Hello and welcome to the IsoRay's Third Quarter Fiscal 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note that this event is being recorded.

I now would like to turn the conference over to Stephanie Prince from PCG. Please go ahead, ma'am..

Thank you, Keith. Good afternoon everyone and welcome to IsoRay's third quarter fiscal 2018 earnings conference call. With me on the call today are Tom LaVoy, Chairman and CEO; Bill Cavanagh, COO and Chief Scientific Officer; and Mike Krachon, VP of Sales and Marketing. IsoRay issued its third quarter earnings press release at 4:05 p.m.

today after the market closed. For those of you who have not yet seen the release, it is available on the Investor Relations section of the Company's website at isoray.com.

Before turning the call over to management, I'd like to remind you that today’s call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These words include such as believe, expect, anticipate, plans, project, seeks, and other similar expressions that involve numerous risks and uncertainties.

The Company's actual results could differ materially from those anticipated or implied as a result of certain factors set forth in the Company's filings with the SEC. The Company undertakes no obligation to update any forward-looking statements. With that, I'd now like to turn the call over to Tom LaVoy.

Tom?.

Thank you, Stephanie, and good afternoon everyone. Welcome to IsoRay's third quarter earnings conference call. I'll begin the call with an overview of our third quarter results and discuss developments that occurred during the quarter. I'll then turn the call over to Bill Cavanagh, our Chief Scientific Officer and COO.

Bill will talk about the changes in prostate brachytherapy through the years and now its renaissance. He will address why the science is again supporting the use of brachytherapy for prostate cancer and why Cesium-131 is particularly well suited for this and other recurrent cancers.

I will then end the call with a discussion of our third quarter results, operating initiatives, and guidance before opening it up for questions. IsoRay had another great quarter. Revenue in the third quarter was up 23% over last year's third quarter.

This is the fifth consecutive quarter of increasing year-over-year sales and we're confident in the upward trend. Third quarter revenue of $1.57 million follows second quarter revenue of $1.54 million, and revenue of $1.20 million in the first quarter, and $1.37 million in the fourth quarter of fiscal 2017.

12-months trailing revenue is now $5.69 million, the highest revenue since 2008. Sales continue to be driven by increasing traction of our newest sales strategies that has resulted in expanding uses of Cesium-131 by existing and returning physicians in prostate as well as other cancers.

We've also been adding new doctors to our customer list as they go to the process of training and licensing of new facilities. This process can take from six to 12 months and we have a large and growing pipeline of prospects that are converting to Cesium-131.

We're pleased with the progress we've made over the last two years and we remain keenly focused on achieving our goals. As a reminder, IsoRay has a two-pronged growth strategy that targets the prostate brachytherapy market through investment and support for the industry, while also promoting development of new surgical applications.

We are the exclusive producer of Cesium-131 which we believe is the next-generation Isotope because Cesium-131 delivers a faster delivery of its radiation dose that other existing low dose rate isotopes, while providing a broader distribution of energy.

This delivers what we consider the goldilocks effect for treatment delivery, very quick energy with an even dose across a very targeted area. Cesium-131's unique ability to deliver a highly targeted dose of intense radiation therapy, while limiting the radiation exposure to surrounding tissue, is potentially well suited for many aggressive cancers.

For these reasons, we see Cesium-131 as a potentially disruptive alternative to the global radiation therapy market which is projected to reach $9.3 billion by the year 2024. We have a number of exciting things happening at IsoRay.

This includes the development of loading devices and other surgical aids for the prostate treatment market as well as ongoing collaborations with a growing list of institutions and an expanding number of other cancer treatments.

As some of you may remember, we have a collaborative development agreement in place with GT Medical Technologies for the joint venture of GammaTile, their proprietary delivery system for utilizing Cesium-131 to treat brain tumors. The GammaTile system uses FDA approved collagen tiles and embeds them with FDA approved Cesium-131 seeds.

Over 100 patients have already been treated with this innovative product and we signed a 10-year exclusive manufacturing agreement with GT in January of 2018. As we previously disclosed, we project potential 510(K) clearance and reimbursement approval of the GammaTile product in mid-calendar 2018.

We're optimistic that we'll receive FDA clearance although there is no guarantees. It's cleared by the FDA; GammaTile will be an important new treatment option for over 50,000 annual patients with recurrent brain tumors, a very large unmet clinical need. It will also be an important new revenue source for IsoRay beginning in fiscal 2019.

Bill is now going to discuss the market development of brachytherapy and why Cesium-131 is uniquely suited to meet market needs and poised for growth.

Bill?.

Thanks Tom. Hello everyone and I'd like to say it's very satisfying to see the hard work of the IsoRay team resulting in gains we've seen these past five quarters. It's very exciting time to be part of the team and I think the best is yet to come. Tom noted IsoRay's two-pronged strategy that we feel will bring continued growth now and in the future.

First, we're actively participating in the reinvigoration of the prostate brachytherapy treatment market and the placement of IsoRay Cesium-131 based products right into this center of this resurgence.

It may help to keep in mind that permanent implant prostate brachytherapy or seed implantation has been considered a viable approach to prostate cancer for nearly a 100 years.

The idea that low energy radiation sources could provide very high therapeutic radiation doses to the prostate, while limiting potentially damaging doses to surrounding tissues is highly appealing for cancer treatment. The problem for sometime had been in the success replacement of these seeds in the prostate.

The seed placement issue was overcome in the 1980s with the introduction of new ultrasound technology that allowed for careful placing of seeds into the prostate.

At the same time, changes were occurring in diagnostic methods including the introduction of TFA that ended up in the diagnosis of a large number of men with early stage prostate cancers who could be treated with brachytherapy.

From the 1990s through the early 2000s, the utilization of seed implants in the treatment of a new population of men with prostate cancer dramatically increased for those who chose to forego radical surgery and other treatment approaches that led to significant treatment related side effects.

Importantly, during the 1990s, researchers were able to publish what we call 10-years study on outcomes following prostate cancer treatment with the available implantable isotopes, Iodine-125 and Palladium-103. Prostate cancer grows slowly, and the long-term survival of patients with most prostate cancers is longer in general than most other cancers.

And the time required to detect the failure of treatments to control these prostate cancers is approximately 10 years. The first implant with IsoRay is Cesium-131 occurred in 2004. And therefore, IsoRay's Cesium-131 compared to other isotopes with 10-year track records was handicapped from its introduction.

In the past few years, we have witnessed the emergence of studies detailing five to eight year outcomes following Cesium-131 prostate brachytherapy from both the University of Pittsburgh and Dr. Brian Moran's Outfit at the Chicago Prostate Cancer Center.

These reported outcomes have been excellent and in line with the other long-term disease control studies reported by the competitive isotopes in the industry over the past 20 years.

The University of Pittsburgh has also specifically reported a very favorable side effect profile following Cesium-131 from prostate brachytherapy including the absence of what we call late radiation side effects.

Keep in mind that the biologic benefits of seed implants provide a continuous dose of radiation that bombards the cancer that is attempting to grow as opposed to conventional external beam radiation that divides the treatment into dozens of fractions separated into daily treatments that takes weeks to complete.

The duration of the brachytherapy dose is dependent upon the half life of the isotope. This duration can be over six months with Iodine-125 whereas it is approximately 30 days with Cesium-131.

The Pittsburgh findings suggest that the shorter duration of radiation spares Cesium patients' months of urinary side effects that might result from longer lived isotope radiation. Now, in 2018, we are confident that these same centers will be in a position to report nine and 10-year results following Cesium-131 prostate brachytherapy.

In essence, we see this reporting as leveling the playing field as Cesium-131 finally catches up with the earlier established isotopes. We feel that these publications will be significant reporting events will serve to reduce barriers to acceptance of Cesium-131 that were based on the absence of long-term data in the past.

We expect 10-year data to be released within the next year. We believe that we can leverage these potential long-term favorable outcomes Cesium-131 into an environment in which it is becoming increasingly clear that prostate brachytherapy must play a key role in the treatment of intermediate to high risk localized prostate cancers.

Data continues to materialize that strongly suggests that intermediate and high risk disease outcomes are significantly improved when using a combination therapy of brachytherapy seeds and external beam radiation therapy.

The most significant data recently published is based on the ASCENDE-RT trial which was a randomized trial that made a comparison of external beam radiation and hormonal therapy versus external beam radiation hormonal therapy and brachytherapy.

The studies major finding was that recurrence rates were significantly lower when adding brachytherapy 22% recurrence rate versus 42% recurrence rate over a nine-year period, favoring the group that received the brachytherapy implant.

We also believe that reducing the side effect profile of prostate cancer treatment in both the low risk and the high risk patient will continue to be a paramount importance to patients, to physicians, and ultimately to the healthcare system.

Towards this end, we have initiated multiple research programs that seek to deliver optimal radiation with Cesium-131, while minimizing side effects such as difficulties with the male urinary system.

In the preceding time, while we have waited for long-term follow-up of these prostate cancer series, we've been able to collaborate with oncologists who have directed Cesium-131 brachytherapy against more aggressive cancers that cause serious problems in the short-term.

Chief among these are recurrent cancers which are those that have resisted previous treatment with radiation and/or surgery. We have been quite fortunate to work with investigators largely in university settings who have observed excellent control rates in recurrent cancers of the brain, the gynecologic track, and the head and neck.

In most cases these cancers under study have recurred despite intensive radiation treatment.

Getting back to the short half life of Cesium-131, it has been considered by radiation biologists for some time relatively rapid delivery of radiation by IsoRay Cesium-131 seeds confronts fast growing cancers more effectively than the much slower radiation dose emitted by Iodine-125 which is the most widely used in brachytherapy isotope.

A very interesting series that we think illustrates this benefit is the University of Kentucky working recurrent gynecologic cancers. One publication by the UK Group describes a group of women who experienced rapid regrowth of cancers of the vagina after hysterectomy and radiation treatment.

By inserting Cesium-131 sources directly into these cancers, the physician researchers observed the retreat of these cancers which in many cases is in sharp contrast of life changing pelvic organ renewal, that was considered one of the only options left for these women.

Keep in mind that in general, the appeal of brachytherapy with Cesium-131 is in the high B conformal doses of radiation therapy that avoid or spare high doses to neighboring tissue.

It is difficult to overstate the value of such treatment in the setting such as the brain where it is very clear that putting significant radiation dose outside the cancerous target causes incremental brain injury. Currently IsoRay has over a half dozen major academic centers using Cesium-131 seeds in the management of a variety of brain cancers.

This strategic idea is also driving the new product development as in the case of GammaTile, as mentioned by Tom, which was developed by experienced brain cancer specialists from the Barrow Neurological Institute.

The adoption of Cesium-131 brain breaking therapy is due to the ease and reproducibility of the brain implant developed by this group is getting close to commercialization with potential clearance by the FDA in mid-2018.

There are more initiatives occurring that I can go into here, but I would emphasize that the dual strategy of stimulating the prostate brachytherapy sector based on very compelling emerging data, stressing the need of brachytherapy, along with long-term Cesium-131 outcome data, coupled with an expanding interest in the vexing problems presented by recurring cancer where Cesium-131 is finding a presence and creating market opportunities was very significant for the company.

Thank you. I would like to now turn the call back to Tom.

Tom?.

Hey, thank you, Bill. I would now like to provide a little more color on our financial results. As I mentioned earlier, we reported sales of $1.57 million for the quarter, a 23% increase year-over-year and the fifth consecutive quarter of year-over-year revenue increases primarily establishing our upward sales trend.

Sales were up 2% sequentially from the second quarter this year. The reason for the lower sequential growth in the quarter is that customer acquisition actually occurs in a step-by-step process. So as we bring on new customers we can increase in the revenues and the next growth level occur as other new customers come online.

So as we noted in earlier, we have a developed pipeline with about six to 12 months sale cycle.

Prostate brachytherapy accounted for 83% of our total revenue for the quarter this year compared to 88% in last year's third quarter representing good growth in other cancer treatment areas such as brain, gynecological, and head and neck in addition to prostate cancer growth.

Gross profit continues to benefit from the manufacturing and process improvements and tight expense controls we put in place over the last two years. For the third quarter, gross profits reached $0.61 million more than double last year's gross profit and 15% higher than the second quarter.

The gross profit margin was 39% for the quarter and compares to 23% last year and is the highest ever reached by the company. The plant automation project is being phased in during this year and next and as a result we expect additional sustainable improvements going forward in gross profits. Operating costs for the quarter were $1.95 million.

Continued increases in research and development and sales and marketing expenses including higher headcount were muted by a decrease in general and administrative expenses which includes reductions in legal, consulting fees, and benefits from other efficiency enhancement programs.

The increase in sales expense resulted primarily from higher sales compensation costs. As a reminder, we review our investments in sales and marketing and research and development including the collaborative development agreement with GT Medical Technologies as the key to our future success.

In total, we've invested over $2 million in these areas over the last two years and we believe that we're just beginning to realize a return on these investments. The increases in sales and gross profits combined with tight expense controls have begun to reduce the operating loss.

In the quarter, the operating loss was $1.34 million compared to $1.39 million in the third quarter last year, and a loss of $1.47 million in the second quarter of this year. We expect that operating losses will continue to decline as we leverage our expanding sales base.

At March 31, IsoRay had cash on hand of approximately $4.5 million and stockholder equity of $6.6 million. We are continuing discussions to review our long-term sources of capital and we have several options currently and we will release more information at the appropriate time.

Our fiscal year ends June 30 and our guidance has remained unchanged all year. We continue to expect revenue growth of at least 20% which will result in approximately $5.8 million in revenue for the full 12 months of fiscal 2018.

In closing, we're proud of our accomplishments over last two years which includes reversing the revenue trend, investing in R&D and clinical data development, and increasing our share in the established $100 million prostate market, by filling the leadership void in the market and improving our sales team and strategies.

Our efforts have been supported by multiple recent studies that show a brachytherapy advantage and higher risk disease. Combined with sales momentum, we've built the pipeline of new and returning physicians and we remain confident about our outlook for growth. Thank you for joining us today, and I'd now like to open the call for questions.

Operator, Keith?.

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions]. And the first question will come from Jason McCarthy with Maxim Group..

Hey guys, thanks for taking the question. Tom, can you just elaborate a little bit more on the progress with GammaTile.

I know you had mentioned submitting to the 510(k) this year; can you give us some more color on what IsoRay expects in terms of timing for potential approval and commercial launch as well as reimbursement discussions?.

Yes, thank you, Jason. The GammaTile 510(k) application was initially submitted in March of actually 2017 last -- in August or June of 2017 the FDA had reviewed our submittal and had requested that we do biocompatibility testing on the DuraGen Cesium product.

So we have stated in the past that activity, that biocompatibility testing began in January of 2018 scheduled for approximately four months and that -- after that biocompatibility testing would be complete, the results would be reported, and then, resubmitted to FDA and FDA then would have a certain amount of time to approve that.

So we're moving through that process as we expected. We stated in this call that we feel confident that we are on track. But again as with all applications with the FDA nothing is certain until everything is clear. So we believe we're still on track for mid-2018 which is not too far away..

Perfect. As if I can go, I'll just go back to prostate cancer and the brachytherapy space and where we're really saying some resurgence there.

With all of the 10-year data, long-term data showing combination of external beam and Cesium being made available, can you discuss a little bit about any potential sort of changes to current treatment guidelines? Is there going to need to be more data that has to emerge? Can you just explain a little bit how that thinking could shift amongst KOLs and treatment guidelines?.

I think I'll turn that one over to Bill.

Bill, do you have a comment regarding that?.

Sure. Well our position in general is that the data out there is very unequivocal in terms of recommending the addition of prostate brachytherapy to external beam in these high risk cancers.

I think these cancers are where there's a significant volume of cancer in the prostate and this combined approach makes a lot of sense theoretically and the data coming out is very compelling. The Journal article studies very large studies continue to come out including one recently in The Journal of the American Medical Association.

So we're where we think our job to do with the absence of a lot of leadership in the field as Tom has pointed out is bit of a vacuum in the field at the moment that we're seeking to fill.

And that's going to require discussions with the societies, physician groups and others to raise awareness of this fact that the very compelling data out there and the long-term data with Cesium combined together makes for a case we think that's very difficult to dispute, it’s just a matter of we think getting out there and raising awareness..

Okay. And just one last question on the financial side, Tom, your gross profit margin rose to 39% over 23% last year.

Do you expect that number to continue to rise or where do you see it plateauing based on your cost of goods for Cesium?.

Yes, so I mean right now the reason we’re seeing this change and improvement is because we do have a plant here in Richland, Washington has capacity -- significant capacity and currently with automation that we’re working on, we believe that we can leverage the plant, labor, and one of really the only incremental costs going forward is going to be the isotope cost that we have to buy for the product.

So we believe that over the next couple of years as we scale the plant up, we should continue to see good improvement in gross profits and really not, we don't have it -- it's hard to predict exactly but we believe that the when it scaled up the gross profit margin should be somewhere between 50% and 60%..

Thank you. And the next question comes from Ed Woo with Ascendiant Capital..

Thank you for taking my question and congratulations on the quarter.

My question is as these studies are released on terms of the 10-year data, you mentioned that within next year, how quickly do you think you're going to start to see rapid adoption by providers of brachytherapy?.

Edward, I think that's a great question. What we're currently doing I mean right now the industry is accepting Cesium-131. I mean we -- the current change in revenue that we've seen over the last two years is from the industry, it's a niche industry with somewhere between 300 and 500 radiation oncologists, practitioners that do brachytherapy.

We have three-year data. We have five-year data and now we're starting to see seven and nine year data. I think there's a number of them that have adopted.

I think there's a number of them that are waiting for a little bit longer term data and again as we do a good job in the marketing of our product and the sales of our product, again 10-year data will only help us.

So we will continue to get more and more adoption of Cesium-131 and more market share because of our 10-year data, but also because of our sales and marketing team. We also have seen really one of the biggest differential factors in prostate cancer treatment has been the side effect profile that Dr.

Benoit, University of Pittsburgh Medical College has published in the Red Journal last year which again shows this three to six months back to baseline for urinary side effects when using Cesium-131. And one of the biggest issues in treatment of prostate cancer with brachytherapy over the last 20-plus-years it's been that side effect profile.

And so with Iodine and Palladium that side effect profile is somewhere between 12 and 18 months and now that they're getting this data and showing that those urinary side effects are relieved much faster, I think as that data gives out and that continues to get published that again will give more traction for us in the marketplace.

So there's a lot of different factors 10-year just help us go to the next level with the number of doctors maybe that have been waiting for 10-year data but we've been getting adoption over the last eight or 10 years but now we hope to see a faster adoption..

Great. As you get the message out about Cesium-131 is there change you could decrease the six to 12 month sales cycle and implementation cycle..

Yes, I think that as more and more of these practitioners start to convert there could be a pretty significant word of mouth it is again a niche industry with again 300 to 500 significant doctors and again it's as if there's a pretty small society of doctors that again once there's more -- once there is more and more adoption I think it could shorten that sales cycle..

Thank you. And the next question comes from Doug Williams with TGPC LLC..

Hello, Mr. Tom Congratulations on another nice quarter. My question is about your listing status is it in jeopardy..

No, that the New York Stock Exchange listing requirement is a $6 million equity number at the end of the quarter and on our balance sheet we noted it was $6.6 million..

Okay, that was it, just a simple question..

All right. Thank you..

Thank you. As there are no more questions at the present time, I'd like to turn the call to Tom LaVoy for any closing comments..

All right, well thank you for joining us on our third quarter conference call. IsoRay’s momentum continues to build and we're excited about our future outlook. We look forward to speaking with you again for our year-end conference call on early September. Have a good night and thank you very much for joining us..

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..