5
Common stock options		3,272		2,456
Total potential dilutive securities		3,581		2,520

5. Inventory

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

	March 31,		June 30,
	2018		2017
Raw materials	$	287	$	191
Work in process		153		121
Finished goods		18		11
Total inventory, current	$	458	$	323

5

	March 31,		June 30,
	2018		2017
Enriched barium, non-current	$	347	$	470
Raw materials, non-current		48		43
Total inventory, non-current	$	395	$	513

Inventory, non-current is raw materials that were ordered in quantities to obtain volume cost discounts which based on current and anticipated sales volumes will not be consumed within an operating cycle.

On August 25, 2017, the Company entered into a Consignment Agreement and related Services Agreement with MedikorPharma-Ural LLC to begin utilizing our enriched barium-130 carbonate inventory beginning in November 2017. The Company anticipates obtaining enough Cesium-131 under this arrangement to obtain over 4,000 curies of Cesium-131 over a ten-year period but there is no assurance as to whether the agreements will be terminated before this full amount is obtained and other supply sources are used, nor is there assurance that the agreements with the third-party Cesium-131 suppliers will be executed.

6. Property and Equipment

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

	March 31,			June 30,
	2018			2017
Land	$	366		$	366
Equipment		3,806			3,776
Leasehold improvements		4,136			4,130
Other1		568			373
Property and equipment		8,876			8,645
Less accumulated depreciation		(7,647	)		(7,591	)
Property and equipment, net	$	1,229		$	1,054

¹ – Represents items that meet the capitalization threshold or which management believes will meet the threshold at the time of completion and which have yet to be placed into service as of the date of the balance sheet. Also included at March 31, 2018 and June 30, 2017 are costs associated with automation of production processes and advance planning and design work on the Company’s new production facility.

7. Share-Based Compensation

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

	Three Months ended March 31,
	2018		2017
Cost of product sales	$	10	$	15
Research and development expenses		20		13
Sales and marketing expenses		17		9
General and administrative expenses		30		3
Total share-based compensation	$	77	$	40

6

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

	Nine Months ended March 31,
	2018		2017
Cost of product sales	$	40	$	59
Research and development expenses		58		28
Sales and marketing expenses		50		35
General and administrative expenses		97		40
Total share-based compensation	$	245	$	162

As of March 31, 2018, total unrecognized compensation expense related to stock-based options was approximately $622,000 and the related weighted-average period over which it is expected to be recognized is approximately 1.16 years.

A summary of stock options within the Company’s share-based compensation plans as of March 31, 2018 was as follows (in thousands except for exercise prices and terms):

					Weighted
			Weighted		Average
	Number of		Exercise		Contractual		Intrinsic
As of March 31, 2018	Options		Price		Term (Years)		Value
Outstanding		3,272	$	.76		7.14	$	41
Vested and expected to vest		3,172	$	.76		7.08	$	41
Vested and exercisable		1,742	$	.91		5.25	$	41

There were no stock options exercised during the three months ended March 31, 2018 and 2017, respectively. The Company’s current policy is to issue new shares to satisfy stock option exercises.

There were 15,000 and 10,000 option awards granted with a fair value of approximately $5,000 and $4,000 during the three months ended March 31, 2018 and 2017, respectively.

There were no and 22,500 stock option awards which expired during the three months ended March 31, 2018 and 2017, respectively.

There were 37,500 and 96,432 stock option awards forfeited during the three months ended March 31, 2018 and 2017, respectively.

There were 82,810 and 6,800 stock options exercised, with approximately nil and $3,000 of intrinsic value associated with these exercises during the nine months ended March 31, 2018 and 2017, respectively. The Company’s current policy is to issue new shares to satisfy stock option exercises.

There were 90,000 and 20,000 option awards granted with a fair value of approximately $38,000 and $7,700 during the nine months ended March 31, 2018 and 2017, respectively.

There were no and 303,034 stock option awards which expired during the nine months ended March 31, 2018 and 2017, respectively.

There were 114,041 and 179,437 stock option awards forfeited during the nine months ended March 31, 2018 and 2017, respectively.

7

8. Commitments and Contingencies

Isotope Purchase Agreement 

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

Research and Development - Collaborative Arrangement

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

During the three months ended March 31, 2018 and 2017, costs incurred in connection with the CDA were $304,000 and $322,000, respectively.

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

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

Derivative Complaint related to Shareholder Value

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

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

8

Media Advertising Agreement

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

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

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

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

9. Fair Value Measurements

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

	Fair Value at March 31, 2018
	Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	2,365	$	2,365	$	-	$	-

	Fair Value at June 30, 2017
	Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	5,932	$	5,932	$	-	$	-

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

10. Related Party Transactions

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

11. Concentrations of Credit and Other Risks

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

	Nine months ended
	March 31,			March 31,
Facility	2018			2017
El Camino Hospital of Los Gatos, Fremont Surgery Center & other facilities 1		24.23	%		22.76	%

¹ – This group of facilities individually each comprise less than 10% of total Company product sales. They are serviced by the same physician group, one of whom is our Medical Director.

9

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

12. Shareholders’ Equity

Warrants

On October 3, 2017, the Company entered into a Media Advertising Agreement with Al & J Media Inc. (“Al & J”). As part of the compensation for the services, Al & J received 250,000 warrants upon execution of the Agreement, which vested immediately, entitling Al & J to purchase shares of IsoRay common stock, exercisable on or before October 3, 2020, at an exercise price of $0.54 each. These warrants, using the Black-Scholes model, resulted in approximately $72,000 of share based compensation during the nine months ended March 31, 2018. On December 29, 2017, the Company notified Al & J of its decision to terminate the Media Advertising Agreement.

The key assumptions used in the Black-Scholes valuation model to calculate the fair value of the warrants are as follows:

	October 3,
	2017
Grant date fair value	$	0.2874
Options issued		250,000
Exercise price	$	0.54
Expected term (in years)		3
Risk-free rate		1.62	%
Volatility		81.66	%

The following table summarizes all warrants outstanding as of the beginning of the fiscal year, all activity related to warrants issued, cancelled, exercised or expired during the period and weighted average prices by category.

			Weighted average
	Warrants		exercise price
Outstanding as of June 30, 2017		-	$	-
Warrants issued		250,000	$	0.54
Outstanding as of March 31, 2018		250,000	$	0.54

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

Number of Warrants	Exercise Price¹		Expiration Date
250,000	$	0.54	October 2020

¹ – Exercise prices have been rounded to the nearest whole cent.

10

ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Caution Regarding Forward-Looking Information

In addition to historical information, this Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA). This statement is included for the express purpose of availing IsoRay, Inc. of the protections of the safe harbor provisions of the PSLRA.

All statements contained in this Form 10-Q, 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,” “expect,” “anticipate,” “intends,” “estimate,” “forecast,” “project,” and similar expressions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products, services, developments or industry rankings; any statements regarding future revenue, economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. 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 described under Item 1A - Risk Factors below that may cause actual results to differ materially.

Consequently, all of the forward-looking statements made in this Form 10-Q 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. Readers are cautioned not to place undue reliance on such forward-looking statements as they speak only of the Company’s views as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Critical Accounting Policies and Estimates

The discussion and analysis of the Company’s financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, management evaluates past judgments and estimates, including those related to bad debts, inventories, accrued liabilities, derivative liabilities and contingencies. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies and related risks described in the Company’s annual report on Form 10-K as filed with the SEC on September 28, 2017 are those that depend most heavily on these judgments and estimates. As of March 31, 2018, there had been no material changes to any of the critical accounting policies contained therein.

Overview

IsoRay, Inc. is a brachytherapy device manufacturer with FDA clearance and CE marking for a single medical device that can be delivered to the physician in multiple configurations as prescribed for the treatment of cancers in multiple body sites. The Company manufactures and sells this product as the Cesium-131 brachytherapy seed.

The brachytherapy seed utilizes Cesium-131, with a 9.7 day half-life, as its radiation source. The Company believes that it is the unique combination of the short half-life and the energy of the Cesium-131 isotope that is yielding the beneficial treatment results that have been published in peer reviewed journal articles and presented in various forms at conferences and tradeshows.

The Company has distribution agreements outside of the United States through its subsidiary IsoRay International LLC. These distributors are responsible for obtaining regulatory clearance to sell the Company’s products in their territories, with the support of the Company. As of the date of this report, the Company had distributors in Italy and the Russian Federation, with approximately $35,000 in reported revenues in the nine months ended March 31, 2018.

11

Results of Operations

Three months ended March 31, 2018 and 2017 (in thousands):

	Three months ended March 31,
	2018						2017						2018 - 2017
	Amount			% (a)			Amount			% (a)			% Change
Product sales, net	$	1,573			100		$	1,282			100			23
Cost of product sales		964			61			989			77			(3	)
Gross profit / (loss)		609			39			293			23			108
Operating expenses:
Research and development expenses - proprietary		317			20			166			13			91
Research and development expenses – collaboration agreement, net of reimbursement		156			10			161			13			(3	)
Sales and marketing expenses		692			44			530			41			31
General and administrative expenses		783			50			825			64			(5	)
Total operating expenses		1,948			124			1,682			131			16
Operating loss		(1,339	)		(85	)		(1389	)		(108	)		(4	)

(a) Expressed as a percentage of product sales, net

Nine months ended March 31, 2018 and 2017 (in thousands):

	Nine months ended March 31,
	2018						2017						2018 - 2017
	Amount			% (a)			Amount			% (a)			% Change
Product sales, net	$	4,320			100		$	3,391			100			27
Cost of product sales		2,915			67			3,051			90			(4	)
Gross profit / (loss)		1,405			33			340			10			313
Operating expenses:
Research and development expenses - proprietary		914			21			488			14			87
Research and development expenses – collaboration agreement, net of reimbursement		260			6			161			5			61
Sales and marketing expenses		1,980			46			1,550			46			28
General and administrative expenses		2,610			60			2,632			77			(1	)
Change in estimate of ARO		-			-			(48	)		(1	)		(100	)
Total operating expenses		5,764			133			4,783			141			21
Operating loss		(4,359	)		(101	)		(4,443	)		(131	)		(2	)

(a) Expressed as a percentage of product sales, net

Product Sales

Changes in sales personnel and implementation of a revitalized sales and marketing strategy in the third quarter of fiscal 2017 has resulted in positive sales growth in the third quarter of fiscal 2018 when compared to the prior fiscal year's third quarter. Ongoing training and support of new sales personnel has led to not only new accounts but also reconnecting with and receiving orders from prior accounts.

12

Three months ended March 31, 2018 and 2017 (in thousands):

	Three months ended March 31,
	2018				2017				2018 - 2017
	Amount		% (a)		Amount		% (a)		% Change
Prostate brachytherapy	$	1,304		83	$	1,124		88		16
Other brachytherapy		269		17		158		12		70
Product sales, net		1,573		100		1,282		100		23

(a) Expressed as a percentage of product sales, net

Nine months ended March 31, 2018 and 2017 (in thousands):

	Nine months ended March 31,
	2018				2017				2018- 2017
	Amount		% (a)		Amount		% (a)		% Change
Prostate brachytherapy	$	3,703		86	$	2,979		88		24
Other brachytherapy		617		14		412		12		50
Product sales, net		4,320		100		3,391		100		27

(a) Expressed as a percentage of product sales, net

Prostate Brachytherapy

During the quarter ended March 31, 2018, the Company had a full sales team in place contributing to the increase in sales. Also, website improvements and significant investments in product support literature, social media and public relations are increasing the awareness of the Company in the prostate brachytherapy treatment markets providing the Company opportunities to develop new customers and reconnect with past customers.

Management believes growth in prostate brachytherapy revenues will be the result of physicians, payers, and patients increasingly considering overall brachytherapy treatment advantages including costs, better treatment outcomes and improvement in the quality of life for patients, when compared with non-brachytherapy treatments.

During the nine months ended March 31, 2018, approximately $35,000 of reported revenues originated from the international market.

Management believes increased pressure to deliver effective healthcare in both terms of outcome and cost drove treatment options, and accordingly drove the Company’s prostate revenues, in the quarter ended March 31, 2018.

Other Brachytherapy

Other brachytherapy includes, but is not limited to, brain, lung, head/neck, and gynecological treatments. Initial applications for these other brachytherapy treatments are primarily used in recurrent cancer treatments or salvage cases that are generally difficult to treat aggressive cancers where other treatment options are either ineffective or unavailable.

These other brachytherapy treatments continue to be subject to the influence of a small pool of innovative physicians who are the early adopters of the technology who also tend to be faculty at teaching hospitals training the next generation of physicians. This causes the revenue created by these types of treatment applications to be more volatile and vary significantly from quarter to quarter. This volatility resulted in the increase from the prior year.

13

Cost of product sales

Cost of product sales consists primarily of the costs of manufacturing and distributing the Company’s products.

Contributing to the three and nine months ended March 31, 2018 and 2017 comparisons were decreases attributed to cost savings initiatives that resulted in lower procurement costs of goods and services. Some costs shifted in the three and nine months ended March 31, 2018 as compared to the same periods in fiscal 2017 to research and development and property and equipment, net from cost of product sales as employees performed research and development work as well as worked on the automation projects. Also, reduced staffing costs were realized with decreased head count. These decreases were partially offset by an increase in supply of isotope from the University of Missouri Research Reactor ("MURR") which increased total cost of product sales but resulted in lower supply cost per curie of Cesium-131 obtained from MURR.

Research and development

Research and development – proprietary

Proprietary research and development consists primarily of employee and third-party costs related to research and development activities.

Contributing to the three months ended March 31, 2018 and 2017 and the nine months ended March 31, 2018 and 2017 proprietary research and development comparison were increases associated with participation in new protocols, device development activities, as well as a reallocation of employee costs from cost of product sales as those employees performed work on research and development projects.

Research and development – collaborative arrangement

Collaboration arrangement related costs are incurred, shared, and separately stated in connection with a Collaborative Development Agreement (CDA) with GammaTile, LLC.

During the three months ended March 31, 2018 and 2017, costs incurred in connection with the CDA were $304,000 and $322,000, respectively.

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

Sales and marketing expenses

Sales and marketing expenses consist primarily of the costs related to the internal and external activities of the sales, marketing and customer service functions of the Company. As the Company increasingly focuses on improving sales, the cost associated with marketing and greater staffing continues to increase.

Staffing differences are a major factor in the cost comparison for the three months ended March 31, 2018 and 2017 as open positions in the quarter ended March 31, 2017 were filled in periods prior to the quarter ended March 31, 2018 with increased salaries and increased travel costs. Due to increased sales, there were also increases in incentive compensation.

Contributing to the nine months ended March 31, 2018 and 2017 comparison were increased advertising and public relations costs as part of the revitalized marketing plan. Staffing differences are a major factor in the cost comparison as open positions in the nine months ended March 31, 2017 were filled in periods prior to the quarter ended March 31, 2018 with increased salaries and travel costs. Due to increased sales, there were also increases in incentive compensation.

14

General and administrative expenses

General and administrative expenses consist primarily of the costs related to the executive, human resources/training quality assurance/regulatory affairs, finance, and information technology functions of the Company.

Contributing to the three months ended March 31, 2018 and 2017 comparison were significant reductions in legal fees, decreases to payroll as a result of the re-organization of the finance department with reduced head count, decreased consulting fees, and public company related expenses. These cost decreases were partially offset in the three months ended March 31, 2018 by increased share-based compensation and bonus expenses, and increased travel costs.

Contributing to the nine months ended March 31, 2018 and 2017 comparison were cost decreases from the prior year. Those include significant decreases to legal expenses, decreases to payroll as a result of the re-organization of the finance department with reduced head count, decreased consulting fees, lower audit and bank fees, and seminars, conference, and training expenses. These cost decreases were partially offset in the nine months ended March 31, 2018 by increases associated with share-based compensation, bonus expense, investor relations fees, state taxes, and employment hiring expenses related to the hiring of the Company's Controller.

Liquidity and capital resources

The Company assesses its liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. The Company has historically financed its operations through selling equity to investors. During the nine month periods ended March 31, 2018 and 2017, the Company used existing cash reserves to fund its operations and capital expenditures (in thousands except current ratio):

	Nine months
	ended March 31,
	2018			2017
Net cash used by operating activities	$	(4,264	)	$	(4,499	)
Net cash provided (used) by investing activities		658			(531	)
Net cash provided (used) by financing activities		39			(9	)
Net decreases in cash and cash equivalents	$	(3,567	)	$	(5,039	)

	As of
	March 31, 2018		June 30, 2017
Working capital	$	5,202	$	9,185
Current ratio		5.63		9.30

Cash flows from operating activities

Net cash used by operating activities in the nine months ended March 31, 2018 was primarily due to a net loss of approximately $4.34 million, net of approximately $432,000 in adjustments for non-cash activity such as depreciation and amortization expense, ARO accretion, and share-based compensation. Changes in operating assets and liabilities used approximately $354,000 to fund operating activities; Increases in accounts receivable, inventory, and prepaid expenses and other current assets, along with decreases in accrued radioactive waste disposal and accrued payroll and related taxes were partially offset by an increase in accounts payable and accrued expenses.

Cash flows from investing activities

Investing activities for the nine months ended March 31, 2018 consisted of transactions related to the purchase of fixed assets, including automation of production processes, as well as the purchase and subsequent maturity of certificates of deposit. Management will continue to invest in technology and machinery that improves and streamlines production processes and to invest maturing certificates of deposit in low-risk investment opportunities that safeguard assets and provide greater assurance those resources will be liquid and available for business needs as they arise. 

15

Cash flows from financing activities

Financing activities in the nine months ended March 31, 2018 included payment of preferred dividends and proceeds of sales of common stock through option exercises.

Projected 2018 Liquidity and Capital Resources

Operating activities

Management forecasts that current cash and cash equivalents along with certificates of deposit will be sufficient to meet projected operating cash needs for the remainder of fiscal 2018 and into the first half of fiscal 2019. Assuming no extraordinary expenses occur (whether operating or capital), if management is successful at implementing its strategy of renewed emphasis on driving the consumer to the prostate market, meets or exceeds its annual growth targets of twenty percent increase in revenue in fiscal 2018 and this annual growth continues, the Company anticipates reaching cashflow break-even in three to five years. Although the Company did not reach that target of twenty percent increased revenue in the first quarter of fiscal 2018, that target was surpassed in the second and third quarters and the Company is continuing to project revenue growth in fiscal 2018 of at least twenty percent over fiscal 2017. There is no assurance that targeted sales growth will materialize over the next three to five years. However, management is encouraged by the results for the nine months ended March 31, 2018 and with the depth and experience of its restructured sales team.

Capital expenditures

Management has completed the design of a future production and administration facility. If financing is obtained and the facility constructed, it is believed that the new facility will have non-cash depreciation cost equal to or greater than the monthly rental cost of the current facility.

Management is reviewing and implementing changes in all aspects of production operations (including process automation), research and development, sales and marketing, and general and administrative functions to evaluate the most efficient deployment of capital to ensure that the appropriate materials, systems, and personnel are available to support and drive product sales.

During the nine months ended March 31, 2018, the Company invested approximately $175,000 in the automation of production processes, resulting in the completion of three pieces of equipment. Each have been received, tested and evaluated, and were placed in service in the nine months ended March 31, 2018. One additional machine has been received and is currently being tested. Beginning in fiscal 2017 and continuing through March 31, 2018, the Company has invested approximately $476,000 in these automation projects and management is expecting to invest approximately $360,000 more over the next 14 months on the remaining projects. This investment is designed to allow the Company to significantly increase the output of Cesium-131 brachytherapy seeds, while allowing the Company to decrease the labor costs related to seed production and also improving the overall safety of our operations. 

Financing activities

There was no material change in the use of proceeds from our public offering as described in our final prospectus supplement filed with the SEC pursuant to Rule 424(b) on March 24, 2014. Through March 31, 2018, the Company had used the net proceeds raised through the March 2014 offering as described in the public offering. 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.

On August 25, 2015, the Company filed a registration statement on Form S-3 to register securities up to $20 million in value for future issuance in our capital raising activities. The registration statement became effective on November 19, 2015, and the SEC file number assigned to the registration statement is 333-206559.

The Company expects to finance its future cash needs through sales of equity, possible strategic collaborations, debt financing or through other sources that may be dilutive to existing shareholders. Management anticipates that if it raises additional financing that it may be at a discount to the market price and if so it will be dilutive to shareholders.

16

The Company’s common stock is currently listed on the NYSE American stock exchange, which will consider delisting a company’s securities if, among other things, a company fails to maintain minimum stockholder's equity.  With the Company’s existing cash reserves, we believe we will not be able to maintain our listing on the NYSE American unless we raise capital in the next three months assuming we maintain our projected budgeted expenses and contemplated level of revenues. 

Other Commitments and Contingencies

The Company presented its other commitments and contingencies in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017. There have been no material changes outside of the ordinary course of business in those obligations during the quarter ended March 31, 2018 other than those previously disclosed in Note 8 to the interim financial statements contained in this Form 10-Q.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as revenue and expenses during the reporting periods. The Company evaluates its estimates and judgments on an ongoing basis. The Company bases its estimates on historical experience and on various other factors the Company believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. Actual results could therefore differ materially from those estimates if actual conditions differ from our assumptions.

During the quarter ended March 31, 2018, there have been no changes to the critical accounting policies and estimates, as discussed in Part II, Item 7 of our Form 10-K for the year ended June 30, 2017.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to the disclosure in the “Quantitative and Qualitative Disclosures about Market Risk Factors” section of our Annual Report on Form 10-K for the year ended June 30, 2017.

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the design and operation of our disclosure controls and procedures, as such term is defined under Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of March 31, 2018. Based on that evaluation, our principal executive officer and our principal financial officer concluded that the design and operation of our disclosure controls and procedures were effective. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, management believes that our system of disclosure controls and procedures is designed to provide a reasonable level of assurance that the objectives of the system will be met.

17

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

The Company is not involved in any material legal proceedings as of the date of this Report.

ITEM 1A – RISK FACTORS

A description of the risk factors associated with our business is included under “Risk Factors” contained in Part I, Item 1A of our Form 10-K for the year ended June 30, 2017, and is incorporated herein by reference. There have been no material changes in our risk factors since such filing, except for the following:

We Rely Heavily On Five Customers

For the nine months ended March 31, 2018, approximately 46% of the Company’s revenues were dependent on five customers with approximately 24% being generated by one group of customers. The loss of any of these customers would have a material adverse effect on the Company’s revenues which may not be replaced by other customers particularly as these customers are in the prostate sector which is facing substantial competition from other treatments.

We Will Need Additional Capital In The Next Three Months To Maintain Our NYSE American Listing And For Acquisitions And Expansion Into Other Markets. 

Our common stock is currently listed on the NYSE American stock exchange which will consider delisting a company’s securities if, among other things, a company fails to maintain minimum stockholder's equity. With our existing cash reserves we believe we will not be able to maintain our listing on the NYSE American unless we raise capital in the next three months assuming we maintain our projected budgeted expenses and contemplated level of revenues. In the event that our common stock is delisted from the NYSE American, trading, if any, in the common stock would be conducted in the over-the-counter market. As a result, our shareholders would likely find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our common stock. We may also need to raise capital for strategic acquisitions or expansion into other markets and there is no assurance management will not pursue this additional capital if available.

18

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 - MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 – OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibits:
10.1	Manufacturing and Supply Agreement, dated January 3, 2018, between IsoRay Medical, Inc. and GT Medical Technologies, Inc., incorporated by reference to Exhibit 10.1 of the Form 8-K filed on January 8, 2018.
10.2	Collaborative Development Agreement, dated effective as of March 13, 2017, between IsoRay Medical, Inc. and GammaTile, LLC, incorporated by reference to Exhibit 10.2 of the Form 8-K filed on January 8, 2018.
31.1*	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
31.2*	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32**	Section 1350 Certifications
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith.

** Furnished herewith

19

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: May 4, 2018
	ISORAY, INC., a Minnesota corporation
	/s/ Thomas C. LaVoy
	Thomas C. LaVoy
	Chief Executive Officer (Principal Executive Officer)
	/s/ Mark J. Austin
	Mark J. Austin
	Controller (Principal Financial and Accounting Officer)

20

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Thomas C. LaVoy, certify that:

1. I have reviewed this quarterly report on Form 10-Q of IsoRay, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 4, 2018          

/s/ Thomas C. LaVoy

Thomas C. LaVoy

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Mark J. Austin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of IsoRay, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 4, 2018          

/s/ Mark J. Austin

Mark J. Austin

Controller

(Principal Financial and Accounting Officer)

EX-32

Exhibit 32

Section 1350 Certifications

Pursuant to 18 U.S.C. § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of IsoRay, Inc., a Minnesota corporation (the "Company"), hereby certify that:

To my knowledge, the Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2018 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: May 4, 2018
	/s/ Thomas C. LaVoy
	Thomas C. LaVoy
	Chief Executive Officer (Principal Executive Officer)
	/s/ Mark J. Austin
	Mark J. Austin
	Controller (Principal Financial and Accounting Officer)

XML

Document And Entity Information - shares	9 Months Ended
	Mar. 31, 2018	May 02, 2018
Document Information [Line Items]
Entity Registrant Name	IsoRay, Inc.
Entity Central Index Key	0000728387
Trading Symbol	isr
Current Fiscal Year End Date	--06-30
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		55,100,229
Document Type	10-Q
Document Period End Date	Mar. 31, 2018
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q3
Amendment Flag	false

XML

Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Mar. 31, 2018	Jun. 30, 2017
Current assets:
Cash and cash equivalents	$ 2,365	$ 5,932
Certificates of deposit (Note 3)	2,150	3,039
Accounts receivable, net of allowance for doubtful accounts of $26 and $26, respectively	970	726
Inventory	458	323
Prepaid expenses and other current assets	382	271
Total current assets	6,325	10,291
Property and equipment, net	1,229	1,054
Restricted cash	181	181
Inventory, non-current	395	513
Other assets, net of accumulated amortization	192	230
Total assets	8,322	12,269
Current liabilities:
Accounts payable and accrued expenses	773	630
Accrued protocol expense	77	75
Accrued radioactive waste disposal	28	125
Accrued payroll and related taxes	105	138
Accrued vacation	140	138
Total current liabilities	1,123	1,106
Long-term liabilities:
Asset retirement obligation	583	561
Total liabilities	1,706	1,667
Commitments and contingencies (Note 8)
Shareholders' equity:
Common stock, $.001 par value; 192,998,329 shares authorized; 55,100,229 and 55,017,419 shares issued and outstanding	55	55
Additional paid-in capital	83,507	83,151
Accumulated deficit	(76,946)	(72,604)
Total shareholders' equity	6,616	10,602
Total liabilities and shareholders' equity	8,322	12,269
Series A Preferred Stock [Member]
Shareholders' equity:
Preferred stock, value, issued	0	0
Series B Preferred Stock [Member]
Shareholders' equity:
Preferred stock, value, issued	0	0
Series C Preferred Stock [Member]
Shareholders' equity:
Preferred stock, value, issued	0	0
Series D Preferred Stock [Member]
Shareholders' equity:
Preferred stock, value, issued	$ 0	$ 0

XML

Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) $ in Thousands	Mar. 31, 2018	Jun. 30, 2017
Allowance for doubtful accounts receivable, current	$ 26	$ 26
Preferred stock, shares authorized (in shares)	7,001,671	7,001,671
Preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized (in shares)	192,998,329	192,998,329
Common stock, shares issued (in shares)	55,100,229	55,017,419
Common stock, shares outstanding (in shares)	55,100,229	55,017,419
Series A Preferred Stock [Member]
Preferred stock, shares authorized (in shares)	1,000,000	1,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Series B Preferred Stock [Member]
Preferred stock, shares authorized (in shares)	5,000,000	5,000,000
Preferred stock, shares issued (in shares)	59,065	59,065
Preferred stock, shares outstanding (in shares)	59,065	59,065
Series C Preferred Stock [Member]
Preferred stock, shares authorized (in shares)	1,000,000	1,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Series D Preferred Stock [Member]
Preferred stock, shares authorized (in shares)	1,671	1,671
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0

XML

Consolidated Statements of Operations (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2018	Mar. 31, 2017	Mar. 31, 2018	Mar. 31, 2017
Product sales, net	$ 1,573	$ 1,282	$ 4,320	$ 3,391
Cost of product sales	964	989	2,915	3,051
Gross profit	609	293	1,405	340
Research and development
Proprietary research and development	317	166	914	488
Collaboration arrangement, net of reimbursement (Note 8)	156	161	260	161
Total research and development	473	327	1,174	649
Sales and marketing	692	530	1,980	1,550
General and administrative	783	825	2,610	2,632
Change in estimate of asset retirement obligation				(48)
Total operating expenses	1,948	1,682	5,764	4,783
Operating loss	(1,339)	(1,389)	(4,359)	(4,443)
Non-operating income:
Interest income, net	7	29	17	89
Change in fair value of warrant derivative liability				27
Other income				20
Non-operating income, net	7	29	17	136
Net loss	(1,332)	(1,360)	(4,342)	(4,307)
Preferred stock dividends	(3)	(3)	(8)	(8)
Net loss applicable to common shareholders	$ (1,335)	$ (1,363)	$ (4,350)	$ (4,315)
Basic and diluted loss per share (in dollars per share)	$ (0.02)	$ (0.02)	$ (0.08)	$ (0.08)
Weighted average shares used in computing net loss per share:
Basic and diluted (in shares)	55,100	55,017	55,058	55,015

XML

Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$ (4,342)	$ (4,307)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation expense	56	50
Loss on equipment disposals		5
Amortization of other assets	37	35
Change in fair value of warrant derivative liability		(27)
Accretion of asset retirement obligation	22	22
Change in estimate of asset retirement obligation		(48)
Share-based compensation	317	162
Changes in operating assets and liabilities:
Accounts receivable, gross	(250)	(249)
Inventory	(16)	54
Prepaid expenses and other current assets	(58)	(44)
Accounts payable and accrued expenses	96	(104)
Accrued protocol expense	2	(38)
Accrued radioactive waste disposal	(97)	26
Accrued payroll and related taxes	(33)	(47)
Accrued vacation	2	11
Net cash used by operating activities	(4,264)	(4,499)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment	(231)	(293)
Additions to other assets		(151)
Proceeds from maturity of certificates of deposit	4,943
Purchases of and interest from certificates of deposit	(4,054)	(87)
Net cash provided (used) by investing activities	658	(531)
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred dividends paid	(11)	(11)
Proceeds from sales of common stock, pursuant to exercise of options	50	2
Net cash provided (used) by financing activities	39	(9)
Net decrease in cash and cash equivalents	(3,567)	(5,039)
Cash and cash equivalents, beginning of period	5,932	10,139
CASH AND CASH EQUIVALENTS, END OF PERIOD	2,365	5,100
Non-cash investing and financing activities:
Land acquired with accounts payable		$ 198

XML

Note 1 - Basis of Presentation

9 Months Ended

Mar. 31, 2018

Notes to Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Text Block]

1. Basis of Presentation

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

10

-K for the year ended

June 30, 2017.

The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures are adequate for the information

not

to be misleading.

Certain prior period amounts have been reclassified to conform to the current period’s presentation. The results of operations for the periods presented

may

not

be indicative of those which

may

be expected for a full year.  The Company anticipates that as the result of continuing operating losses and the significant net operating losses available from prior fiscal years, its effective income tax rate for fiscal year

2018

will be

0%.

XML

Note 2 - New Accounting Pronouncements

9 Months Ended

Mar. 31, 2018

Notes to Financial Statements

Description of New Accounting Pronouncements Not yet Adopted [Text Block]

2. New Accounting Pronouncements

In

May 2014,

the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)

No.

2014

-

09

  Revenue Recognition, replacing guidance currently codified in Subtopic

605

-

10

Revenue Recognition-Overall with various SEC Staff Accounting Bulletins providing interpretive guidance. The guidance establishes a new

five

step principle-based framework in an effort to significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The standard will be effective for the Company in the

first

quarter of its fiscal year

2019,

but early adoption is permitted starting in the

first

quarter of fiscal year

2018.

The Company intends to adopt the new standard in the

first

quarter of fiscal year

2019

and expects to use the modified retrospective method. The Company has evaluated the impact of the future adoption of ASU 

2014

-

09

 on its consolidated financial statements and does

not

currently expect significant changes in the timing of revenue recognition compared to the existing methodology. 

In

July 2015,

the FASB issued ASU

No.

2015

-

11:

Inventory. The guidance requires an entity’s management to measure inventory within the scope of this ASU at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2016.

Early application is permitted. The ASU became effective for the Company on

July 1, 2017.

This update did

not

have a material impact on the Company’s consolidated financial statements upon adoption.

In

November 2015,

the FASB issued an ASU

2015

-

17

to simplify the balance sheet classification of deferred taxes. This update requires all deferred tax assets and liabilities to be reported as non-current in the consolidated balance sheets. The ASU became effective for the Company on

July 1, 2017.

This update did

not

to have a material impact on the Company’s consolidated financial statements upon adoption.

In

February 2016,

the FASB issued ASU

2016

-

02

Leases (Subtopic

842

), which will require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by most leases. The update is effective for annual and interim reporting periods beginning after

December 15, 2018.

Early adoption is permitted. The ASU will be effective for the Company in the

first

quarter of fiscal year

2020.

We are currently evaluating the impact of the guidance on the Company’s consolidated financial statements.

In

August 2016,

the FASB issued ASU

No.

2016

-

15

Statement of Cash Flows (Topic

230

): Classification of Certain Cash Receipts and Cash Payments. The update provides guidance on classification for cash receipts and payments related to

eight

specific issues. The update is effective for fiscal years beginning after

December 15, 2017,

and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of implementing this update on the consolidated financial statements.

Other accounting standards that have been issued or proposed by FASB that do

not

require adoption until a future date are

not

expected to have a material impact on the consolidated financial statements upon adoption. The Company does

not

discuss recent pronouncements that are

not

anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

XML

Note 3 - Certificates of Deposit

9 Months Ended

Mar. 31, 2018

Notes to Financial Statements

Cost-method Investments, Description [Text Block]

3. Certificates of Deposit

Certificate of Deposit Account Registry Service (CDARS) is a system that allows the Company to invest in certificates of deposit through a single financial institution that exceed the

$250,000

limit to be fully insured by the Federal Deposit Insurance Corporation (FDIC). That institution utilizes the CDARS system to purchase certificates of deposit at other financial institutions while keeping the investment at each institution fully insured by the FDIC. CDARS held by the Company as of

March 31, 2018

and

June 30, 2017

are as follows (in thousands):

	As of March 31, 2018
	Under 90		91 days to		Six months to		Greater
	Days		six months		1 year		than 1 year
CDARS	$	1,325	$	825	$	-	$	-

	As of June 30, 2017
	Under 90		91 days to		Six months to		Greater
	Days		six months		1 year		than 1 year
CDARS	$	3,039	$	-	$	-	$	-

XML

Note 4 - Loss Per Share

9 Months Ended

Mar. 31, 2018

Notes to Financial Statements

Earnings Per Share [Text Block]

4. Loss per Share

Basic and diluted earnings (loss) per share are calculated by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding, and does

not

include the impact of any potentially dilutive common stock equivalents. At

March 31, 2018

and

2017,

the calculation of diluted weighted average shares did

not

include convertible preferred stock, common stock warrants, or options that are potentially convertible into common stock as those would be antidilutive due to the Company’s net loss position.

Securities

not

considered in the calculation of diluted weighted average shares, but that could be dilutive in the future as of

March 31, 2018

and

2017,

were as follows (in thousands):

	March 31,
	2018		2017
Series B preferred stock		59		59
Common stock warrants		250		5
Common stock options		3,272		2,456
Total potential dilutive securities		3,581		2,520

XML

Note 5 - Inventory

9 Months Ended

Mar. 31, 2018

Notes to Financial Statements

Inventory Disclosure [Text Block]

5. Inventory

Inventory consisted of the following at

March 31, 2018

and

June 30, 2017 (

in thousands):

	March 31,		June 30,
	2018		2017
Raw materials	$	287	$	191
Work in process		153		121
Finished goods		18		11
Total inventory, current	$	458	$	323

	March 31,		June 30,
	2018		2017
Enriched barium, non-current	$	347	$	470
Raw materials, non-current		48		43
Total inventory, non-current	$	395	$	513

Inventory, non-current is raw materials that were ordered in quantities to obtain volume cost discounts which based on current and anticipated sales volumes will

not

be consumed within an operating cycle.

On

August 25, 2017,

the Company entered into a Consignment Agreement and related Services Agreement with MedikorPharma-Ural LLC to begin utilizing our enriched barium-

130

carbonate inventory beginning in

November 2017.

The Company anticipates obtaining enough Cesium-

131

under this arrangement to obtain over

4,000

curies of Cesium-

131

over a

ten

-year period but there is

no

assurance as to whether the agreements will be terminated before this full amount is obtained and other supply sources are used, nor is there assurance that the agreements with the

third

-party Cesium-

131

suppliers will be executed.

XML

Note 6 - Property and Equipment

9 Months Ended

Mar. 31, 2018

Notes to Financial Statements

Property, Plant and Equipment Disclosure [Text Block]

6. Property and Equipment

Property and equipment consisted of the following at

March 31, 2018

and

June 30, 2017 (

in thousands):

	March 31,			June 30,
	2018			2017
Land	$	366		$	366
Equipment		3,806			3,776
Leasehold improvements		4,136			4,130
Other 1		568			373
Property and equipment		8,876			8,645
Less accumulated depreciation		(7,647	)		(7,591	)
Property and equipment, net	$	1,229		$	1,054

1

– Represents items that meet the capitalization threshold or which management believes will meet the threshold at the time of completion and which have yet to be placed into service as of the date of the balance sheet. Also included at

March 31, 2018

and

June 30, 2017

are costs associated with automation of production processes and advance planning and design work on the Company’s new production facility.

XML

Note 7 - Share-based Compensation

9 Months Ended

Mar. 31, 2018

Notes to Financial Statements

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

7. Share-Based Compensation

The following table presents the share-based compensation expense recognized for stock-based options during the

three

months ended

March 31, 2018

and

2017

(in thousands): 

	Three Months ended March 31,
	2018		2017
Cost of product sales	$	10	$	15
Research and development expenses		20		13
Sales and marketing expenses		17		9
General and administrative expenses		30		3
Total share-based compensation	$	77	$	40

The following table presents the share-based compensation expense recognized for stock-based options during the

nine

months ended

March 31, 2018

and

2017

(in thousands): 

	Nine Months ended March 31,
	2018		2017
Cost of product sales	$	40	$	59
Research and development expenses		58		28
Sales and marketing expenses		50		35
General and administrative expenses		97		40
Total share-based compensation	$	245	$	162

As of

March 31, 2018,

total unrecognized compensation expense related to stock-based options was approximately

$622,000

and the related weighted-average period over which it is expected to be recognized is approximately

1.16

years.

A summary of stock options within the Company’s share-based compensation plans as of

March 31, 2018

was as follows (in thousands except for exercise prices and terms):

					Weighted
			Weighted		Average
	Number of		Exercise		Contractual		Intrinsic
As of March 31, 2018	Options		Price		Term (Years)		Value
Outstanding		3,272	$	.76		7.14	$	41
Vested and expected to vest		3,172	$	.76		7.08	$	41
Vested and exercisable		1,742	$	.91		5.25	$	41

There were

no

stock options exercised during the

three

months ended

March 31, 2018

and

2017,

respectively. The Company’s current policy is to issue new shares to satisfy stock option exercises.

There were

15,000

and

10,000

option awards granted with a fair value of approximately

$5,000

and

$4,000

during the

three

months ended

March 31, 2018

and

2017,

respectively.

There were

no

and

22,500

stock option awards which expired during the

three

months ended

March 31, 2018

and

2017,

respectively.

There were

37,500

and

96,432

stock option awards forfeited during the

three

months ended

March 31, 2018

and

2017,

respectively.

There were

82,810

and

6,800

stock options exercised, with approximately

nil

and

$3,000

of intrinsic value associated with these exercises during the

nine

months ended

March 31, 2018

and

2017,

respectively. The Company’s current policy is to issue new shares to satisfy stock option exercises.

There were 

90,000

and

20,000

option awards granted with a fair value of approximately

$38,000

and

$7,700

during the

nine

months ended

March 31, 2018

and

2017,

respectively.

There were

no

 and

303,034

stock option awards which expired during the

nine

months ended

March 31, 2018

and

2017,

respectively.

There were

114,041

and

179,437

stock option awards forfeited during the

nine

months ended

March 31, 2018

and

2017,

respectively.

XML

Note 8 - Commitments and Contingencies

9 Months Ended

Mar. 31, 2018

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

8. Commitments and Contingencies

Isotope Purchase Agreement

 

In

December 2015,

the Company completed negotiations with The Open Joint Stock Company (located in Russia) for the purchase of Cesium-

131

manufactured by the Institute of Nuclear Materials. The purchase agreement provided the Company with

one

year’s supply of Cesium-

131.

The original agreement was due to expire on

March 31, 2017,

but in

December 2016

an addendum was signed extending it until

December 31, 2017.

On

October 23, 2017,

the Company, together with The Open Joint Stock Company signed an addendum to the contract to include Cesium-

131

manufactured at the Research Institute of Atomic Reactors ("SSC RIAR") and extended it until

December 31, 2018.

Research and Development - Collaborative Arrangement

On

March 13, 2017,

IsoRay Medical, Inc. (Medical) entered into a Collaborative Development Agreement (CDA) with GammaTile, LLC to further develop a brachytherapy medical device for the treatment of cancerous tumors in the brain and to seek regulatory approval for the new product. As the project manager, Medical will incur all costs in connection with the collaboration project which has been shared equally by both parties as of

November 8, 2016

when they informally began the collaboration. As of

March 31, 2018,

the collaboration is ongoing and we expect it to continue through our fiscal

2018

fourth

quarter.  In accordance with ASC

808

“Collaborative Arrangements”, this activity is accounted for as a collaborative arrangement and related costs are incurred, shared, and separately stated in connection with a collaborative research and development project. These costs are reported on the financial statements under “Research and development: Collaboration arrangements, net of reimbursement.”  The Company collaborated with GammaTile LLC in filing applications to the U.S. Food and Drug Administration (FDA) to clear GammaTile™ for clinical use, and a New Technology Add-on Payment (NTAP) to the Center for Medicare and Medicaid Services (CMS) seeking re-imbursement for the GammaTile™ treatment in the in-patient setting.  The application with the FDA is ongoing, however, the NTAP was filed in

October 2017. 

During the

three

months ended

March 31, 2018

and

2017,

costs incurred in connection with the CDA were

$304,000

and

$322,000,

respectively.

During the

nine

months ended

March 31, 2018

and

2017,

costs incurred in connection with the CDA were

$509,000

and

$322,000,

respectively.

As of

March 31, 2018

and

June 30, 2017,

the Company had outstanding receivables from GammaTile LLC of 

$73,000

and

$66,000

respectively. These amounts are included in the Prepaid expenses and other current assets on the consolidated balance sheet.

Derivative Complaint related to Shareholder Value

On

September 29, 2016,

David M. Kitley, purportedly on behalf of IsoRay, filed a derivative lawsuit in the United States District Court for the District of Minnesota under the case caption Kitley v. IsoRay, Inc., Case

No.

0:16

-cv-

03297

-DTS. The complaint named as defendants current and former IsoRay directors Dwight Babcock, Thomas LaVoy, Philip J. Vitale and Michael W. McCormick, alleging that they violated their fiduciary duties to IsoRay in connection with a press release allegedly containing false and misleading statements concerning the results from a peer reviewed study of its Cesium-

131

isotope seeds for the treatment of non-small cell lung cancers, thereby artificially inflating the price of IsoRay stock. The complaint sought unspecified damages, in an amount

not

presently determinable, among other forms of relief.

On

November 17, 2016,

IsoRay moved to dismiss the complaint, arguing that plaintiff was

not

entitled to pursue his derivative claims due to his failure to serve a pre-suit demand on IsoRay’s board. Rather than respond to the motion to dismiss, plaintiff filed an amended complaint on

January 23, 2017.

The amended complaint alleged the same derivative claims as the original, and added IsoRay director Alan Hoffmann as a defendant. Plaintiff sought an award of damages and an order directing IsoRay to undertake reforms of its corporate governance and internal procedures. IsoRay moved to dismiss the amended complaint on

March 9, 2017.

Plaintiff responded on

April 20, 2017,

and IsoRay replied on

May 17, 2017.

The court heard oral argument on the motion on

August 22, 2017,

and took the matter under advisement at that time. On

October 19, 2017,

the court granted IsoRay’s motion to dismiss.  The matter is now resolved.

Media Advertising Agreement

On

October 3, 2017,

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

Pursuant to the Agreement, Al & J was to introduce IsoRay to potential sources of media, marketing agreements, and/or strategic alliances, including but

not

limited to radio and television media advertising, various media publications, and Internet podcasts. Al & J did

not

promote IsoRay as part of the Agreement; it acted only as a media agent for advertising.

On 

December 29, 2017,

IsoRay notified Al&J of its decision to terminate the Agreement between the parties because Al & J's services were

no

longer needed.

As compensation for the services provided prior to termination, IsoRay paid Al & J 

$60,000

and issued Al & J 

250,000

warrants upon execution of the Agreement, which vested immediately, entitling Al & J to purchase shares of IsoRay common stock, exercisable on or before

October 3, 2020,

at an exercise price of

$0.54

per share. See Note

12.

XML

Note 9 - Fair Value Measurements

9 Months Ended

Mar. 31, 2018

Notes to Financial Statements

Fair Value Disclosures [Text Block]

9. Fair Value Measurements

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

	Fair Value at March 31, 2018
	Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	2,365	$	2,365	$	-	$	-

	Fair Value at June 30, 2017
	Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	5,932	$	5,932	$	-	$	-

The Company’s cash and cash equivalent instruments are classified within Level

1

of the fair value hierarchy because they are valued using quoted market prices.

XML

Note 10 - Related Party Transactions

9 Months Ended

Mar. 31, 2018

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

10. Related Party Transactions

During the quarter ended

June 30, 2016,

the Company engaged GO Intellectual Capital, LLC (GO) for marketing services in support of the Company’s rebranding effort. Michael McCormick, a member of the Company Board of Directors, is a

1/3

owner of GO. A statement of work was developed defining the scope of the effort and the deliverables to the Company which included a new logo with brand messaging and communication tools including a website, sales presentation tools and a public relations strategy. For the

nine

months ended

March 31, 2017,

the Company paid approximately

$20,000

to GO for its performance of work related to the agreed upon statement of work.

No

such services were provided in the

nine

months ended

March 31, 2018.

XML

Note 11 - Concentrations of Credit and Other Risks

9 Months Ended

Mar. 31, 2018

Notes to Financial Statements

Concentration Risk Disclosure [Text Block]

11. Concentrations of Credit and Other Risks

One group of customers, facilities or physician practices has revenues that aggregate to greater than

10%

of total Company product sales:

	Nine months ended
	March 31,			March 31,
Facility	2018			2017
El Camino Hospital of Los Gatos, Fremont Surgery Center & other facilities 1		24.23	%		22.76	%

1

– This group of facilities individually each comprise less than

10%

of total Company product sales. They are serviced by the same physician group,

one

of whom is our Medical Director.

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

XML

Note 12 - Shareholders' Equity

9 Months Ended

Mar. 31, 2018

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

1 2 . Shareholders’ Equity

Warrants

On

October 3, 2017,

the Company entered into a Media Advertising Agreement with Al & J Media Inc. (“Al & J”). As part of the compensation for the services, Al & J received

250,000

warrants upon execution of the Agreement, which vested immediately, entitling Al & J to purchase shares of IsoRay common stock, exercisable on or before

October 3, 2020,

at an exercise price of

$0.54

each. These warrants, using the Black-Scholes model, resulted in approximately

$72,000

of share based compensation during the

nine

months ended

March 31, 2018.

On

December 29, 2017,

the Company notified Al & J of its decision to terminate the Media Advertising Agreement.

The key assumptions used in the Black-Scholes valuation model to calculate the fair value of the warrants are as follows:

	October 3,
	2017
Grant date fair value	$	0.2874
Options issued		250,000
Exercise price	$	0.54
Expected term (in years)		3
Risk-free rate		1.62	%
Volatility		81.66	%

The following table summarizes all warrants outstanding as of the beginning of the fiscal year, all activity related to warrants issued, cancelled, exercised or expired during the period and weighted average prices by category.

			Weighted average
	Warrants		exercise price
Outstanding as of June 30, 2017		-	$	-
Warrants issued		250,000	$	0.54
Outstanding as of March 31, 2018		250,000	$	0.54

The following table summarizes additional information about the Company’s common warrants outstanding as of

March 31, 2018:

Number of Warrants	Exercise Price¹		Expiration Date
250,000	$	0.54	October 2020

1

– Exercise prices have been rounded to the nearest whole cent.

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Note 3 - Certificates of Deposit (Tables)

9 Months Ended

Mar. 31, 2018

Notes Tables

Schedule of Cost Method Investments [Table Text Block]

	As of March 31, 2018
	Under 90		91 days to		Six months to		Greater
	Days		six months		1 year		than 1 year
CDARS	$	1,325	$	825	$	-	$	-

	As of June 30, 2017
	Under 90		91 days to		Six months to		Greater
	Days		six months		1 year		than 1 year
CDARS	$	3,039	$	-	$	-	$	-

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Note 4 - Loss Per Share (Tables)

9 Months Ended

Mar. 31, 2018

Notes Tables

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share [Table Text Block]

	March 31,
	2018		2017
Series B preferred stock		59		59
Common stock warrants		250		5
Common stock options		3,272		2,456
Total potential dilutive securities		3,581		2,520

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Note 5 - Inventory (Tables)

9 Months Ended

Mar. 31, 2018

Notes Tables

Schedule of Inventory, Current [Table Text Block]

	March 31,		June 30,
	2018		2017
Raw materials	$	287	$	191
Work in process		153		121
Finished goods		18		11
Total inventory, current	$	458	$	323

Schedule of Inventory, Noncurrent [Table Text Block]

	March 31,		June 30,
	2018		2017
Enriched barium, non-current	$	347	$	470
Raw materials, non-current		48		43
Total inventory, non-current	$	395	$	513

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Note 6 - Property and Equipment (Tables)

9 Months Ended

Mar. 31, 2018

Notes Tables

Property, Plant and Equipment [Table Text Block]

	March 31,			June 30,
	2018			2017
Land	$	366		$	366
Equipment		3,806			3,776
Leasehold improvements		4,136			4,130
Other 1		568			373
Property and equipment		8,876			8,645
Less accumulated depreciation		(7,647	)		(7,591	)
Property and equipment, net	$	1,229		$	1,054

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Note 7 - Share-based Compensation (Tables)

9 Months Ended

Mar. 31, 2018

Notes Tables

Schedule of Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Table Text Block]

	Three Months ended March 31,
	2018		2017
Cost of product sales	$	10	$	15
Research and development expenses		20		13
Sales and marketing expenses		17		9
General and administrative expenses		30		3
Total share-based compensation	$	77	$	40

	Nine Months ended March 31,
	2018		2017
Cost of product sales	$	40	$	59
Research and development expenses		58		28
Sales and marketing expenses		50		35
General and administrative expenses		97		40
Total share-based compensation	$	245	$	162

Share-based Compensation Arrangements by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding [Table Text Block]

					Weighted
			Weighted		Average
	Number of		Exercise		Contractual		Intrinsic
As of March 31, 2018	Options		Price		Term (Years)		Value
Outstanding		3,272	$	.76		7.14	$	41
Vested and expected to vest		3,172	$	.76		7.08	$	41
Vested and exercisable		1,742	$	.91		5.25	$	41

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Note 9 - Fair Value Measurements (Tables)

9 Months Ended

Mar. 31, 2018

Notes Tables

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis [Table Text Block]

	Fair Value at March 31, 2018
	Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	2,365	$	2,365	$	-	$	-

	Fair Value at June 30, 2017
	Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	5,932	$	5,932	$	-	$	-

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Note 11 - Concentrations of Credit and Other Risks (Tables)

9 Months Ended

Mar. 31, 2018

Notes Tables

Schedules of Concentration of Risk, by Risk Factor [Table Text Block]

	Nine months ended
	March 31,			March 31,
Facility	2018			2017
El Camino Hospital of Los Gatos, Fremont Surgery Center & other facilities 1		24.23	%		22.76	%

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Note 12 - Shareholders' Equity (Tables)

9 Months Ended

Mar. 31, 2018

Notes Tables

Schedule of Share-based Payment Award, Warrants, Valuation Assumptions [Table Text Block]

	October 3,
	2017
Grant date fair value	$	0.2874
Options issued		250,000
Exercise price	$	0.54
Expected term (in years)		3
Risk-free rate		1.62	%
Volatility		81.66	%

Schedule of Stockholders' Equity Note, Warrants or Rights [Table Text Block]

			Weighted average
	Warrants		exercise price
Outstanding as of June 30, 2017		-	$	-
Warrants issued		250,000	$	0.54
Outstanding as of March 31, 2018		250,000	$	0.54

Schedule of Stockholders Equity Note Warrants or Rights By Exercise Price Range [Table Text Block]

Number of Warrants	Exercise Price¹		Expiration Date
250,000	$	0.54	October 2020

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Note 1 - Basis of Presentation (Details Textual)	9 Months Ended
	Mar. 31, 2018
Effective Income Tax Rate Reconciliation, Percent, Total	0.00%

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Note 3 - Certificates of Deposit - Summary of Certificates of Deposit (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Jun. 30, 2017
Under 90 Days [Member]
CDARS	$ 1,325	$ 3,039
For 91 Days to Six Months [Member]
CDARS	825
Six Months to 1 Year [Member]
CDARS
Greater than 1 Year [Member]
CDARS

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Note 4 - Loss Per Share - Antidilutive Securities (Details) - shares shares in Thousands	9 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Antidilutive securities (in shares)	3,581	2,520
Series B Preferred Stock [Member]
Antidilutive securities (in shares)	59	59
Warrant [Member]
Antidilutive securities (in shares)	250	5
Employee Stock Option [Member]
Antidilutive securities (in shares)	3,272	2,456

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Note 5 - Inventory - Current Inventory (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Jun. 30, 2017
Raw materials	$ 287	$ 191
Work in process	153	121
Finished goods	18	11
Total inventory, current	$ 458	$ 323

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Note 5 - Inventory - Noncurrent Inventory (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Jun. 30, 2017
Total inventory, non-current	$ 395	$ 513
Enriched Barium Inventory [Member]
Total inventory, non-current	347	470
Raw Materials [Member]
Total inventory, non-current	$ 48	$ 43

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Note 6 - Property and Equipment - Summary of Property and Equipment (Details) - USD ($) $ in Thousands		Mar. 31, 2018	Jun. 30, 2017
Property and equipment, gross		$ 8,876	$ 8,645
Less accumulated depreciation		(7,647)	(7,591)
Property and equipment, net		1,229	1,054
Land [Member]
Property and equipment, gross		366	366
Equipment [Member]
Property and equipment, gross		3,806	3,776
Leasehold Improvements [Member]
Property and equipment, gross		4,136	4,130
Other [Member]
Property and equipment, gross	[1]	$ 568	$ 373

[1] Represents items that meet the capitalization threshold or which management believes will meet the threshold at the time of completion and which have yet to be placed into service as of the date of the balance sheet. Also included at March 31, 2018 and June 30, 2017 are costs associated with automation of production processes and advance planning and design work on the Company's new production facility.

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Note 7 - Share-based Compensation (Details Textual) - USD ($)	3 Months Ended		9 Months Ended
	Mar. 31, 2018	Mar. 31, 2017	Mar. 31, 2018	Mar. 31, 2017
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Total	$ 622,000		$ 622,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition			1 year 58 days
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period	0	0	82,810	6,800
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross	15,000	10,000	90,000	20,000
Share-based Compensation Arrangement By Share-based Payment Award Options Grants in Period Fair Value	$ 5,000	$ 4,000	$ 38,000	$ 7,700
Share-based Compensation Arrangement by Share-based Payment Award, Options, Expirations in Period	0	22,500	0	303,034
Share-based Compensation Arrangement by Share-based Payment Award, Options, Forfeitures in Period	37,500	96,432	114,041	179,437
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period, Intrinsic Value			$ 0	$ 3,000

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Note 7 - Share-based Compensation - Share-based Compensation Expense (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2018	Mar. 31, 2017	Mar. 31, 2018	Mar. 31, 2017
Total share-based compensation	$ 77	$ 40	$ 245	$ 162
Cost of Sales [Member]
Total share-based compensation	10	15	40	59
Research and Development Expense [Member]
Total share-based compensation	20	13	58	28
Selling and Marketing Expense [Member]
Total share-based compensation	17	9	50	35
General and Administrative Expense [Member]
Total share-based compensation	$ 30	$ 3	$ 97	$ 40

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Note 7 - Share-based Compensation - Summary of Stock Options (Details) $ / shares in Units, shares in Thousands, $ in Thousands	9 Months Ended
	Mar. 31, 2018 USD ($) $ / shares shares
Outstanding, options (in shares) | shares	3,272
Outstanding, weighted average exercise price (in dollars per share) | $ / shares	$ 0.76
Outstanding, weighted average contractual term (Year)	7 years 51 days
Outstanding, intrinsic value | $	$ 41
Vested and expected to vest, options (in shares) | shares	3,172
Vested and expected to vest, weighted average exercise price (in dollars per share) | $ / shares	$ 0.76
Vested and expected to vest, weighted average contractual term (Year)	7 years 29 days
Vested and expected to vest, intrinsic value | $	$ 41
Vested and exercisable, options (in shares) | shares	1,742
Vested and exercisable, weighted average exercise price (in dollars per share) | $ / shares	$ 0.91
Vested and exercisable, weighted average contractual term (Year)	5 years 91 days
Vested and exercisable, intrinsic value | $	$ 41

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Note 8 - Commitments and Contingencies (Details Textual) - USD ($)		3 Months Ended			9 Months Ended
	Oct. 03, 2017	Mar. 31, 2018		Mar. 31, 2017	Mar. 31, 2018		Mar. 31, 2017	Jun. 30, 2017
Research and Development Expense, Total		$ 473,000		$ 327,000	$ 1,174,000		$ 649,000
Receivables, Net, Current, Total		$ 970,000			$ 970,000			$ 726,000
Class of Warrant or Right, Issued for Services					250,000
Class of Warrant or Right, Exercise Price of Warrants or Rights		$ 0.54	[1]		$ 0.54	[1]
Al & J Media [Member]
Payments for Advertising Services	$ 60,000
Class of Warrant or Right, Issued for Services	250,000
Class of Warrant or Right, Exercise Price of Warrants or Rights	$ 0.54
Collaborative Development Agreement [Member]
Research and Development Expense, Total		$ 304,000		$ 322,000	$ 509,000		$ 322,000
Collaborative Development Agreement [Member] | GammaTile LLC [Member] | Prepaid Expenses and Other Current Assets [Member]
Receivables, Net, Current, Total		$ 73,000			$ 73,000			$ 66,000

[1] Exercise prices have been rounded to the nearest whole cent.

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Note 9 - Fair Value Measurements - Assets and Liabilities Measured on a Recurring Basis (Details) - Fair Value, Measurements, Recurring [Member] - USD ($) $ in Thousands	Mar. 31, 2018	Jun. 30, 2017
Cash and cash equivalents	$ 2,365	$ 5,932
Fair Value, Inputs, Level 1 [Member]
Cash and cash equivalents	2,365	5,932
Fair Value, Inputs, Level 2 [Member]
Cash and cash equivalents
Fair Value, Inputs, Level 3 [Member]
Cash and cash equivalents

XML

Note 10 - Related Party Transactions (Details Textual) - USD ($)	9 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Go Intellectual Capital LLC [Member]
Related Party Transaction, Selling, General and Administrative Expenses from Transactions with Related Party	$ 0	$ 20,000

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Note 11 - Concentrations of Credit and Other Risks - Revenue Concentration (Details)		9 Months Ended
		Mar. 31, 2018	Mar. 31, 2017
Sales Revenue, Goods, Net [Member]
El Camino Hospital of Los Gatos, Fremont Surgery Center & other facilities	[1]	24.23%	22.76%

[1] This group of facilities individually each comprise less than 10% of total Company product sales. They are serviced by the same physician group, one of whom is our Medical Director.

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Note 12 - Shareholders' Equity (Details Textual) - USD ($)		3 Months Ended			9 Months Ended
	Oct. 03, 2017	Mar. 31, 2018		Mar. 31, 2017	Mar. 31, 2018		Mar. 31, 2017	Jun. 30, 2017
Class of Warrant or Right, Issued for Services					250,000
Class of Warrant or Right, Exercise Price of Warrants or Rights		$ 0.54	[1]		$ 0.54	[1]
Allocated Share-based Compensation Expense, Total		$ 77,000		$ 40,000	$ 245,000		$ 162,000
Warrant [Member]
Class of Warrant or Right, Issued for Services	250,000
Class of Warrant or Right, Exercise Price of Warrants or Rights	$ 0.54
Al & J Media [Member]
Class of Warrant or Right, Issued for Services	250,000
Class of Warrant or Right, Exercise Price of Warrants or Rights	$ 0.54
Al & J Media [Member] | Warrant [Member]
Allocated Share-based Compensation Expense, Total					$ 72,000

[1] Exercise prices have been rounded to the nearest whole cent.

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Note 12 - Shareholders' Equity - Fair Value Assumptions (Details) - $ / shares		9 Months Ended
	Oct. 03, 2017	Mar. 31, 2018		Jun. 30, 2017
Options issued (in shares)		250,000
Exercise Price (in dollars per share)		$ 0.54	[1]
Warrant [Member]
Grant date fair value (in dollars per share)	$ 0.2874
Options issued (in shares)	250,000
Exercise Price (in dollars per share)	$ 0.54
Expected term (in years) (Year)	3 years
Risk-free rate	1.62%
Volatility	81.66%

[1] Exercise prices have been rounded to the nearest whole cent.

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Note 12 - Shareholders' Equity - Warrant Activity (Details)	9 Months Ended
	Mar. 31, 2018 $ / shares shares
Outstanding as of June 30, 2017 (in shares) | shares
Options issued (in shares) | shares	250,000
Outstanding as of March 31, 2018 (in shares) | shares	250,000
Outstanding, as of June 30, 2017, weighted average exercise price (in dollars per share) | $ / shares
Warrants issued, weighted average exercise price (in dollars per share) | $ / shares	0.54
Outstanding, as of March 31, 2018, weighted average exercise price (in dollars per share) | $ / shares	$ 0.54	[1]

[1] Exercise prices have been rounded to the nearest whole cent.

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Note 12 - Shareholders' Equity - Warrant Information (Details) - $ / shares	Mar. 31, 2018		Jun. 30, 2017
Exercise Price (in dollars per share)	$ 0.54	[1]
Number of Warrants (in shares)	250,000

[1] Exercise prices have been rounded to the nearest whole cent.