UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ QUARTERLY Report PURSUANT TO Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2014
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 | (I.R.S. Employer |
organization) | 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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 x 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”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer ¨ |
Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x
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 7, 2014 |
Common stock, $0.001 par value | 54,392,781 |
ISORAY, INC.
Table of Contents
PART I | FINANCIAL INFORMATION | |
Item 1 | Consolidated Unaudited Financial Statements | 1 |
Consolidated Balance Sheets | 3 | |
Consolidated Statements of Operations (Unaudited) | 4 | |
Consolidated Statements of Cash Flows (Unaudited) | 5 | |
Notes to Unaudited Consolidated Financial Statements | 6 | |
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 |
Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 23 |
Item 4 | Controls and Procedures | 23 |
PART II | OTHER INFORMATION | 24 |
Item 1A | Risk Factors | 24 |
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 24 |
Item 5 | Other Information | 24 |
Item 6 | Exhibits | 25 |
Signatures | 26 |
2 |
PART I – FINANCIAL INFORMATION
Consolidated Balance Sheets
(Unaudited) | ||||||||
March 31, | June 30, | |||||||
2014 | 2013 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 23,702,901 | $ | 2,899,927 | ||||
Accounts receivable, net of allowance for doubtful accounts of $71,377 and $52,598, respectively | 805,326 | 923,780 | ||||||
Inventory | 387,020 | 405,571 | ||||||
Prepaid expenses and other current assets | 212,079 | 214,382 | ||||||
Total current assets | 25,107,326 | 4,443,660 | ||||||
Fixed assets, net of accumulated depreciation and amortization | 1,183,067 | 1,684,282 | ||||||
Restricted cash | 181,194 | 181,149 | ||||||
Inventory, non-current | 469,758 | 469,758 | ||||||
Other assets, net of accumulated amortization | 258,619 | 276,507 | ||||||
Total assets | $ | 27,199,964 | $ | 7,055,356 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 609,761 | $ | 432,566 | ||||
Accrued protocol expense | 75,057 | 25,305 | ||||||
Accrued radioactive waste disposal | 130,301 | 100,000 | ||||||
Accrued payroll and related taxes | 87,660 | 127,419 | ||||||
Accrued vacation | 117,971 | 107,578 | ||||||
Total current liabilities | 1,020,750 | 792,868 | ||||||
Warrant derivative liability | 678,000 | 104,000 | ||||||
Asset retirement obligation | 847,351 | 792,242 | ||||||
Total liabilities | 2,546,101 | 1,689,110 | ||||||
Commitments and contingencies (Note 6) | ||||||||
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 | 59 | 59 | ||||||
Series C: 1,000,000 shares allocated; no shares issued and outstanding | - | - | ||||||
Series D: 1,671 and 0 shares allocated; no shares issued and outstanding | - | - | ||||||
Common stock, $.001 par value; 192,998,329 & 193,000,000 shares authorized; 54,181,444 and 34,618,517 shares issued and outstanding | 54,181 | 34,618 | ||||||
Treasury stock, at cost, 13,200 shares | (8,390 | ) | (8,390 | ) | ||||
Additional paid-in capital | 80,980,664 | 57,431,293 | ||||||
Accumulated deficit | (56,372,651 | ) | (52,091,334 | ) | ||||
Total shareholders' equity | 24,653,863 | 5,366,246 | ||||||
Total liabilities and shareholders' equity | $ | 27,199,964 | $ | 7,055,356 |
The accompanying notes are an integral part of these consolidated financial statements.
3 |
Consolidated Statements of Operations
(Unaudited)
Three months ended March 31, | Nine months ended March 31, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Product sales | $ | 1,134,319 | $ | 1,251,478 | $ | 3,269,642 | $ | 3,283,167 | ||||||||
Cost of product sales | 1,083,413 | 1,065,574 | 3,329,950 | 3,276,314 | ||||||||||||
Gross profit / (loss) | 50,906 | 185,904 | (60,308 | ) | 6,853 | |||||||||||
Operating expenses: | ||||||||||||||||
Research and development expenses | 153,611 | 155,137 | 470,631 | 445,785 | ||||||||||||
Sales and marketing expenses | 245,558 | 290,812 | 931,210 | 928,962 | ||||||||||||
General and administrative expenses | 640,732 | 564,075 | 1,805,732 | 1,678,487 | ||||||||||||
Total operating expenses | 1,039,901 | 1,010,024 | 3,207,573 | 3,053,234 | ||||||||||||
Operating loss | (988,995 | ) | (824,120 | ) | (3,267,881 | ) | (3,046,381 | ) | ||||||||
Non-operating income (expense): | ||||||||||||||||
Interest income | 556 | 83 | 1,391 | 355 | ||||||||||||
Change in fair value of warrant derivative liability | (1,095,000 | ) | 109,000 | (1,014,000 | ) | 183,000 | ||||||||||
Financing and interest expense | - | - | (827 | ) | (6 | ) | ||||||||||
Non-operating income / (expense), net | (1,094,444 | ) | 109,083 | (1,013,436 | ) | 183,349 | ||||||||||
Net loss | (2,083,439 | ) | (715,037 | ) | (4,281,317 | ) | (2,863,032 | ) | ||||||||
Preferred stock deemed dividends (Note 9) | - | - | (726,378 | ) | - | |||||||||||
Preferred stock dividends | (2,658 | ) | (2,658 | ) | (7,974 | ) | (7,974 | ) | ||||||||
Net loss applicable to common shareholders | $ | (2,086,097 | ) | $ | (717,695 | ) | $ | (5,015,669 | ) | $ | (2,871,006 | ) | ||||
Basic and diluted loss per share | $ | (0.05 | ) | $ | (0.02 | ) | $ | (0.13 | ) | $ | (0.08 | ) | ||||
Weighted average shares used in computing net loss per share: | ||||||||||||||||
Basic and diluted | 42,506,077 | 34,611,517 | 38,852,980 | 34,359,567 |
The accompanying notes are an integral part of these consolidated financial statements.
4 |
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended March 31, | ||||||||
2014 | 2013 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (4,281,317 | ) | $ | (2,863,032 | ) | ||
Adjustments to reconcile net loss to net cash used by operating activities: | ||||||||
Allowance for doubtful accounts | 18,779 | (32,174 | ) | |||||
Depreciation and amortization of fixed assets | 517,548 | 563,850 | ||||||
Amortization of deferred financing costs and other assets | 23,056 | 21,036 | ||||||
Change in fair value of warrant derivative liability | 1,014,000 | (183,000 | ) | |||||
Accretion of asset retirement obligation | 55,109 | 50,383 | ||||||
Share-based compensation | 65,217 | 85,369 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, gross | 99,675 | 67,195 | ||||||
Inventory | 18,551 | 87,368 | ||||||
Other receivables | 4,516 | 2,204 | ||||||
Prepaid expenses and other current assets | (2,213 | ) | (69,427 | ) | ||||
Accounts payable and accrued expenses | 177,195 | (21,525 | ) | |||||
Accrued protocol expense | 49,752 | 27,500 | ||||||
Accrued radioactive waste disposal | 30,301 | 36,000 | ||||||
Accrued payroll and related taxes | (39,759 | ) | (54,654 | ) | ||||
Accrued vacation | 10,393 | 12,961 | ||||||
Net cash used by operating activities | (2,239,197 | ) | (2,269,946 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of fixed assets | (16,333 | ) | - | |||||
Additions to licenses and other assets | (5,168 | ) | (12,926 | ) | ||||
Change in restricted cash | (45 | ) | (104 | ) | ||||
Net cash used by investing activities | (21,546 | ) | (13,030 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Preferred dividends paid | (10,632 | ) | (10,632 | ) | ||||
Proceeds from sales of preferred stock, pursuant to underwritten offering, net | 1,478,703 | - | ||||||
Proceeds from sales of common stock, pursuant to underwritten offering, net | 1,800,589 | - | ||||||
Proceeds from sales of common stock, pursuant to registered direct offering, net | 13,818,927 | 3,291,977 | ||||||
Proceeds from sales of common stock, pursuant to exercise of warrants, net | 5,961,001 | 1,825 | ||||||
Proceeds from sales of common stock, pursuant to exercise of options | 15,129 | 11,309 | ||||||
Net cash provided by financing activities | 23,063,717 | 3,294,479 | ||||||
Net increase in cash and cash equivalents | 20,802,974 | 1,011,503 | ||||||
Cash and cash equivalents, beginning of period | 2,899,927 | 2,672,711 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 23,702,901 | $ | 3,684,214 | ||||
Non-cash investing and financing activities: | ||||||||
Reclassification of derivative warrant liability to equity upon exercise | $ | (440,000 | ) | $ | - | |||
Reclassification of convertible preferred stock to common stock upon conversion | (1,478,703 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
5 |
Notes to the Unaudited Consolidated Financial Statements
For the three and nine months ended March 31, 2014 and 2013
1. | Basis of Presentation |
The accompanying consolidated financial statements are those of IsoRay, Inc., and its wholly-owned subsidiaries (IsoRay or the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts in the prior-year financial statements have been reclassified to conform to the current year presentation.
In the opinion of management, the accompanying unaudited interim consolidated financial statements and notes to the interim consolidated financial statements contain all adjustments, consisting of normal recurring items, necessary to present fairly, in all material respects, the financial position of IsoRay, Inc. and its wholly-owned subsidiaries. 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, 2013, as it may be amended from time to time.
The results of operations for the periods presented may not be indicative of those which may be expected for a full year. 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.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the disclosures of contingent liabilities. Accordingly, ultimate results could differ materially from those estimates.
2. | New Accounting Pronouncements |
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “FASB”) or other standards setting bodies that are adopted by us as of the specified effective dates. Unless otherwise discussed, we believe the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial position, results of operations and cash flows upon adoption.
3. | Loss per Share |
Basic earnings per share is calculated by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding, and does not include the impact of any potentially dilutive common stock equivalents. Common stock equivalents, including warrants and options to purchase the Company's common stock, are excluded from the calculations when their effect is antidilutive. At March 31, 2014 and 2013, the calculation of diluted weighted average shares did not include 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.
6 |
Securities not considered in the calculation of diluted weighted average shares, but that could be dilutive in the future as of March 31, 2014 and 2013, were as follows:
March 31, | ||||||||
2014 | 2013 | |||||||
Series B preferred stock | 59,065 | 59,065 | ||||||
Common stock warrants | 646,811 | 1,957,033 | ||||||
Common stock options | 2,324,072 | 2,312,072 | ||||||
Total potential dilutive securities | 3,029,948 | 4,328,170 |
4. | Inventory |
Inventory consisted of the following at March 31, 2014 and June 30, 2013:
March 31, | June 30, | |||||||
2014 | 2013 | |||||||
Raw materials | $ | 165,657 | $ | 167,671 | ||||
Work in process | 181,457 | 195,323 | ||||||
Finished goods | 39,906 | 42,577 | ||||||
$ | 387,020 | $ | 405,571 |
5. | Share-Based Compensation |
The following table presents the share-based compensation expense recognized during the three and nine months ended March 31, 2014 and 2013:
Three months ended March 31, | Nine months ended March 31, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Cost of product sales | $ | 4,500 | $ | 10,164 | $ | 13,421 | $ | 30,492 | ||||||||
Research and development expenses | 3,482 | 7,607 | 10,447 | 25,042 | ||||||||||||
Sales and marketing expenses | 879 | 1,386 | 2,636 | 4,568 | ||||||||||||
General and administrative expenses | 4,572 | 8,423 | 38,713 | 25,267 | ||||||||||||
Total share-based compensation | $ | 13,433 | $ | 27,580 | $ | 65,217 | $ | 85,369 |
As of March 31, 2014, total unrecognized compensation expense related to stock-based options was $29,192 and the related weighted-average period over which it is expected to be recognized is approximately 0.87 years.
The Company currently provides stock-based compensation under four equity incentive plans approved by the Board of Directors. Options granted under each of the plans have a ten year maximum term, an exercise price equal to at least the fair market value of the Company’s common stock on the date of the grant, and varying vesting periods as determined by the Board. For stock options with graded vesting terms, the Company recognizes compensation cost on a straight-line basis over the requisite service period for the entire award.
7 |
A summary of stock options within the Company’s share-based compensation plans as of March 31, 2014 was as follows:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||||||||
Options | Price | Term | Value | |||||||||||||
Outstanding at March 31, 2014 | 2,324,072 | $ | 1.82 | 4.3 | $ | 2,050,334 | ||||||||||
Vested and expected to vest at March 31, 2014 | 2,238,840 | $ | 1.86 | 4.23 | $ | 1,923,611 | ||||||||||
Vested and exercisable at March 31, 2014 | 2,040,732 | $ | 1.93 | 3.85 | $ | 1,714,527 |
There were 26,333 options exercised during the nine months ended March 31, 2014 and 31,700 options exercised during the nine months ended March 31, 2013. The Company’s current policy is to issue new shares to satisfy option exercises. The intrinsic value of the employee options exercised during the nine months ended March 31, 2014 was $15,130 and the nine months ended March 31, 2013 was $13,866.
There were 65,000 stock option awards granted and no stock option awards granted during the nine months ended March 31, 2014 and 2013, respectively.
Of the 65,000 options, 50,000 were director stock options issued to the Chief Executive Officer and Chairman on September 5, 2013 with an exercise price of $0.58 per share which was the closing price of the Company common stock on the day of issuance. The fair value of the stock options issued on September 5, 2013 using a Black Scholes model is $25,150 utilizing the closing price on the day of grant of $0.58 per share as the grant and exercise price, a five year term, volatility of 132.31% and a discount rate of 1.85%.
The remaining 15,000 were employee stock options issued to three members of management on September 6, 2013 with an exercise price of $0.59 per share which was the closing price of the Company common stock on the day of issuance. The fair value of the stock options issued on September 6, 2013 using a Black Scholes model is $6,906 utilizing the closing price on the day of grant of $0.59 per share as the grant and exercise price, a five year term, volatility of 132.31% and a discount rate of 1.77%.
6. | Commitments and Contingencies |
Patent and Know-How Royalty License Agreement
The Company is the holder of an exclusive license to use certain “know-how” developed by one of the founders of a predecessor to the Company and licensed to the Company by the Lawrence Family Trust, a Company shareholder. The terms of this license agreement require the payment of a royalty based on the Net Factory Sales Price, as defined in the agreement, of licensed product sales. Because the licensor’s patent application was ultimately abandoned, only a 1% “know-how” royalty based on Net Factory Sales Price, as defined in the agreement, remains applicable. To date, management believes that there have been no product sales incorporating the “know-how” and therefore no royalty is due pursuant to the terms of the agreement. Management believes that ultimately no royalties should be paid under this agreement as there is no intent to use this “know-how” in the future.
8 |
The licensor of the “know-how” has disputed management’s contention that it is not using this “know-how”. On September 25, 2007 and again on October 31, 2007, the Company participated in nonbinding mediation regarding this matter; however, no settlement was reached with the Lawrence Family Trust. After additional settlement discussions, which ended in April 2008, the parties failed to reach a settlement. The parties may demand binding arbitration at any time.
7. | Fair Value Measurements |
The table below sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2014 and June 30, 2013, respectively, and the fair value calculation input hierarchy level the Company has determined applies to each asset and liability category.
Description | Balance at March 31, 2014 | Balance at June 30, 2013 | Input Hierarchy Level | |||||||
Assets: | ||||||||||
Cash and cash equivalents | $ | 23,702,901 | $ | 2,899,927 | Level 1 | |||||
Restricted cash | 181,194 | 181,149 | Level 1 | |||||||
Liabilities: | ||||||||||
Warrant liability | $ | 678,000 | $ | 104,000 | Level 2 |
8. | Preferred Dividends |
On December 19, 2013, the Board of Directors declared a dividend on the Series B Preferred Stock of all currently payable and accrued outstanding and cumulative dividends through December 31, 2013 in the amount of $10,632. Dividends on the Series B Preferred Stock were last paid on December 31, 2012 as declared by the Board of Directors on December 21, 2012 in the amount of $10,632. The dividends outstanding and cumulative through December 31, 2013 of $10,632 and through December 31, 2012 of $10,632 were paid as of those dates.
9. | Shareholders’ Equity |
Common and preferred stock transactions
Series D
On August 29, 2013, the Company entered into an agreement to sell 3,800,985 common units, each consisting of 1 share of common stock and a warrant to purchase 0.816 shares of common stock (the “Common Units”), and 1,670 preferred units, each consisting of 1 share of Series D Convertible Preferred Stock and a warrant to purchase 1,525.23 shares of common stock (the “Preferred Units”) on a firm commitment underwritten basis. The Common Units were sold at an initial per unit purchase price of $0.535 and the Preferred Units were sold at an initial per unit purchase price of $1,000. The warrants were all exercisable at $0.72 per share and had a twenty-four month term. Each share of the Series D Convertible Preferred Stock was convertible into 1,869.15 shares of common stock at any time at the option of the holder, subject to adjustment and certain ownership percentage restrictions. The preferred shares which were convertible into shares of common stock contained a beneficial conversion feature of $726,378 which was recognized as a deemed dividend to the Series D preferred shareholders on the date of issuance. This public offering resulted in gross proceeds of $3.7 million. The offering yielded approximately $3,279,292 in cash after expenses.
9 |
Gross proceeds from public offering | $ | 3,703,527 | ||
Underwriting discount | (185,176 | ) | ||
Legal and accounting expense | (184,514 | ) | ||
Listing expense | (48,500 | ) | ||
Other expense | (6,045 | ) | ||
Net proceeds | 3,279,292 |
During January 2014, the holder of the 1,670 shares of Series D convertible preferred stock fully exercised its right to convert the 1,670 shares of Series D convertible preferred stock into 3,121,480 shares of common stock which at the time of conversion resulted in an increase in shares of common stock outstanding from 38,419,502 to 41,540,982. Subsequent to the conversion, no shares of Series D convertible preferred stock remain outstanding.
Common Stock
On March 21, 2014, the Company entered into a Securities Purchase Agreement with certain investors providing for the sale of a total of 5,644,300 shares of common stock for an aggregate purchase price of $14,675,180 at a price per share of $2.60 (the “Registered Direct Offering”). The Company received net proceeds from the offering of approximately $13,818,927 from the Registered Direct Offering which will be used to meet the Company’s working capital needs and general corporate purposes.
Gross proceeds from registered direct offering | $ | 14,675,180 | ||
Placement agent fees | (733,759 | ) | ||
Legal and accounting expense | (72,494 | ) | ||
Listing expense | (45,000 | ) | ||
Other expense | (5,000 | ) | ||
Net proceeds | 13,818,927 |
Warrant exercises
During the month of March 2014, the holder of the Series D warrants issued in November 2010 exercised its right to purchase 1,050,000 shares of common stock. Each warrant had an exercise price of $1.56 per share of Company common stock and the exercise contributed $1,638,000 in total additional cash and equity.
During the month of March 2014, certain holders of the warrants to purchase Company common stock issued in the October and December 2011 equity transaction exercised their right to purchase 37,574 shares of common stock. Each warrant had an original exercise price of $1.053 that was reduced in accordance with the terms of the warrant for dilution as the result of subsequent offerings to a revised exercise price of $0.944 per share of Company common stock. This created a liability of $35,470 as the stock had not been issued by the transfer agent as of the end of March, however, shares of common stock were issued during April in compliance with the contractual terms of the warrant.
During the month of March 2014, certain holders of the warrants to purchase Company common stock issued in the October and December 2011 equity transaction exercised their right to purchase 271,091 shares of common stock. Each warrant had an original exercise price of $1.053 that was reduced in accordance with the terms of the warrant for dilution as the result of subsequent offerings to a current exercise price of $0.944 per share of Company common stock and the exercise contributed $255,910 in total additional cash and equity.
During the month of March 2014, the holders of the warrants to purchase Company common stock issued in the August 2013 equity transaction exercised their right to purchase 5,648,738 shares of common stock. Each warrant had an exercise price of $0.72 per share of Company common stock and the exercise contributed $4,067,091 in total additional cash and equity.
10 |
The gross proceeds from the exercise of the common stock warrants exercised were $5,961,001 during the nine months ended March 31, 2014, net of the $35,470 liability for the shares of common stock which were not issued until April 2014.
Warrant liability and related offering cost deferral
Based on the guidance contained in ASC 815 “Derivatives and Hedging”, management has concluded that the warrants issued in the October and December 2011 underwritten registered offering of 2,500,000 shares of common stock should be classified as a derivative liability and has recorded a liability at fair value. The Company determined the fair value of the warrants using the Black-Scholes fair value model. The Company determined the fair value of the warrants on the date of the offering to be as disclosed in the tables below. The Company has recognized a change in fair value as described in the tables below:
Change in fair value of the derivative warrant liability for the three months ended March 31, 2014 and 2013, respectively.
Three months ended | Three months ended | |||||||
March 31, 2014 | March 31, 2013 | |||||||
Change in fair value of the derivative warrant liability | $ | 1,095,000 | $ | (109,000 | ) |
Change in fair value of the derivative warrant liability for purchaser warrants and underwriter warrants contained in an equity transaction on October 19, 2011.
Three months ended March 31, 2014 | Three months ended March 31, 2013 | |||||||||||||||
Quantity1 | Amount | Quantity1 | Amount | |||||||||||||
Balance, beginning of the period | 650,003 | $ | 20,000 | 650,003 | $ | 218,000 | ||||||||||
Change in fair value | 650,003 | 1,004,000 | (99,000 | ) | ||||||||||||
Warrants corrected | 10,869 | - | - | - | ||||||||||||
Warrants exercised | (258,943 | ) | (423,000 | ) | - | - | ||||||||||
Balance, end of the period | 401,929 | $ | 601,000 | 650,003 | $ | 119,000 |
Change in fair value of the derivative warrant liability for purchaser warrants and underwriter warrants contained in an equity transaction on December 7, 2011.
Three months ended March 31, 2014 | Three months ended
March 31, 2013 | |||||||||||||||
Quantity1 | Amount | Quantity1 | Amount | |||||||||||||
Balance, beginning of the period | 63,598 | $ | 3,000 | 63,598 | $ | 22,000 | ||||||||||
Change in fair value | 63,598 | 91,000 | 63,598 | (10,000 | ) | |||||||||||
Warrants corrected | (400 | ) | - | - | - | |||||||||||
Warrants exercised | (12,148 | ) | (17,000 | ) | - | - | ||||||||||
Balance, end of the period | 51,050 | $ | 77,000 | 63,598 | $ | 12,000 | ||||||||||
Total fair value of warrant derivative liability at March 31, 2014 and 2013 | $ | 678,000 | $ | 131,000 |
11 |
Change in fair value of the derivative warrant liability for the nine months ended March 31, 2014 and 2013, respectively.
Nine months
ended | Nine
months ended | |||||||
Change in fair value | $ | 1,014,000 | $ | (183,000 | ) |
Change in fair value of the derivative warrant liability for purchaser warrants and underwriter warrants contained in an equity transaction on October 19, 2011.
Nine months ended March 31, 2014 | Nine months ended March 31, 2013 | |||||||||||||||
Quantity1 | Amount | Quantity1 | Amount | |||||||||||||
Balance, beginning of the period | 650,003 | $ | 94,000 | 650,003 | $ | 286,000 | ||||||||||
Change in fair value | 650,003 | 914,000 | 650,003 | (167,000 | ) | |||||||||||
Warrants corrected | 10,869 | 16,000 | ||||||||||||||
Warrants exercised | (258,943 | ) | (423,000 | ) | - | - | ||||||||||
Balance, end of the period | 401,929 | $ | 601,000 | 650,003 | $ | 119,000 |
Change in fair value of the derivative warrant liability for purchaser warrants and underwriter warrants contained in an equity transaction on December 7, 2011.
Nine months ended March 31, 2014 | Nine months ended March 31, 2013 | |||||||||||||||
Quantity1 | Amount | Quantity1 | Amount | |||||||||||||
Balance, beginning of the period | 63,598 | $ | 10,000 | 63,598 | $ | 28,000 | ||||||||||
Change in fair value | 63,598 | 85,000 | 63,598 | (16,000 | ) | |||||||||||
Warrants corrected | (400 | ) | (1,000 | ) | ||||||||||||
Warrants exercised | (12,148 | ) | (17,000 | ) | - | - | ||||||||||
Balance, end of the period | 51,050 | $ | 77,000 | 63,598 | $ | 12,000 | ||||||||||
Total fair value of warrant derivative liability at March 31, 2014 and 2013 | $ | 678,000 | $ | 131,000 |
1 Quantity of warrants either issued or outstanding as of the date of valuation.
Warrants
The following table summarizes the warrants outstanding as of the beginning of the fiscal year, warrants exercised and warrants issued during the year and weighted average prices for each category.
Warrants | Weighted average exercise price | |||||||
Outstanding as of June 30, 2013 | 1,957,033 | $ | 1.38 | |||||
Warrants issued | 5,648,738 | 0.72 | ||||||
Warrants corrected | 10,869 | 0.94 | ||||||
Warrants exercised | (6,969,829 | ) | 0.86 | |||||
Outstanding as of March 31, 2014 | 646,811 | $ | 1.14 |
12 |
Warrants outstanding as of March 31, 2014
Quantity | Expiration date | Exercise price | |||||||
6,000 | June 8, 2015 | $ | 1.18 | ||||||
25,000 | July 27, 2015 | 2.00 | |||||||
157,832 | November 21, 2015 | 1.56 | |||||||
401,929 | October 19, 2016 | 0.944 | |||||||
51,050 | December 7, 2016 | 0.944 | |||||||
5,000 | June 27, 2017 | 0.98 | |||||||
646,811 | $ | 1.14 |
10. | Related Party Transaction |
During the nine months ended March 31, 2014 and 2013, the Company continued to engage the services of APEX Data Systems, Inc., owned by Dwight Babcock, the Company’s Chairman and Chief Executive Officer, to modify and maintain the Company’s web interfaced data collection application to aggregate patient data in a controlled environment. The Audit Committee and Board of Directors approved the use of the ongoing services of APEX Data Systems. Mr. Babcock recused himself from the Board vote due to his conflict of interest. The cost recorded during nine months ended March 31, 2014 and 2013 from APEX Data Systems, Inc. for the maintenance of the web interfaced data collection application was $12,720 and $10,960. An additional $9,000 was spent on the implementation of Customer Relationship Management software in the nine months ended March 31, 2014.
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 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 “Risk Factors” under Part II, Item 1A below and in the “Risk Factors” section of our Form 10-K for the fiscal year ended June 30, 2013 that may cause actual results to differ materially.
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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 accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, management evaluates past judgments and estimates, including those related to bad debts, inventories, accrued liabilities, and contingencies. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies and related risks described in the Company’s annual report on Form 10-K as filed with the Securities and Exchange Commission on September 30, 2013 are those that depend most heavily on these judgments and estimates. As of March 31, 2014, there had been no material changes to any of the critical accounting policies contained therein.
Results of Operations
Three months ended March 31, 2014 compared to three months ended March 31, 2013.
Revenues. During the three months ended March 31, 2014, total revenue decreased approximately nine (9%) percent when compared to the three months ended March 31, 2013. Revenue produced by prostate brachytherapy decreased in the three months ended March 31, 2014 by approximately 6%. Prostate seed brachytherapy contributed 82% of the overall product sales during the three months ended March 31, 2014 compared to 79% of overall product sales during the three months ended March 31, 2013. Management continues work with physicians to utilize the Company’s FDA cleared products, sometimes in tandem with other FDA cleared devices or application methods, to develop innovative methods to provide alternative treatments for cancers in various other body sites, which contributed the balance of product sales, which were 18% of product sales during the three months ended March 31, 2014 compared to 21% of product sales during the three months ended March 31, 2014. During the three months ended March 31, 2014, the Company primarily treated five body sites including brain, gynecological, head and neck, lung and prostate cancers. Management believes that the overall market for prostate brachytherapy has continued to receive increased pressure from other treatment options with higher reimbursement rates such as Intensity –Modulated Radiation Therapy (IMRT) and Robotics, however, management believes that the treatment strategy of combining treatments which incorporate brachytherapy with other modalities in the prostate, the addition of new treatment facilities and treatment of additional other body sites with brachytherapy has the potential to increase revenue.
Key operating factors
Description | Three
months | Three months ended 3-31-13 | Variance ($) | Variance (%) | ||||||||||||
Product Sales | $ | 1,134,319 | $ | 1,251,478 | $ | (117,159 | ) | (9 | )% |
14 |
Cost of product sales. Cost of product sales nominally increased during the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The two key operating factors that changed significantly in the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 were the increase in materials expense related to seed production which was primarily created by the price increase in isotope received from Russia in combination with one additional shipment of isotope during the three months ended March 31, 2014 when compared to the three months ended March 31, 2013 and a decrease in production costs of the GliaSite® Radiation Therapy System (the “GliaSite RTS”) which was primarily the result of improved timing of cases which allowed for a greater volume of Iotrex solution produced to be utilized in treating patients during the three months ended March 31, 2014 and the non-recurrence of an expense related to expired catheters which occurred during the three months ended March 31, 2013. Nominal cost changes which occurred in other categories of seed production expenses are summarized as Other cost of product sales (Seeds) which as a group were insignificant.
Key operating factors
Description | Three months ended 3-31-14 | Three months ended 3-31-13 | Variance ($) | Variance (%) | ||||||||||||
Materials expense | $ | 421,122 | $ | 356,126 | $ | 64,996 | 18 | % | ||||||||
Other cost of product sales (Seeds) | 637,150 | 663,723 | (26,573 | ) | (4 | )% | ||||||||||
GliaSite RTS | 25,141 | 45,725 | (20,584 | ) | (45 | )% | ||||||||||
Total cost of product sales | $ | 1,083,413 | $ | 1,065,574 | $ | 17,839 | 2 | % |
Gross profit. Gross profit for the three months ended March 31, 2014 decreased compared to the three month period ended March 31, 2013 as a result of decreased revenue from product sales which was further reduced by a nominal increase in total cost of product sales. Management continued to seek to control variable costs, however, at this time most remaining production costs are of a fixed nature and related to minimum personnel costs required to satisfy peak demand orders, however, during the three months ended March 31, 2014, there was an additional increase in the cost of some materials that could not be controlled as the result of limited sources for these materials.
Key operating factor
Description | Three months ended 3-31-14 | Three months ended 3-31-13 | Variance ($) | Variance (%) | ||||||||||||
Gross profit | $ | 50,906 | $ | 185,904 | $ | (134,998 | ) | (73 | )% | |||||||
Gross profit percentage | 4 | % | 15 | % |
Research and development. Research and development costs decreased by a nominal amount for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. No single cost factor changed significantly during the three months ended March 31, 2014 when compared to the three months ended March 31, 2013.
15 |
Key operating factors
Description | Three
months | Three
months | Variance ($) | Variance (%) | ||||||||||||
Total research and development | $ | 153,611 | $ | 155,137 | $ | (1,526 | ) | (1 | )% |
Sales and marketing expenses. Sales and marketing expenses were decreased in the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The single category which changed significantly was travel expense as the Company continues to manage its travel costs as actively as possible.
Key operating factors
Description | Three months ended 3-31-14 | Three months ended 3-31-13 | Variance ($) | Variance (%) | ||||||||||||
Travel expense | $ | 46,430 | $ | 69,470 | $ | (23,040 | ) | (33 | )% | |||||||
Other sales-marketing expense | 199,128 | 221,342 | (22,214 | ) | (10 | )% | ||||||||||
Total sales and marketing | $ | 245,558 | $ | 290,812 | $ | (45,254 | ) | (16 | )% |
General and administrative expenses. General and administrative expenses increased in the three months ended March 31, 2014 compared to the three months ended March 31, 2013. A single expense category, bad debt expense (recovery), which is an estimate made based on established criteria by management of the unpaid invoices in accounts receivable which may not be paid by the customer, increased materially. This management estimate fluctuates significantly based on timeliness of payments received from our customers. The balance of the increased cost was from a combination of nominal changes in other cost categories which are summarized as general and administrative (Other).
Key operating factors
Description | Three months ended 3-31-14 | Three months ended 3-31-13 | Variance ($) | Variance (%) | ||||||||||||
Bad debt expense (recovery) | $ | 38,861 | $ | (18,697 | ) | 57,558 | 308 | % | ||||||||
General and administrative (Other) | 601,871 | 582,772 | 19,099 | 3 | % | |||||||||||
Total general and administrative | $ | 640,732 | $ | 564,075 | $ | 76,657 | 14 | % |
Operating loss. Operating loss for the three months ended March 31, 2014 increased compared to the three months ended March 31, 2013 primarily as the result of the decrease in product sales coupled with the marginal increase in cost of product sales and the nominal increase in operating expenses.
Key operating factor
Description | Three months ended 3-31-14 | Three months ended 3-31-13 | Variance ($) | Variance (%) | ||||||||||||
Operating loss | $ | (988,995 | ) | $ | (824,120 | ) | $ | 164,875 | 20 | % |
16 |
Change in fair value of warrant derivative liability. During the three months ended December 31, 2011, there was a warrant derivative liability established upon issuance of warrants during October 2011 to December 2011 to the purchasers and underwriters in the Company’s registered offering. The warrant derivative liability requires periodic evaluation for changes in fair value. As required at March 31, 2014 and March 31, 2013, the Company evaluated the fair value of the warrant derivative liability using the Black-Scholes option pricing model and applied updated inputs as of those dates. The resulting change in fair value was recorded as of March 31, 2014 and March 31, 2013. The change in valuation of the warrant derivative liability as calculated using the Black-Scholes option pricing model is not reflective of Company operations which is why these changes are included in the consolidated statement of operations in the non-operating income/(expense) section and an adjusting item to reconcile net loss to net cash used by operating activities in the consolidated statement of cash flows.
The increase in the warrant derivative liability resulted from the significant increase in the value of the Company’s common stock in March 2014. The Black-Scholes option pricing model utilizes multiple inputs over which management exerts little control. The model uses stock price (market driven), exercise price (contractual), expected life of the contractual life (estimate made by management when the warrant derivative liability is established and reduced by the life expended), volatility of the Company stock (market driven) and a risk-free rate.
Key operating factor
Description | Three months ended 3-31-14 | Three months ended 3-31-13 | Variance ($) | Variance (%) | ||||||||||||
Change in fair value of warrant derivative liability | $ | (1,095,000 | ) | $ | 109,000 | $ | (1,204,000 | ) | (1,105 | )% |
Nine months ended March 31, 2014 compared to nine months ended March 31, 2013.
Revenues. During the nine months ended March 31, 2014, total revenue, and revenue produced by prostate brachytherapy and brachytherapy utilized to provide brachytherapy treatment alternatives for other non-prostate applications, were unchanged when compared to the nine months ended March 31, 2013. Revenue produced by prostate brachytherapy was unchanged in the nine months ended March 31, 2014 when compared to the nine months ended March 31, 2013. Prostate seed brachytherapy contributed 83% of the overall product sales during the nine months ended March 31, 2013 and 2014, respectively. Management continues to work with physicians to utilize the Company’s FDA cleared products, sometimes in tandem with other FDA cleared devices or application methods to develop innovative methods, to provide treatment alternatives for cancers in various other body sites, which contributed the balance of product sales of 17% during the nine months ended March 31, 2014 and 2013, respectively. During the nine months ended March 31, 2014, the Company primarily treated five body sites including brain, gynecological, head and neck, lung and prostate cancers. Management believes that the overall market for prostate brachytherapy has continued to receive increased pressure from other treatment options with higher reimbursement rates such as Intensity – Modulated Radiation Therapy (IMRT) and Robotics, however, management believes that the treatment strategy of combining treatments which incorporate brachytherapy with other modalities in the prostate, the addition of new treatment facilities and treatment of additional other body sites with brachytherapy has the potential to increase revenue.
Key operating factors
Description | Nine months ended 3-31-14 | Nine months ended 3-31-13 | Variance ($) | Variance (%) | ||||||||||||
Product Sales | $ | 3,269,642 | $ | 3,283,167 | $ | (13,525 | ) | 0 | % |
17 |
Cost of product sales. Cost of product sales related to brachytherapy seed sales increased by a nominal amount during the nine months ended March 31, 2014 compared to the nine months ended March 31, 2013 as the result of a combination of factors including increases in materials expense and the addition of the medical device tax incurred as part of the Affordable Care Act beginning in the calendar year 2013 which only impacted three of the nine months ended March 31, 2013 compared to all nine of the months for the nine months ended March 31, 2014. These increases were partially reduced by decreases in depreciation and amortization expense as assets continue to reach the end of their depreciable lives without being replaced and a net reduction in preload expense as the result of a reduced utilization of third party loaders which was partially offset by increased internal costs to accommodate the increased volume of work. Cost of product sales related to GliaSite RTS increased as the result of increased Iotrex production required to support the increased sales of the product all of which was not able to be fully utilized due to the timing of cases along with the additional medical device tax incurred as part of the Affordable Care Act. The net impact of the changes resulted in a nominal increase in cost of product sales.
Key operating factors
Description | Nine months ended 3-31-14 | Nine months ended 3-31-13 | Variance ($) | Variance (%) | ||||||||||||
Medical device tax | $ | 71,378 | $ | 27,553 | $ | 43,825 | 159 | % | ||||||||
Materials expense | 1,316,564 | 1,247,592 | 68,972 | 6 | % | |||||||||||
Depreciation and amortization expense | 505,829 | 548,241 | (42,412 | ) | (8 | )% | ||||||||||
Pre-loading expense | 219,277 | 236,616 | (17,339 | ) | (7 | )% | ||||||||||
GliaSite RTS | 106,212 | 83,991 | 22,221 | 26 | % | |||||||||||
Other cost of product sales (Seeds) | 1,110,690 | 1,132,321 | (21,631 | ) | (2 | )% | ||||||||||
Total cost of product sales | $ | 3,329,950 | $ | 3,276,314 | $ | 53,636 | 2 | % |
Gross profit / (loss). Gross profit / (loss) for the nine month period ended March 31, 2014 decreased compared to the nine month period ended March 31, 2013 primarily as a result of the decreased product sales combined with a nominal increase in cost of product sales.
Key operating factor
Description | Nine months ended 3-31-14 | Nine months ended 3-31-13 | Variance ($) | Variance (%) | ||||||||||||
Gross profit / (loss) | $ | (60,308 | ) | $ | 6,853 | $ | (67,161 | ) | (980 | )% | ||||||
Gross profit / (loss) percentage | (2 | )% | 0 | % |
Research and development. Research and development costs increased during the nine months ended March 31, 2014 compared to the nine months ended March 31, 2013 primarily as a result of a change in the single operating factor that increased in research and development expense which was the continued investment in protocol expenses.
Key operating factors
Description | Nine months ended 3-31-14 | Nine months ended 3-31-13 | Variance ($) | Variance (%) | ||||||||||||
Protocol expense | $ | 130,322 | $ | 67,025 | $ | 63,297 | 94 | % | ||||||||
Research and development (Other) | 340,309 | 378,760 | (38,451 | ) | (10 | )% | ||||||||||
Total research and development | $ | 470,631 | $ | 445,785 | $ | 24,846 | 6 | % |
18 |
Sales and marketing expenses. Sales and marketing expenses were virtually unchanged during the nine months ended March 31, 2014 compared to the nine months ended March 31, 2013. Travel expense was reduced as the result of a decrease in meal expenses and automobile expense incurred during the nine months ended March 31, 2014 when compared to the nine months ended March 31, 2013. The overall decrease in travel expense and in particular meals expense is the result of a revision of the travel policy governing reimbursement for these expenses combined with the reduction in automobile travel expense is impacted by both the number of sales managers in the field and the method by which they are reimbursed for the use of their vehicles.
Key operating factors
Description | Nine months ended 3-31-14 | Nine months ended 3-31-13 | Variance ($) | Variance (%) | ||||||||||||
Travel expense | $ | 160,057 | $ | 201,010 | $ | (40,953 | ) | (20 | )% | |||||||
Sales and marketing (Other) | 771,153 | 727,952 | 43,201 | 6 | % | |||||||||||
Total sales and marketing | $ | 931,210 | $ | 928,962 | $ | 2,248 | 0 | % |
General and administrative expenses. General and administrative expenses increased in the nine months ended March 31, 2014 compared to the nine months ended March 31, 2013 primarily as a result of three operating factors. The three key operating factors that increased were bad debt expense/(recovery), legal expense and public company expense. Bad debt expense/(recovery) increased as the result of the aging of specific customer accounts that in the judgment of management required creating an allowance for their potential collectability, legal expenses increased as the result of increased SEC filings, compliance review, contract revisions and general corporate legal services while public company expense increased due to increased SEC filing expenses.
Key operating factors
Description | Nine months ended 3-31-14 | Nine months ended 3-31-13 | Variance ($) | Variance (%) | ||||||||||||
Bad debt expense/(recovery) | $ | 18,879 | $ | (32,174 | ) | $ | 51,053 | 159 | % | |||||||
Legal expense | 150,475 | 102,381 | 48,094 | 47 | % | |||||||||||
Public company expense | 230,495 | 206,565 | 23,930 | 12 | % | |||||||||||
General and administrative (Other) | 1,405,883 | 1,401,715 | 4,168 | 0 | % | |||||||||||
Total general and administrative | $ | 1,805,732 | $ | 1,678,487 | $ | 127,245 | 8 | % |
Operating loss. Operating loss for the nine months ended March 31, 2014 increased compared to the nine months ended March 31, 2013 primarily as a result of a decrease in revenue from product sales and an increase in both cost of product sales and operating expenses.
Key operating factor
Description | Nine months ended 3-31-14 | Nine months ended 3-31-13 | Variance ($) | Variance (%) | ||||||||||||
Operating loss | $ | (3,267,881 | ) | $ | (3,046,381 | ) | $ | 221,500 | 7 | % |
19 |
Change in fair value of warrant derivative liability. During the three months ended December 31, 2011, there were warrant derivative liabilities established upon issuance of warrants to the purchasers and underwriters in the Company’s registered offering during October 2011 to December 2011. Per ASC 820, the warrant derivative liability requires periodic evaluation for changes in fair value. As required at March 31, 2014 and March 31, 2013, the Company evaluated the fair value of the warrant derivative liability using the Black-Scholes option pricing model on which the original warrant derivative liability was based and applied updated inputs as of those dates. The resulting change in fair value was recorded as of March 31, 2014 and March 31, 2013. The change in valuation of the warrant derivative liability is calculated using the Black-Scholes option pricing model and not reflective of Company an operations which is why these changes are included in the consolidated statement of operations in the non-operating income/(expense) section and as an adjusting item to reconcile net loss to net cash used by operating activities in the consolidated statement of cash flows.
The increase in the warrant derivative liability resulted from the significant increase in the value of the Company’s common stock in March 2014. The Black-Scholes option pricing model utilizes multiple inputs over which management exerts little control. The model uses stock price (market driven), exercise price (contractual), expected life of the contractual life (estimate made by management when the warrant derivative liability is established and reduced by the life expended), volatility of the Company stock (market driven) and a risk-free rate.
Key operating factor
Description | Nine months ended 3-31-14 | Nine months ended 3-31-13 | Variance ($) | Variance (%) | ||||||||||||
Change in fair value of warrant derivative liability | $ | (1,014,000 | ) | $ | 183,000 | $ | (1,197,000 | ) | (654 | )% |
Liquidity and capital resources. The Company has historically financed its operations through cash investments from shareholders. During the nine months ended March 31, 2014 and March 31, 2013, the Company primarily used existing cash reserves to fund its operations and capital expenditures.
Cash flows from operating activities
Cash used by operating activities is the net loss adjusted for non-cash items and changes in operating assets and liabilities. Management has continued to control cash used in operations which has increased by a nominal amount during the nine months ended March 31, 2014 when compared to the nine months ended March 31, 2013.
Key operating factor
Description | Nine months ended 3-31-14 | Nine months ended 3-31-13 | Variance ($) | Variance (%) | ||||||||||||
Net loss | $ | (4,281,317 | ) | $ | (2,863,032 | ) | $ | (1,418,285 | ) | (50 | )% | |||||
Non-cash items | 1,693,709 | 505,464 | 1,188,245 | 235 | % | |||||||||||
Non-cash changes in operating assets and liabilities | 348,411 | 87,622 | 260,789 | 298 | % | |||||||||||
Net cash used by operating activities | $ | (2,239,197 | ) | $ | (2,269,946 | ) | $ | 30,749 | 1 | % |
20 |
Cash flows from investing activities
Cash used by investing activities during the nine months ended March 31, 2014 was primarily related to the deployment of new equipment to improve the efficiency of operations and in the nine months ended March 31, 2013 was primarily related to the capitalization of costs related to other assets. The amounts recorded to restricted cash in both periods are the accrual of interest earned on certificates of deposit with two financial institutions that are a requirement of the Washington State Department of Health.
Key operating factor
Description | Nine months ended 3-31-14 | Nine months ended 3-31-13 | Variance ($) | Variance (%) | ||||||||||||
Purchases of fixed assets | $ | (16,333 | ) | $ | - | $ | (16,333 | ) | 100 | % | ||||||
Additions to licenses and other assets | (5,168 | ) | (12,926 | ) | 7,758 | (60 | )% | |||||||||
Change in restricted cash | (45 | ) | (104 | ) | 59 | (57 | )% | |||||||||
Net cash used by investing activities | $ | (21,546 | ) | $ | (13,030 | ) | $ | (8,516 | ) | 65 | % |
Cash flows from financing activities
Cash provided by financing activities in the nine months ended March 31, 2014 and March 31, 2013 was the result of the sales of common stock and Series D Convertible Preferred Stock through registered direct and underwritten offerings, common stock warrant exercises and non-qualified stock option exercises by former employees. Cash used during the nine months ended March 31, 2014 and 2013 was the result of dividend payments to the Series B preferred shareholders.
Key operating factor
Description | Nine months ended 3-31-14 | Nine months ended 3-31-13 | Variance ($) | Variance (%) | ||||||||||||
Preferred dividend payments | $ | (10,632 | ) | $ | (10,632 | ) | $ | - | 0 | % | ||||||
Proceeds from exercise of employee stock options | 15,129 | 11,309 | 3,820 | 34 | % | |||||||||||
Proceeds from exercise of common stock warrants | 5,961,001 | 1,825 | 5,959,176 | 326,530 | % | |||||||||||
Proceeds from sale of preferred stock, pursuant to underwritten offering, net | 1,478,703 | - | 1,478,703 | 100 | % | |||||||||||
Proceeds from sale of common stock, pursuant to underwritten offering, net | 1,800,589 | - | 1,800,589 | 100 | % | |||||||||||
Proceeds from sale of common stock, net | 13,818,927 | 3,291,977 | 10,526,950 | 320 | % | |||||||||||
Net cash provided by financing activities | $ | 23,063,717 | $ | 3,294,479 | $ | 19,769,238 | 600 | % |
Projected Fiscal Year 2014 Liquidity and Capital Resources
At March 31, 2014, the Company held cash and cash equivalents of $23,702,901 as compared to $2,899,927 of cash and cash equivalents at June 30, 2013.
The Company had approximately $23.62 million of cash and cash equivalents, which are fully insured by the Federal Depository Insurance Company (FDIC), and no short-term investments as of April 30, 2014. The Company’s monthly required cash operating expenditures were approximately $249,000 in the nine months ended March 31, 2014, which represents a 1% decrease or approximately $3,000 from average monthly cash operating expenditures of $252,000 in the nine months ended March 31, 2013. The increased use of cash in operating activities of approximately $31,000 is primarily the result of the increased net loss of approximately $1,418,285 which was driven primarily by the non-cash increased change in change in fair value of warrant derivative liability of $1,197,000 and an increase of approximately $261,000 in non-cash changes in operating assets and liabilities. Management believes that there will not be a significant requirement for capital equipment with the exception of the production of liquid cesium-131 for use in the GliaSite RTS which is expected to be less than $50,000, however, there is no assurance that unanticipated needs for capital equipment may not arise for other needs.
21 |
Management intends to continue its existing protocol studies and to begin new protocol studies on lung and inter-cranial cancer treatments using Cesium-131 brachytherapy seeds and the GliaSite RTS. The Company continues to believe that approximately $180,000 in expense will be incurred during fiscal year 2014 related to protocol expenses relating to lung cancer, intra-cranial cancer and both dual therapy and mono therapy prostate cancer protocols but there is no assurance that unanticipated needs for additional protocols in support of the development of new applications of our existing products may not arise.
Based on the foregoing assumptions, management believes cash, cash equivalents, and short-term investments of approximately $23.62 million on hand at April 30, 2014 will be sufficient to meet our anticipated cash requirements for operations and capital expenditure requirements for several years assuming both revenue and expenses remain at current levels.
Management plans to attain breakeven and generate additional cash flows by increasing revenues from both new and existing customers (through our direct sales channels and through our distributors), increasing sales of the Company’s GliaSite RTS, and expanding into other market applications which initially will include inter-cranial, head and neck, and lung implants, while maintaining the Company's focus on cost control. However, there can be no assurance that the Company will attain profitability or that the Company will be able to attain increases in its revenue. Sales in the prostate market have not shown the increases necessary to breakeven during the past nine fiscal years and showed no change during the nine months ended March 31, 2014.
For the nine months ended March 31, 2014, revenue from other treatment modalities with brachytherapy seeds has decreased by 20% when compared to the nine months ended March 31, 2013. When including the revenue from the sale of GliaSite RTS, revenue from non-prostate treatments has decreased 4% in the nine months ended March 31, 2014 compared to the nine months ended March 31, 2013. As management is focused on increasing revenue from head and neck, colorectal, lung and brain applications of Cesium-131 brachytherapy seeds in addition to increasing the number of cases treated with of the GliaSite RTS, management believes the Company has sufficient cash and cash equivalents to sustain protocols, marketing staff, production staff and production equipment as it works to gain market share.
These non-prostate brachytherapy treatments are in the early stages of application in the clinical setting and the purchasing patterns are subject to the influence of a few key physicians which can significantly influence revenue from quarter to quarter and year to year.
There was no material change in the use of proceeds from our public offerings as described in our final prospectus supplements filed with the SEC pursuant to Rule 424(b) on July 17, 2012, August 29, 2013 and March 24, 2014. Through March 31, 2014, the Company had used the net proceeds raised through the July 2012, August 2013 and March 2014 offerings as described in the table below and held the remaining net proceeds in cash and cash equivalents. 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.
Offering description | Period | Net proceeds | Remaining net proceeds | |||||||||
Registered direct offering | July 2012 | $ | 3,291,977 | $ | 643,681 | |||||||
Underwritten offering | August 2013 | 3,279,292 | 3,279,292 | |||||||||
Registered direct offering | March 2014 | 13,818,927 | 13,818,927 | |||||||||
Total | $ | 20,390,196 | $ | 17,741,900 |
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While management does not believe it needs to raise additional capital to meet its goals and objectives for the foreseeable future, if it does need to raise additional capital as the result of presently unanticipated opportunities or strategic acquisitions, the Company expects to finance its future cash needs through the conversion of outstanding warrants to purchase common stock, other 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 will be at a discount to the market price and it will be dilutive to shareholders. Of course, funding may not be available to it on acceptable terms, or at all.
Other Commitments and Contingencies
The Company is subject to various local, state, and federal environmental regulations and laws due to the isotopes used to produce the Company’s product. As part of normal operations, amounts are expended to ensure that the Company is in compliance with these laws and regulations. While there have been no reportable incidents or compliance issues, the Company believes that if it relocates its current production facilities then certain decommissioning expenses will be incurred. An asset retirement obligation was established in the first quarter of fiscal year 2008 for the Company’s obligations at its current production facility. This asset retirement obligation will be for obligations to remove any residual radioactive materials and to remove all leasehold improvements.
The industry that the Company operates in is subject to product liability litigation. Through its production and quality assurance procedures, the Company works to mitigate the risk of any lawsuits concerning its product. The Company also carries product liability insurance to help protect it from this risk.
The Company has no off-balance sheet arrangements.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, the Company is not required to provide Part I, Item 3 disclosure in this Quarterly Report.
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, 2014. 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.
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.
The Company is continuing the process of remediating the single deficiency which constituted a material weakness identified in its Form 10-K for the fiscal year ended June 30, 2013.
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Progress made on remediating the single deficiency which constituted a material weakness in the nine months ended March 31, 2014 consisted of the following:
· | The Company promoted its Controller, Principal Financial and Accounting Officer, to the position of Chief Financial Officer effective October 1, 2013. |
As a result of ongoing reviews of all significant and non-routine transactions, management believes that there are no material inaccuracies or omissions of material fact and to the best of its knowledge believes that the consolidated financial statements for the three and nine months ended March 31, 2014 fairly present in all material respects the financial condition and results of operations for the Company in conformity with U.S generally accepted accounting principles.
There have been no material changes to the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended June 30, 2013.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Use of Proceeds from Registered Securities
On October 27, 2009, we filed a registration statement on Form S-3 to register securities up to $15 million in value for future issuance in our capital raising activities. The registration statement became effective on November 13, 2009, and the Commission file number assigned to the registration statement is 333-162694. An additional $585,559 was added to this registration statement through a Form S-3 MEF filed on July 16, 2012. The registration statement expired on November 12, 2012.
There was no material change in the use of proceeds from the July 17, 2012 registered direct offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b) on July 17, 2012. Through March 31, 2014, we had begun to use the net proceeds from this registered offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b) and had invested all remaining net proceeds in cash and cash equivalents.
The proceeds used during the nine months ended March 31, 2014 from the July 17, 2012 registered direct offering.
Proceeds used in the nine months ended March 31, 2014: | ||||
Indirect payments to directors and officers for database maintenance and development | $ | 21,720 | ||
Direct payments of compensation to directors | 106,000 | |||
Direct payments of salaries to officers | 475,757 | |||
Working capital | 1,650,944 | |||
Total proceeds used in the nine months ended March 31, 2014 | $ | 2,254,421 |
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers
On May 12, 2014, the Board of Directors of IsoRay, Inc. (the “Registrant” or “IsoRay”), on the recommendation of the Compensation Committee, approved a 2.5% increase to the base salary of all employees of IsoRay and its subsidiaries, effective July 1, 2014. This increase applies to all of IsoRay’s executive officers, other than the Company’s CEO whose compensation will be considered separately at a future meeting.
On May 14, 2014, the Board of Directors of IsoRay, on the recommendation of the Compensation Committee, approved a form of option agreement under IsoRay’s 2014 Employee Stock Option Plan (the “Plan”), which was adopted by the Board on January 16, 2014 and approved by the IsoRay shareholders on March 5, 2014. The Plan authorizes the grant of options to employees, officers, consultants and advisors who provide services to the Registrant or its subsidiaries and who the Plan administrator determines are eligible persons. The Plan is administered by a committee of independent directors or the full Board. The Plan will expire on the ten-year anniversary of its adoption, and 2 million shares of IsoRay common stock are reserved and available for issuance under the Plan. IsoRay's executive officers are eligible to receive grants of options under the Plan, in accordance with the terms and conditions of the Plan. The form of option agreement provides for a ten year option term and equal annual vesting over a three-year period.
The foregoing summaries of the Plan and the form of option agreement do not purport to be complete or describe all of their terms, and are qualified in their entirety by reference to the full text thereof, copies of which are filed herewith as Exhibits 4.32 and 4.33 and are incorporated by reference herein.
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Exhibits:
4.32* | 2014 Employee Stock Option Plan |
4.33* | Form of Stock Option Agreement under the 2014 Employee Stock Option Plan |
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 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.
*** Furnished herewith. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
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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 15, 2014 | ||
ISORAY, INC., a Minnesota corporation | ||
By | /s/ Dwight Babcock | |
Dwight Babcock, Chief Executive Officer (Principal Executive Officer) | ||
By | /s/ Brien Ragle | |
Brien Ragle, Chief Financial Officer (Principal Financial and Accounting Officer) |
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ISORAY, INC.
2014 EMPLOYEE STOCK OPTION PLAN
1. Establishment, Purpose and Term of Plan.
1.1 Establishment. This IsoRay, Inc. 2014 Employee Stock Option Plan (the "Plan") is hereby established effective as of January 16, 2014 (the "Effective Date").
1.2 Purpose. The purpose of the Plan is to advance the interests of the Participating Company Group and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group.
1.3 Term of Plan. The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued and all restrictions on such shares under the terms of the Plan and the agreements evidencing Awards granted under the Plan have lapsed. However, all Awards shall be granted, if at all, within ten (10) years from the earlier of the date the Plan is adopted by the Board or the date the Plan is duly approved by the stockholders of the Company. The Company intends that the Plan comply with Section 409A of the Code, including any amendments or replacements of such section, and the Plan shall be so construed.
2. Definitions and Construction.
2.1 Definitions. Whenever used herein, the following terms shall have the respective meanings set forth below:
(a) "Affiliate" means (i) an entity, other than a Parent Corporation, that directly, or indirectly, through one or more intermediary entities, controls the Company or (ii) an entity, other than a Subsidiary Corporation, that is controlled by the Company directly, or indirectly through one or more intermediary entities. For this purpose, the term "control" (including the term "controlled by") means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the relevant entity, whether through the ownership of voting securities, by contract or otherwise; or shall have such other meaning assigned such term for the purposes of registration on Form S-8 under the Securities Act.
(b) "Assumed " means that pursuant to a Corporate Transaction either (i) an Award is expressly affirmed by the Company or (ii) the contractual obligations represented by the Award are expressly assumed (and not simply by operation of law) by the successor entity or its parent in connection with the Corporate Transaction, with appropriate adjustments to the number and type of securities of the successor entity or its parent subject to the Award and the exercise or purchase price thereof, which at least preserves the compensation element of the Award existing at the time of the Corporate Transaction, as determined in accordance with the instruments evidencing the agreement to assume the Award.
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(c) "Award" means an Option granted under the Plan.
(d) "Award Agreement" means an Option Agreement, as the case may be.
(e) "Board" means the Board of Directors of the Company. If the Committee has been appointed by the Board to administer the Plan, "Board" also means such Committee.
(f) "Cause" means, with respect to a Participant and unless otherwise defined by the Participant's Award Agreement or contract of employment or service, any of the following: (1) the Participant's actual or attempted theft, dishonesty, or falsification of any Participating Company documents or records or other misconduct in the performance of his or her duties (including, but not limited to, violation of Company policies, workplace rules, standards of conduct, or breaches of loyalty); (2) the Participant's disclosure of or improper use of a Participating Company's confidential or proprietary information; (3) any action by the Participant which has a material detrimental effect on a Participating Company's reputation or business; (4) the Participant's repeated failure, neglect or inability to perform any assigned duties; (5) any material breach by the Participant of any employment or service agreement between the Participant and a Participating Company, which breach is not cured pursuant to the terms of such agreement; or (6) the Participant's commission or conviction (including any plea of guilty or nolo contendere) of any felony or other crime involving fraud, dishonesty or moral turpitude. A Participant who agrees to resign his affiliation with a Participant Company in lieu of being terminated for Cause may, at the Board's discretion, be deemed to have been terminated for Cause for purposes of the Plan.
(g) "Code" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder.
(h) "Committee" means the compensation committee or other committee of the Board appointed to administer the Plan and having such powers as shall be specified by the Board, provided that unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted herein, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. To the extent required by applicable regulations under Section 162(m) of the Code, the Committee shall be comprised of two or more "outside directors" (as defined in applicable regulations thereunder) who, to the extent required by Rule 16b-3, or any successor provision, shall be non-employee directors within the meaning of such Rule.
(i) "Company" means IsoRay, Inc., a Minnesota corporation, or any successor corporation thereto.
(j) "Consultant" means a person engaged to provide consulting or advisory services (other than as an Employee or a Director) to a Participating Company, provided that the identity of such person, the nature of such services or the entity to which such services are provided would not preclude the Company from offering or selling securities to such person pursuant to the Plan in reliance on either the exemption from registration provided by Rule 701 under the Securities Act or, if the Company is required to file reports pursuant to Sections 13 or 15(d) of the Exchange Act, registration on a Form S-8 Registration Statement under the Securities Act.
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(k) "Corporate Transaction" means any of the following transactions:
(i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated;
(ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company;
(iii) the complete liquidation or dissolution of the Company;
(iv) any reverse merger or series of related transactions culminating in a reverse merger (including, but not limited to, a tender offer followed by a reverse merger) in which the Company is the surviving entity but (A) the shares of Common Stock outstanding immediately prior to such merger are converted or exchanged by virtue of the merger into other property, whether in the form of securities, cash or otherwise, or (B) in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger or the initial transaction culminating in such merger, but excluding any such transaction or series of related transactions that the Board determines not to be a Corporate Transaction; or
(v) acquisition in a single or series of related transactions by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities, but excluding any such transaction or series of related transactions that the Board determines shall not be a Corporate Transaction.
(l) "Director" means a member of the Board or of the board of directors of any other Participating Company.
(m) "Disability" means a mental or physical condition that the Board determines in its judgment, and based on such evidence as it deems appropriate, renders the Participant unable to perform, with or without reasonable accommodations, the major duties of the Participant's position with the Participating Company Group, and which is expected to be permanent or of indefinite duration; provided that, for purposes of the exercise of an incentive stock option, it shall mean a total and permanent disability within the meaning of Code Section 22(e)(3).
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(n) "Employee" means any individual that is an employee (including an Officer or a Director who is also treated as an employee) of a Participating Company and, with respect to any Incentive Stock Option granted to such person, who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a Director nor payment of a director's fee shall be sufficient to constitute employment for purposes of the Plan. The Board shall determine in its discretion whether an individual has become or has ceased to be an Employee and the effective date of such individual's employment or termination of employment, as the case may be. For purposes of an individual's rights, if any, under the Plan as of the time of the Board's determination, all such determinations shall be final, binding and conclusive, notwithstanding that the Board or any court of law or governmental agency may subsequently make a contrary determination.
(o) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(p) "Fair Market Value" means, as of any date, the value of a share of Stock or other property as determined by the Board, in its discretion, or by the Company, in its discretion, if such determination is expressly allocated to the Company herein, subject to the following:
(i) If, on such date, the Stock is listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the New York Stock Exchange, the NASDAQ Global Market, the NASDAQ Global Select Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in The Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its discretion.
(ii) If the Stock is not listed on an established stock exchange or national market system, but the Stock is regularly quoted by a recognized securities dealer, its Fair Market Value shall be the mean of the high bid and low asked prices for such date or, if there are no high bid and low asked prices for a share of Stock on such date, the high bid and low asked prices for a share of Stock on the last preceding date for which such information exists, as reported in The Wall Street Journal or such other source as the Board deems reliable.
(iii) If, on such date, the Stock is not listed on a national or regional securities exchange or market system or regularly quoted by a recognized securities dealer, the Fair Market Value of a share of Stock shall be as determined by the Board in good faith without regard to any restriction other than a restriction which, by its terms, will never lapse, and subject to compliance with Section 409A of the Code.
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(q) "Good Reason" means, with respect to a Participant and unless otherwise defined by the Participant's Award Agreement or contract of employment or service, the occurrence after a Corporate Transaction of any of the following events or conditions, unless consented to by the Participant (and the Participant shall be deemed to have consented to any such event or condition unless he or she provides written notice of his or her non-acquiescence within 30 days of the effective time of such event or condition):
(i) a change in the Participant's responsibilities or duties, which represents a material and substantial diminution in the Participant's responsibilities or duties as in effect immediately preceding the consummation of a Corporate Transaction;
(ii) a reduction in the Participant's base salary to a level at least twenty percent (20%) below Participant's base salary in effect at any time within twelve (12) months preceding the consummation of a Corporate Transaction; provided that an across-the-board reduction in the salary level of substantially all other individuals in positions similar to the Participant's by the same percentage amount shall not constitute such a salary reduction; or
(iii) requiring the Participant to be based at any place outside a 50-mile radius from the Participant's job location or residence prior to the Corporate Transaction, except for reasonably required travel on business which is not materially greater than such travel requirements prior to the Corporate Transaction.
(r) "Incentive Stock Option" means an Option intended to be (as set forth in the Option Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code.
(s) "Insider" means an Officer, a member of the Board or other person whose transactions in Stock are subject to Section 16 of the Exchange Act.
(t) "Nonstatutory Stock Option" means an Option not intended to be (as set forth in the Option Agreement) or which does not qualify as an Incentive Stock Option.
(u) "Officer" means any person designated by the Board as an officer of the Company.
(v) "Option" means a right granted under Section 6 to purchase Stock pursuant to the terms and conditions of the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory Stock Option.
(w) "Option Agreement" means the written agreement between the Company and a Participant setting forth the terms, conditions and restrictions of the Option granted to the Participant and any shares acquired upon the exercise thereof. An Option Agreement may consist of a form of "Notice of Grant of Stock Option" and a form of "Stock Option Agreement" incorporated therein by reference, or such other form or forms as the Board may approve from time to time.
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(x) "Parent Corporation" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code.
(y) "Participant" means any eligible person who has been granted one or more Awards.
(z) "Participating Company" means the Company or any Parent Corporation or Subsidiary Corporation.
(aa) "Participating Company Group" means, at any point in time, all corporations, collectively, that are then Participating Companies.
(bb) "Replaced" means that pursuant to a Corporate Transaction an Award is replaced with a comparable stock award or a cash incentive program of the Company, the successor entity (if applicable) or parent of either of them, which preserves the compensation element of such Award existing at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same (or a more favorable) vesting schedule applicable to such Award. The determination of Award comparability shall be made by the Board and its determination shall be final, binding and conclusive.
(cc) "Rule 16b-3" means Rule 16b-3 under the Exchange Act, as amended from time to time, or any successor rule or regulation.
(dd) "Securities Act" means the Securities Act of 1933, as amended.
(ee) "Service" means a Participant's employment or service with the Participating Company Group, whether in the capacity of an Employee or a Consultant. A Participant's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders Service to the Participating Company Group or a change in the Participating Company for which the Participant renders such Service, provided that there is no interruption or termination of the Participant's Service. Furthermore, a Participant's Service shall not be deemed to have terminated if the Participant takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the one hundred eighty-first (181st) day following the commencement of such leave, any Incentive Stock Option held by the Participant shall cease to be treated as an Incentive Stock Option and instead shall be treated thereafter as a Nonstatutory Stock Option, unless the Participant's right to return to Service is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining vesting under the Participant's Option Agreement or Stock Purchase Agreement. Except as otherwise provided by the Board, in its discretion, the Participant's Service shall be deemed to have terminated either upon an actual termination of Service or upon the entity for which the Participant performs Service ceasing to be a Participating Company. Subject to the foregoing, the Board, in its discretion, shall determine whether the Participant's Service has terminated and the effective date of and reason for such termination for purposes of the Plan.
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(ff) "Stock" means the common stock of the Company, as adjusted from time to time in accordance with Section 4.2.
(gg) "Subsidiary Corporation" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code.
(hh) "Ten Percent Stockholder" means a person who, at the time an Award is granted to such person, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company within the meaning of Section 422(b)(6) of the Code.
2.2 Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise.
3. Administration.
3.1 Administration of the Plan. The Plan shall be administered by the Board until the Committee has been appointed by the Board, and upon such appointment and in accordance with Sections 2.1(e) and (h) hereof, the Committee shall administer the Plan in lieu of the Board and have all of the powers of the Board granted herein (unless specifically limited by the Board), including, without limitation, the powers set forth in Section 3.2 of this Plan; provided, however, and notwithstanding the foregoing or anything herein which may be construed as being to the contrary, the Board exclusively shall have the power to and may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter and once again directly administer the Plan.
3.2 Powers of the Board. In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Board shall have the full and final power and authority, in its discretion:
(a) to determine when, to whom and in what types and amounts Awards should be granted, and the terms and conditions applicable to each Award, including the exercise price and term of Options;
(b) to construe and interpret the Plan and to make all determinations (including determining Fair Market Value) necessary or advisable for the administration of the Plan;
(c) to make, amend, and rescind rules relating to the Plan, including rules with respect to the exercisability of Awards upon the termination of Services of a Participant;
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(d) to determine the terms and conditions of any and all Award Agreements (which need not be identical with respect to any Option Agreement against another), approve forms of Award Agreements for use under the Plan, and, with the consent of the Participant, to amend any such Award Agreement at any time; provided that the consent of the Participant shall not be required for any amendment which (i) does not materially adversely affect the rights of the Participant, or (ii) is necessary or advisable (as determined by the Board) to carry out the purpose of the Award as a result of any new or change in existing applicable law or accounting rules;
(e) to accelerate the exercisability of any Award or any group of Awards for any reason and at any time, including in connection with a Participant's termination;
(f) subject to the terms and provisions of the Plan, to extend the time during which any Award or group of Awards may be exercised;
(g) to make such adjustments or modifications to Awards to Participants who are working outside the United States or to create and administer sub-plans as the Board deems advisable to fulfill the purposes of the Plan or to comply with applicable local law;
(h) to cancel, with the consent of the Participant, outstanding Awards and grant new Awards in substitution therefor;
(i) to delegate to officers, employees or independent contractors of the Company matters involving the routine administration of the Plan, and which are not specifically required by any provision of this Plan to be performed by the Board;
(j) to impose such additional terms and conditions upon the grant, exercise or retention of Awards as the Board may, before or concurrently with the grant thereof, deem appropriate, including limiting the percentage of Awards which may from time to time be exercised by a Participant;
(k) to correct any defect, omission or inconsistency in the Plan, grant, or Award Agreement in any manner and to the extent it shall deem necessary or expedient; and
(l) to take any other action with respect to any matters relating to the Plan for which it is responsible.
All questions of interpretation of the Plan or of any Award shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan or such Award.
3.3 Committee Action. Upon its appointment, the Committee may select one of its members as its chairman, and shall hold meetings at such times and places as it may determine. A majority of the Committee shall constitute a quorum, and acts of a majority of the members of the Committee at a meeting at which a quorum is present, or acts reduced to or approved in writing by all the members of the Committee (if consistent with applicable state law), shall be the valid acts of the Committee.
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3.4 Administration with Respect to Insiders. With respect to participation by Insiders in the Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b-3.
3.5 Indemnification. In addition to such other rights of indemnification as they may have as members of the Board or officers or employees of the Participating Company Group, members of the Board and any officers or employees of the Participating Company Group to whom authority to act for the Board or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal thereof, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in performance of his or her duties; provided, however, that within sixty (60) days after the institution of any such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same.
3.6 At-Will Employment. Nothing in the Plan or in any Award Agreement hereunder shall confer upon any Participant any right to continue in the employ of, or as a Director or Consultant for, a Participating Company, or shall interfere with or restrict in any way the rights of a Participating Company, which rights are hereby expressly reserved, to discharge any Participant at any time for any reason whatsoever, with or without Cause, except to the extent expressly provided otherwise in a written agreement between the Participant and a Participating Company.
3.7 Repricing. The Board shall have the authority, without the approval of the shareholders of the Company, to amend any outstanding Option to increase or reduce the price per share or to cancel and replace an Option with the grant of an Option having an exercise price per share that is less than, greater than or equal to the price per share of the original Option.
4. Shares Subject to Plan.
4.1 Maximum Number of Shares Issuable. Subject to adjustment as provided in Section 4.2, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be 2,000,000, and shall consist of authorized but unissued or reacquired shares of Stock or any combination thereof. If an outstanding Award for any reason expires or is terminated or canceled, or if shares of Stock are acquired upon the exercise of an Award subject to a Company repurchase option and are repurchased by the Company at the Participant's exercise or purchase price, the shares of Stock allocable to the unexercised portion of such Award or such repurchased shares of Stock shall again be available for issuance under the Plan. However, except as adjusted pursuant to Section 4.2, in no event shall more than 1,000,000 shares of Stock be available for issuance pursuant to the exercise of Incentive Stock Options (the "ISO Share Limit").
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4.2 Adjustments for Changes in Capital Structure. Subject to any required action by the stockholders of the Company, in the event of any change in the Stock effected without receipt of consideration by the Company, whether through merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares, or similar change in the capital structure of the Company, or in the event of payment of a dividend or distribution to the stockholders of the Company in a form other than Stock (excepting normal cash dividends) that has a material effect on the Fair Market Value of shares of Stock, appropriate and proportionate adjustments shall be made in the number and class of shares subject to the Plan and to any outstanding Options, in the ISO Share Limit set forth in Section 4.1, and in the exercise price per share of any outstanding Options in order to prevent dilution or enlargement of Optionees' rights under the Plan. For purposes of the foregoing, conversion of any convertible securities of the Company shall not be treated as "effected without receipt of consideration by the Company." Any fractional share resulting from an adjustment pursuant to this Section 4.2 shall be rounded down to the nearest whole number, and in no event may the exercise price of any Option be decreased to an amount less than the par value, if any, of the stock subject to the Option. Such adjustments shall be determined by the Board, and its determination shall be final, binding and conclusive.
5. Eligibility and Option Limitations.
5.1 Persons Eligible for Awards. Awards may be granted only to Employees and Consultants. For purposes of the foregoing sentence, "Employees" and "Consultants" shall include prospective Employees and prospective Consultants to whom Options are granted in connection with written offers of an employment or other service relationship with the Participating Company Group. Eligible persons may be granted more than one (1) Award. However, eligibility in accordance with this Section shall not entitle any person to be granted an Award, or, having been granted an Award, to be granted an additional Award.
5.2 Option Grant Restrictions. An Incentive Stock Option may be granted only to a person who is an Employee on the effective date of grant of the Option to such person. Any person who is not an Employee on the effective date of the grant of an Option to such person may only be granted a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective Employee upon the condition that such person become an Employee shall be deemed granted effective on the date such person commences Service with a Participating Company, with an exercise price determined as of such date in accordance with Section 6.1.
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5.3 Fair Market Value Limitation. To the extent that Options designated as Incentive Stock Options (granted under all stock plans of the Participating Company Group, including the Plan) become exercisable by a Participant for the first time during any calendar year for stock having a Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portions of such Options which exceed such amount shall be treated as Nonstatutory Stock Options. For purposes of this Section 5.3, Options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the time the Option with respect to such stock is granted. If the Code is amended to provide for a different limitation from that set forth in this Section 5.3, such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section 5.3, the Participant may designate which portion of such Option the Participant is exercising. In the absence of such designation, the Participant shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Separate certificates representing each such portion shall be issued upon the exercise of the Option.
6. Terms and Conditions of Options.
Options shall be evidenced by Option Agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish. No Option or purported Option shall be a valid and binding obligation of the Company unless evidenced by a fully executed Option Agreement. Option Agreements may incorporate all or any of the terms of the Plan by reference and shall be subject to the following terms and conditions:
6.1 Exercise Price. The exercise price for each Option shall be established in the discretion of the Board, subject to compliance with Section 409A of the Code; provided, however, that (a) the exercise price per share for an Incentive Stock Option shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option, (b) the exercise price per share for a Nonstatutory Stock Option shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option, and (c) no Option granted to a Ten Percent Stockholder shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provisions of Section 424(a) of the Code.
6.2 Exercisability and Term of Options. Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Board and set forth in the Option Agreement evidencing such Option; provided, however, that, (a) no Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Stockholder shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option, and (c) no Option granted to a prospective Employee or prospective Consultant may become exercisable prior to the date on which such person commences Service with a Participating Company. Subject to the foregoing, unless otherwise specified by the Board in the grant of an Option, any Option granted hereunder shall terminate ten (10) years after the effective date of grant of the Option, unless earlier terminated in accordance with its provisions.
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6.3 Payment of Exercise Price.
(a) Forms of Consideration Authorized. Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check or cash equivalent, (ii) by tender to the Company, or attestation to the ownership, of shares of Stock owned by the Participant having a Fair Market Value not less than the exercise price, (iii) by delivery of a properly executed notice together with irrevocable instructions to a broker providing for the assignment to the Company of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (a "Cashless Exercise"), (iv) by such other consideration as may be approved by the Board from time to time to the extent permitted by applicable law, or (v) by any combination thereof. The Board may at any time or from time to time, by approval of or by amendment to the standard forms of Option Agreement described in Section 8, or by other means, grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration. Notwithstanding any other provision of the Plan to the contrary, no Optionee who is a Director or an "executive officer" of the Company within the meaning of Section 13(k) of the Exchange Act shall be permitted to make payment with respect to any Options granted under the Plan, or continue any extension of credit with respect to such payment with a loan from the Company or a loan arranged by the Company in violation of Section 13(k) of the Exchange Act.
(b) Limitations on Forms of Consideration.
(i) Tender of Stock. Notwithstanding the foregoing, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock to the extent such tender or attestation would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. Unless otherwise provided by the Board, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock unless such shares either have been owned by the Participant for more than six (6) months (and were not used for another Option exercise by attestation during such period) or were not acquired, directly or indirectly, from the Company.
(ii) Cashless Exercise. The Board reserves, at any and all times, the right, in the Board's sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise.
6.4 Effect of Termination of Service.
(a) Option Exercisability. Subject to earlier termination of the Option as otherwise provided herein, and unless otherwise provided by the Board in the grant of an Option and set forth in the Option Agreement, an Option shall be exercisable after a Participant's termination of Service only during the applicable time period determined in accordance with this Section 6.4 and thereafter shall terminate:
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(i) Disability. If the Participant's Service terminates because of the Disability of the Participant, the Option, to the extent unexercised and exercisable on the date on which the Participant's Service terminated, may be exercised by the Participant (or the Participant's guardian or legal representative) at any time prior to the expiration of twelve (12) months (or such longer period of time as determined by the Board, in its discretion) after the date on which the Participant's Service terminated, but in any event no later than the date of expiration of the Option's term as set forth in the Option Agreement evidencing such Option (the "Option Expiration Date").
(ii) Death. If the Participant's Service terminates because of the death of the Participant, the Option, to the extent unexercised and exercisable on the date on which the Participant's Service terminated, may be exercised by the Participant's legal representative or other person who acquired the right to exercise the Option by reason of the Participant's death at any time prior to the expiration of twelve (12) months (or such longer period of time as determined by the Board, in its discretion) after the date on which the Participant's Service terminated, but in any event no later than the Option Expiration Date. The Participant's Service shall be deemed to have terminated on account of death if the Participant dies within three (3) months (or such longer period of time as determined by the Board, in its discretion) after the Participant's termination of Service.
(iii) Termination for Cause. Notwithstanding any other provision of the Plan to the contrary, if the Participant's Service with the Participating Company Group is terminated for Cause, as defined by the Participant's Option Agreement or contract of employment or service (or, if not defined in any of the foregoing, as defined below), the Option shall terminate and cease to be exercisable immediately upon such termination of Service.
(iv) Other Termination of Service. If the Participant's Service terminates for any reason, except Disability, death or Cause, the Option, to the extent unexercised and exercisable by the Participant on the date on which the Participant's Service terminated, may be exercised by the Participant at any time prior to the expiration of six (6) months (or such longer period of time as determined by the Board, in its discretion) after the date on which the Participant's Service terminated, but in any event no later than the Option Expiration Date.
(b) Extension if Exercise Prevented by Law. Notwithstanding the foregoing other than termination for Cause, if the exercise of an Option within the applicable time periods set forth in Section 6.4(a) is prevented by the provisions of Section 11 below, the Option shall remain exercisable until three (3) months (or such longer period of time as determined by the Board, in its discretion) after the date the Participant is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date.
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(c) Extension if Participant Subject to Section 16(b). Notwithstanding the foregoing other than termination for Cause, if a sale within the applicable time periods set forth in Section 6.4(a) of shares acquired upon the exercise of the Option would subject the Participant to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Participant would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Participant's termination of Service, or (iii) the Option Expiration Date.
6.5 Transferability of Options. During the lifetime of the Participant, an Option shall be exercisable only by the Participant or the Participant's guardian or legal representative. No Option shall be assignable or transferable by the Participant, except by will or by the laws of descent and distribution. No Option or interest or right therein shall be liable for the debts, contracts or engagements of the Participant or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, hypothecation, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect. Notwithstanding the foregoing, to the extent permitted by the Board, in its discretion, and set forth in the Option Agreement evidencing such Option, a Nonstatutory Stock Option shall be assignable or transferable subject to the applicable limitations, if any, under Rule 701 under the Securities Act and the General Instructions to Form S-8 Registration Statement under the Securities Act.
7. Standard Forms of Agreements.
7.1 Option Agreement. Unless otherwise provided by the Board at the time the Option is granted, an Option shall comply with and be subject to the terms and conditions set forth in the form of Option Agreement approved by the Board concurrently with its adoption of the Plan and as amended from time to time.
7.2 Authority to Vary Terms. The Board shall have the authority from time to time to vary the terms of any standard form of agreement described in this Section 8 either in connection with the grant or amendment of an individual Award or in connection with the authorization of a new standard form or forms; provided, however, that any such new, revised or amended standard form or forms of agreement shall be subject to the terms of the Plan as set forth herein.
8. Change in Control.
8.1 Termination of Award to Extent Not Assumed in Corporate Transaction. Effective upon the consummation of a Corporate Transaction, all outstanding Awards under the Plan shall terminate. However, all such Awards shall not terminate to the extent they are Assumed in connection with the Corporate Transaction.
8.2 Acceleration of Award Upon Corporate Transaction. Except as provided otherwise in an individual Award Agreement, in the event of a Corporate Transaction and:
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(a) for the portion of each Award that is Assumed or Replaced, then such Award (if Assumed), the replacement Award (if Replaced), or the cash incentive program (if Replaced) automatically shall become fully vested, exercisable and payable and be released from any repurchase or forfeiture rights (other than repurchase rights exercisable at Fair Market Value) for all of the shares of Stock at the time represented by such Assumed or Replaced portion of the Award immediately upon termination of the Participant's Service, if such Service is terminated by the successor company or the Company without Cause or voluntarily by the Participant with Good Reason within twelve (12) months after the Corporate Transaction; and
(b) for the portion of each Award that is neither Assumed nor Replaced, such portion of the Award shall automatically become fully vested and exercisable and be released from any repurchase or forfeiture rights (other than repurchase rights exercisable at Fair Market Value) for all of the shares of Stock at the time represented by such portion of the Award, immediately prior to the specified effective date of such Corporate Transaction, provided however that such accelerated portion of the Award shall terminate under Section 9.1 to the extent not exercised prior to the consummation of such Corporate Transaction.
8.3 Federal Excise Tax Under Section 4999 of the Code.
(a) Excess Parachute Payment. In the event that any acceleration of vesting pursuant to an Award and any other payment or benefit received or to be received by a Participant would subject the Participant to any excise tax pursuant to Section 4999 of the Code due to the characterization of such acceleration of vesting, payment or benefit as an "excess parachute payment" under Section 280G of the Code, the Participant may to the extent permitted by applicable law elect, in his or her sole discretion, to reduce the amount of any acceleration of vesting called for under the Award in order to avoid such characterization.
(b) Determination by Independent Accountants. To aid the Participant in making any election called for under Section 8.3(a), no later than the date of the occurrence of any event that might reasonably be anticipated to result in an "excess parachute payment" to the Participant as described in Section 8.3(a), the Company shall request a determination in writing by independent public accountants selected by the Company (the "Accountants"). As soon as practicable thereafter, the Accountants shall determine and report to the Company and the Participant the amount of such acceleration of vesting, payments and benefits that would produce the greatest after-tax benefit to the Participant. For the purposes of such determination, the Accountants may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Participant shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make their required determination. The Company shall bear all fees and expenses the Accountants may reasonably charge in connection with their services contemplated by this Section 8.3(b).
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9. Tax Withholding.
9.1 Tax Withholding in General. The Company shall have the right to deduct from any and all payments made under the Plan, or to require the Participant, through payroll withholding, cash payment or otherwise, including by means of a Cashless Exercise of an Option, to make adequate provision for, the federal, state, local and foreign taxes, if any, required by law to be withheld by the Participating Company Group with respect to an Award or the shares acquired pursuant thereto. The Company shall have no obligation to deliver shares of Stock or to release shares of Stock from an escrow established pursuant to an Option Agreement or Stock Purchase Agreement until the Participating Company Group's tax withholding obligations have been satisfied by the Participant.
9.2 Withholding in Shares. The Company shall have the right, but not the obligation, to deduct from the shares of Stock issuable to a Participant upon the exercise of an Award, or to accept from the Participant the tender of, a number of whole shares of Stock having a Fair Market Value, as determined by the Company, equal to all or any part of the tax withholding obligations of the Participating Company Group. The Fair Market Value of any shares of Stock withheld or tendered to satisfy any such tax withholding obligations shall not exceed the amount determined by the applicable minimum statutory withholding rates.
10. Compliance with Securities Law.
The grant of Awards and the issuance of shares of Stock upon exercise of Awards shall be subject to compliance with all applicable requirements of federal, state and foreign securities laws. Awards may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other laws or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, no Award may be exercised unless (a) a registration statement under the Securities Act shall at the time of exercise be in effect with respect to the shares of Stock issuable upon such exercise or (b) in the opinion of legal counsel to the Company, the shares issuable upon exercise may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to lawfully issue and sell any shares of Stock hereunder shall relieve the Company of any liability in respect of the failure to issue or sell such shares. As a condition to the exercise of any Award, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company.
11. Termination or Amendment of Plan.
The Board may terminate or amend the Plan at any time. However, subject to changes in applicable law, regulations or rules that would permit otherwise, without the approval of the Company's stockholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Section 4.2), (b) no change in the class of persons eligible to receive Incentive Stock Options, and (c) no other amendment of the Plan that would require approval of the Company's stockholders under any applicable law, regulation or rule. No termination or amendment of the Plan shall affect any then outstanding Award unless expressly provided by the Board. In any event, no termination or amendment of the Plan may adversely affect any then outstanding Award without the consent of the Participant, unless such termination or amendment is required to enable an Option designated as an Incentive Stock Option to qualify as an Incentive Stock Option or is necessary to comply with any applicable law, regulation or rule.
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12. Miscellaneous Provisions.
12.1 Repurchase Rights. Shares issued under the Plan may be subject to a right of first refusal, one or more repurchase options, or other conditions and restrictions as determined by the Board in its discretion at the time the Award is granted. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company. Upon request by the Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions.
12.2 Approval of Plan by Shareholders. The Plan may be submitted for the approval of the Company's shareholders within twelve (12) months of the date of the Board's initial adoption of the Plan. Awards requiring shareholder approval may be granted or awarded prior to such shareholder approval, provided that such Awards shall not be exercisable, shall not vest and the restrictions thereon shall not lapse and no shares of Stock shall be issued pursuant thereto prior to the time when the Plan is approved by the shareholders, and provided further that if such approval has not been obtained at the end of said twelve (12) month period, all Awards that require shareholder approval and were previously granted or awarded under the Plan shall thereupon be canceled and become null and void.
12.3 No Shareholder Rights. Except as otherwise provided herein, a Participant shall have none of the rights of a shareholder with respect to shares of Stock covered by any Award until the Participant becomes the record owner of such shares of Stock.
12.4 Effect of Plans on Other Compensation Plans. The adoption of the Plan shall not affect any other compensation or incentive plans in effect for any Participating Company. Nothing in the Plan shall be construed to limit the right of any Participating Company: (a) to establish any other forms of incentives or compensation for Employees, Directors or Consultants of any Participating Company, or (b) to grant or assume options or other rights or awards otherwise than under the Plan in connection with any proper corporate purpose including without limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, partnership, limited liability company, firm or association.
12.5 Governing Law. The Plan and any agreements hereunder shall be administered, interpreted and enforced under the internal laws of the State of Minnesota without regard to conflicts of laws thereof.
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12.6 Section 409A. To the extent that the Board determines that any Award granted under the Plan is subject to Section 409A of the Code, the Award Agreement evidencing such Option shall incorporate the terms and conditions required by Section 409A of the Code. To the extent applicable, the Plan and Award Agreements shall be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the Effective Date. Notwithstanding any provision of the Plan to the contrary, in the event that following the Effective Date the Board determines that any Award may be subject to Section 409A of the Code and related Department of Treasury guidance (including such Department of Treasury guidance as may be issued after the Effective Date), the Board may adopt such amendments to the Plan and the applicable Award Agreement or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Board determines are necessary or appropriate to (a) exempt the Award from Section 409A of the Code and/or preserve the intended tax treatment of the benefits provided with respect to the Award, or (b) comply with the requirements of Section 409A of the Code and related Department of Treasury guidance and thereby avoid the application of any penalty taxes under such Section.
12.7 No Rights to Options. No Employee, Consultant or other person shall have any claim to be granted any Option pursuant to the Plan, and neither the Company nor the Board is obligated to treat Employees, Consultants, Participants or any other persons uniformly.
12.8 Relationship to Other Benefits. No payment pursuant to the Plan shall be taken into account in determining any benefits under any pension, retirement, savings, profit sharing, group insurance, welfare or other benefit plan of any Participating Company except to the extent otherwise expressly provided in writing in such other plan or an agreement thereunder.
12.9 Expenses. The expenses of administering the Plan shall be borne by the Participating Companies.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the foregoing sets forth the IsoRay, Inc. 2014 Employee Stock Option Plan as duly adopted by the Board on January 16, 2014.
/s/ Krista Cline | |
Krista Cline, Secretary |
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ISORAY, INC.
STOCK OPTION AGREEMENT
IsoRay, Inc. has granted to the individual (the “Participant”) named in the Notice of Grant of Stock Option (the “Notice”) to which this Stock Option Agreement (the “Option Agreement”) is attached an option (the “Option”) to purchase certain shares of Stock upon the terms and conditions set forth in the Notice and this Option Agreement. The Option has been granted pursuant to and shall in all respects be subject to the terms and conditions of the IsoRay, Inc. 2014 Employee Stock Option Plan (the “Plan”), as amended to the Date of Option Grant, the provisions of which are incorporated herein by reference. By signing the Notice, the Participant: (a) represents that the Participant has received copies of, and has read and is familiar with the terms and conditions of, the Notice, the Plan and this Option Agreement, (b) accepts the Option subject to all of the terms and conditions of the Notice, the Plan and this Option Agreement, and (c) agrees to accept as binding, conclusive and final all decisions or interpretations of the Board (or the Committee, if a Committee has been appointed) upon any questions arising under the Notice, the Plan or this Option Agreement.
1. | Definitions and Construction. |
1.1 Definitions. Unless otherwise defined herein, capitalized terms shall have the meanings assigned to such terms in the Notice or the Plan.
1.2 Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.
2. | Tax Consequences. |
2.1 Tax Status of Option. This Option is intended to have the tax status designated in the Notice.
(a) Incentive Stock Option. If the Notice so designates, this Option is intended to be an Incentive Stock Option within the meaning of Section 422(b) of the Code, but the Company does not represent or warrant that this Option qualifies as such. The Participant should consult with the Participant’s own tax advisor regarding the tax effects of this Option and the requirements necessary to obtain favorable income tax treatment under Section 422 of the Code, including, but not limited to, holding period requirements. (NOTE TO PARTICIPANT: If the Option is exercised more than three (3) months after the date on which you cease to be an Employee (other than by reason of your death or permanent and total disability as defined in Section 22(e)(3) of the Code), the Option will be treated as a Nonstatutory Stock Option and not as an Incentive Stock Option to the extent required by Section 422 of the Code.)
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(b) Nonstatutory Stock Option. If the Notice so designates, this Option is intended to be a Nonstatutory Stock Option and shall not be treated as an Incentive Stock Option within the meaning of Section 422(b) of the Code.
2.2 ISO Fair Market Value Limitation. If the Notice designates this Option as an Incentive Stock Option, then to the extent that the Option (together with all Incentive Stock Options granted to the Participant under all stock option plans of the Participating Company Group, including the Plan) becomes exercisable for the first time during any calendar year for shares having a Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such amount will be treated as Nonstatutory Stock Options. For purposes of this Section 2.2, options designated as Incentive Stock Options are taken into account in the order in which they were granted, and the Fair Market Value of stock is determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a different limitation from that set forth in this Section 2.2, such different limitation shall be deemed incorporated herein effective as of the date required or permitted by such amendment to the Code. If the Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section 2.2, the Participant may designate which portion of such Option the Participant is exercising. In the absence of such designation, the Participant shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Separate certificates representing each such portion shall be issued upon the exercise of the Option. (NOTE TO PARTICIPANT: If the aggregate Exercise Price of the Option (that is, the Exercise Price multiplied by the Number of Option Shares) plus the aggregate exercise price of any other Incentive Stock Options you hold (whether granted pursuant to the Plan or any other stock option plan of the Participating Company Group) is greater than $100,000, you should contact the Chief Financial Officer of the Company to ascertain whether the entire Option qualifies as an Incentive Stock Option.)
3. | Administration of Agreement. |
All questions of interpretation concerning this Option Agreement shall be determined the Board. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any Officer shall the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the Officer has apparent authority with respect to such matter, right, obligation, or election.
4. | Exercise of the Option. |
4.1 Right to Exercise.
(a) In General. Except as otherwise provided herein, the Option shall be exercisable on and after the Initial Exercise Date set forth and prior to the termination of the Option (as provided in Section 6) in an amount not to exceed the Number of Option Shares less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable for more shares than the Number of Option Shares, as adjusted pursuant to Section 9.
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(b) ISO Exercise Limitation. If this Option is designated as an Incentive Stock Option in the Notice, then notwithstanding the provisions of Section 4.1(a) and except as provided in Section 4.1(c), the aggregate Fair Market Value of the shares of Stock with respect to which the Participant may exercise the Option for the first time during any calendar year, when added to the aggregate Fair Market Value of shares subject to other options designated as Incentive Stock Options and granted to the Participant under other stock option plans of the Participating Company Group prior to the Date of Option Grant which options are exercisable for the first time during the same calendar year, shall not exceed One Hundred Thousand Dollars ($100,000). For purposes of the preceding sentence, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of shares of stock shall be determined as of the time the option with respect to such shares is granted. Such limitation on exercise shall be referred to in this Option Agreement as the “ISO Exercise Limitation.” If Section 422 of the Code is amended to provide for a different limitation from that set forth in this Section 4.1(b), the ISO Exercise Limitation shall be deemed amended effective as of the date required or permitted by such amendment to the Code. The ISO Exercise Limitation shall terminate upon the earlier of (i) the Participant’s termination of Service, (ii) the day immediately prior to the effective date of a Corporate Transaction in which the Option is not Assumed or Replaced as provided in Section 8, or (iii) the day ten (10) days prior to the Option Expiration Date. Upon such termination of the ISO Exercise Limitation, the Option shall be deemed a Nonstatutory Stock Option to the extent of the number of shares subject to the Option that would otherwise exceed the ISO Exercise Limitation.
(c) Exception to ISO Exercise Limitation. Notwithstanding any other provision of this Option Agreement, if compliance with the ISO Exercise Limitation as set forth in Section 4.1(b) will result in the exercisability of any Vested Shares being delayed more than thirty (30) days beyond the date such shares become Vested Shares (the “Vesting Date”), the Option shall be deemed to be two (2) options. The first option shall be for the maximum portion of the Number of Option Shares that can comply with the ISO Exercise Limitation without causing the Option to be unexercisable in the aggregate as to Vested Shares on the Vesting Date for such shares. The second option, which shall not be treated as an Incentive Stock Option as described in section 422(b) of the Code, shall be for the balance of the Number of Option Shares; that is, those such shares which, on the respective Vesting Date for such shares, would be unexercisable if included in the first option and thereby made subject to the ISO Exercise Limitation. Shares treated as subject to the second option shall be exercisable on the same terms and at the same time as set forth in this Option Agreement; provided, however, that (i) Section 4.1(b) shall not apply to the second option and (ii) each such share shall become a Vested Share on the Vesting Date such share must first be allocated to the second option pursuant to the preceding sentence. Unless the Participant specifically elects to the contrary in the Participant’s written notice of exercise, the first option shall be deemed to be exercised first to the maximum possible extent and then the second option shall be deemed to be exercised.
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4.2 Method of Exercise. Exercise of the Option shall be by written notice to the Company, which must state the election to exercise the Option, the number of whole shares of Stock for which the Option is being exercised and such other representations and agreements as to the Participant’s investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the Participant and must be delivered in person, by certified or registered mail, return receipt requested, by confirmed facsimile transmission, or by such other means as the Board may permit, to the Chief Financial Officer of the Company, or other authorized representative of the Participating Company Group, prior to the termination of the Option as set forth in Section 6, accompanied by full payment of the aggregate Exercise Price for the number of shares of Stock being purchased. The Option shall be deemed to be exercised upon receipt by the Company of such written notice, the aggregate Exercise Price, and, if required by the Company, such executed agreement.
4.3 Payment of Exercise Price.
(a) Forms of Consideration Authorized. Except as otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for which the Option is being exercised shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company, or attestation to the ownership, of whole shares of Stock owned by the Participant having a Fair Market Value not less than the aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3(b), or (iv) by any combination of the foregoing.
(b) Limitations on Forms of Consideration.
(i) Tender of Stock. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock to the extent such tender or attestation would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company’s stock. The Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock unless such shares either have been owned by the Participant for more than six (6) months (and not used for another option exercise by attestation during such period) or were not acquired, directly or indirectly, from the Company.
(ii) Cashless Exercise. A “Cashless Exercise” means the delivery of a properly executed notice together with irrevocable instructions to a broker in a form acceptable to the Company providing for the assignment to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company’s sole and absolute discretion, to decline to approve or terminate any such program or procedure.
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4.4 Tax Withholding. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Participant hereby authorizes withholding from payroll and any other amounts payable to the Participant, and otherwise agrees to make adequate provision for (including by means of a Cashless Exercise to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Participating Company Group, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired upon exercise of the Option. The Option is not exercisable unless the tax withholding obligations of the Participating Company Group are satisfied. Accordingly, the Company shall have no obligation to deliver shares of Stock until the tax withholding obligations of the Participating Company Group have been satisfied by the Participant.
4.5 Certificate Registration. Except in the event the Exercise Price is paid by means of a Cashless Exercise, the certificate for the shares as to which the Option is exercised shall be registered in the name of the Participant, or, if applicable, in the names of the heirs of the Participant.
4.6 Restrictions on Grant of the Option and Issuance of Shares. The grant of the Option and the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with all applicable requirements of federal, state or foreign securities laws. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws, or any other laws or regulations, or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, the Option may not be exercised unless (i) a registration statement under the Securities Act shall at the time of exercise be in effect with respect to the shares issuable upon exercise or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE PARTICIPANT IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE PARTICIPANT MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to lawfully issue and sell any shares subject to the Option shall relieve the Company of any liability in respect of the failure to issue or sell such shares. As a condition to the exercise of the Option, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company.
4.7 No Fractional Shares. The Participant acknowledges and agrees that the Company will not issue fractional shares upon the exercise of the Option, and the number of Shares in the event of such an exercise shall be rounded down to the nearest whole number.
5. | Nontransferability of the Option. |
The Option may be exercised during the lifetime of the Participant only by the Participant or the Participant’s guardian or legal representative and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. Following the death of the Participant, the Option, to the extent provided in Section 7, may be exercised by the Participant’s legal representative or by any person empowered to do so under the deceased Participant’s will or under the then applicable laws of descent and distribution.
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6. | Termination of the Option. |
The Option shall terminate and may no longer be exercised after the first to occur of (a) the Option Expiration Date, (b) the last date for exercising the Option following termination of the Participant’s Service as described in Section 7, or (c) a Corporate Transaction to the extent provided in Section 8.
7. | Effect of Termination of Service. |
7.1 Option Exercisability.
(a) Disability. If the Participant’s Service terminates because of the Disability of the Participant, the Option, to the extent unexercised and exercisable on the date on which the Participant’s Service terminated, may be exercised by the Participant (or the Participant’s guardian or legal representative) at any time prior to the expiration of twelve (12) months after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date.
(b) Death. If the Participant’s Service terminates because of the death of the Participant, the Option, to the extent unexercised and exercisable on the date on which the Participant’s Service terminated, may be exercised by the Participant’s legal representative or other person who acquired the right to exercise the Option by reason of the Participant’s death at any time prior to the expiration of twelve (12) months after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date. The Participant’s Service shall be deemed to have terminated on account of death if the Participant dies within three (3) months after the Participant’s termination of Service.
(c) Termination for Cause. Notwithstanding any other provision of this Option Agreement, if the Participant’s Service is terminated for Cause, the Option shall terminate and cease to be exercisable on the effective date of such termination of Service. Unless otherwise defined in a contract of employment or service between the Participant and a Participating Company, for purposes of this Option Agreement, “Cause” have the meaning given such term in the Plan.
(d) Other Termination of Service. If the Participant’s Service terminates for any reason, except Disability, death or Cause, the Option, to the extent unexercised and exercisable by the Participant on the date on which the Participant’s Service terminated, may be exercised by the Participant at any time prior to the expiration of six (6) months (or such other longer period of time as determined by the Board, in its discretion) after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date.
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7.2 Extension if Exercise Prevented by Law. Notwithstanding the foregoing, other than a termination for Cause, if the exercise of the Option within the applicable time periods set forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option shall remain exercisable until three (3) months after the date the Participant is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date.
7.3 Extension if Participant Subject to Section 16(b). Notwithstanding the foregoing, other than a termination for Cause, if a sale within the applicable time periods set forth in Section 7.1 of shares acquired upon the exercise of the Option would subject the Participant to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Participant would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Participant’s termination of Service, or (iii) the Option Expiration Date.
8. | Corporate transaction. |
8.1 Termination of Option to Extent Not Assumed in Corporate Transaction. Effective upon the consummation of a Corporate Transaction, the Option shall terminate. However, the Option shall not terminate to the extent it is Assumed in connection with the Corporate Transaction.
8.2 Acceleration of Award Upon Corporate Transaction. In the event of a Corporate Transaction and:
(a) for the portion of the Option that is Assumed or Replaced, then the Option (if Assumed), the replacement Option (if Replaced), or the cash incentive program (if Replaced) automatically shall become fully vested, exercisable and payable and be released from any repurchase or forfeiture rights (other than repurchase rights exercisable at Fair Market Value) for all of the shares of Stock at the time represented by such Assumed or Replaced portion of the Option immediately upon termination of the Participant’s Service, if such Service is terminated by the successor company or the Company without Cause or voluntarily by the Participant with Good Reason within twelve (12) months after the Corporate Transaction; and
(b) for the portion of the Option that is neither Assumed nor Replaced, such portion of the Option shall automatically become fully vested and exercisable and be released from any repurchase or forfeiture rights (other than repurchase rights exercisable at Fair Market Value) for all of the shares of Stock at the time represented by such portion of the Option, immediately prior to the specified effective date of such Corporate Transaction, provided however that such accelerated portion of the Option shall terminate under Section 8.1 to the extent not exercised prior to the consummation of such Corporate Transaction.
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9. | Adjustments for Changes in Capital Structure. |
Subject to any required action by the stockholders of the Company, in the event of any change in the Stock effected without receipt of consideration by the Company, whether through merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares, or similar change in the capital structure of the Company, or in the event of payment of a dividend or distribution to the stockholders of the Company in a form other than Stock (excepting normal cash dividends) that has a material effect on the Fair Market Value of shares of Stock, appropriate and proportionate adjustments shall be made in the number, Exercise Price and class of shares subject to the Option, in order to prevent dilution or enlargement of the Participant’s rights under the Option. For purposes of the foregoing, conversion of any convertible securities of the Company shall not be treated as “effected without receipt of consideration by the Company.” Any fractional share resulting from an adjustment pursuant to this Section 9 shall be rounded down to the nearest whole number, and in no event may the Exercise Price of the Option be decreased to an amount less than the par value, if any, of the stock subject to the Option. Such adjustments shall be determined by the Board, and its determination shall be final, binding and conclusive.
10. | Rights as a Stockholder, Employee or Consultant. |
The Participant shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a certificate for the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 9. If the Participant is an Employee, the Participant understands and acknowledges that, except as otherwise provided in a separate, written employment agreement between a Participating Company and the Participant, the Participant’s employment is “at will” and is for no specified term. Nothing in this Option Agreement shall confer upon the Participant any right to continue in the Service of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Participant’s Service as an Employee or Consultant, as the case may be, at any time. Nothing in this Option shall confer on any person any legal or equitable right against the Company, directly or indirectly, or give rise to any cause of action at law or in equity against any Participating Company. The Option granted hereunder shall not form any part of the wages or salary of Participant for purposes of severance pay or termination indemnities, irrespective of the reason for termination of employment. Under no circumstances shall any person ceasing to be an employee of any Participating Company be entitled to any compensation for any loss of any right or benefit under this Option or the Plan which such employee might otherwise have enjoyed but for termination of employment, whether such compensation is claimed by way of damages for wrongful or unfair dismissal, breach of contract or otherwise.
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11. | Notice of Sales Upon Disqualifying Disposition. |
The Participant shall dispose of the shares acquired pursuant to the Option only in accordance with the provisions of this Option Agreement. In addition, if the Notice designates this Option as an Incentive Stock Option, the Participant shall (a) promptly notify the Chief Financial Officer of the Company if the Participant disposes of any of the shares acquired pursuant to the Option within one (1) year after the date the Participant exercises all or part of the Option or within two (2) years after the Date of Option Grant and (b) provide the Company with a description of the circumstances of such disposition. Until such time as the Participant disposes of such shares in a manner consistent with the provisions of this Option Agreement, unless otherwise expressly authorized by the Company, the Participant shall hold all shares acquired pursuant to the Option in the Participant’s name (and not in the name of any nominee) for the one-year period immediately after the exercise of the Option and the two-year period immediately after Date of Option Grant. At any time during the one-year or two-year periods set forth above, the Company may place a legend on any certificate representing shares acquired pursuant to the Option requesting the transfer agent for the Company’s stock to notify the Company of any such transfers. The obligation of the Participant to notify the Company of any such transfer shall continue notwithstanding that a legend has been placed on the certificate pursuant to the preceding sentence.
12. | Legends. |
The Company may at any time place legends referencing any applicable federal, state or foreign securities law restrictions on all certificates representing shares of Stock subject to the provisions of this Option Agreement. The Participant shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Participant in order to carry out the provisions of this Section. Unless otherwise specified by the Company, legends placed on such certificates shall include, but shall not be limited to, the following:
12.1 “THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.”
12.2 “THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION TO THE REGISTERED HOLDER UPON EXERCISE OF AN INCENTIVE STOCK OPTION AS DEFINED IN SECTION 422 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (“ISO”). IN ORDER TO OBTAIN THE PREFERENTIAL TAX TREATMENT AFFORDED TO ISOs, THE SHARES SHOULD NOT BE TRANSFERRED PRIOR TO [INSERT DISQUALIFYING DISPOSITION DATE HERE]. SHOULD THE REGISTERED HOLDER ELECT TO TRANSFER ANY OF THE SHARES PRIOR TO THIS DATE AND FOREGO ISO TAX TREATMENT, THE TRANSFER AGENT FOR THE SHARES SHALL NOTIFY THE CORPORATION IMMEDIATELY. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE INCENTIVE STOCK OPTION IN THE REGISTERED HOLDER’S NAME (AND NOT IN THE NAME OF ANY NOMINEE) PRIOR TO THIS DATE OR UNTIL TRANSFERRED AS DESCRIBED ABOVE.”
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13. | Restrictions on Transfer of Shares. |
No shares of Stock acquired upon exercise of the Option may be sold, exchanged, transferred (including, without limitation, any transfer to a nominee or agent of the Participant), assigned, pledged, hypothecated or otherwise disposed of, including by operation of law, in any manner which violates any of the provisions of this Option Agreement and any such attempted disposition shall be void. The Company shall not be required (a) to transfer on its books any shares that have been transferred in violation of any of the provisions set forth in this Option Agreement or (b) to treat as owner of such shares, accord the right to vote as such owner or pay dividends to any transferee to whom such shares have been so transferred.
14. | Miscellaneous Provisions. |
14.1 Binding Effect. Subject to the restrictions on transfer set forth herein, this Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns.
14.2 Termination or Amendment. The Board may terminate or amend the Plan or the Option at any time; provided, however, that except as provided in Section 8.1 in connection with a Corporate Transaction, no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Participant, unless such termination or amendment is necessary to comply with any applicable law or government regulation or is required to enable the Option, if designated an Incentive Stock Option in the Notice, to qualify as an Incentive Stock Option. No amendment or addition to this Option Agreement shall be effective unless in writing.
14.3 Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Option Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, with postage and fees prepaid, addressed to the other party at the address shown below that party’s signature or at such other address as such party may designate in writing from time to time to the other party.
14.4 Employment Agreement. The terms and provisions of the employment agreement, if any, between Participant and any Participating Company (the “Employment Agreement”) that relate to or affect this Option are incorporated herein by reference. Notwithstanding the provisions of this Option, in the event of any conflict or inconsistency between the terms and conditions of this Option and the terms and conditions of the Employment Agreement, the terms and conditions of the Employment Agreement shall be controlling.
14.5 Integrated Agreement. The Notice, this Option Agreement and the Plan, together with any employment, service or other agreement with the Participant and a Participating Company referring to the Option, will constitute the entire understanding and agreement of the Participant and the Participating Company Group with respect to the subject matter contained herein or therein and supersedes any prior agreements, understandings, restrictions, representations, or warranties among the Participant and the Participating Company Group with respect to such subject matter other than those as set forth or provided for herein or therein. To the extent contemplated herein or therein, the provisions of the Notice and the Option Agreement shall survive any exercise of the Option and shall remain in full force and effect.
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14.6 Applicable Law. This Option Agreement shall be governed by the laws of the State of Minnesota as such laws are applied to agreements between Minnesota residents entered into and to be performed entirely within the State of Minnesota.
14.7 Counterparts. The Notice may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
14.8 Consultation with Professional Tax and Investment Advisors. The holder of this Option acknowledges that the grant, exercise, vesting or any payment with respect to this Option, and the sale or other taxable disposition of the shares of Stock acquired pursuant to the exercise thereof, may have tax consequences pursuant to the Code or under local, state or international tax laws. The holder further acknowledges that such holder is relying solely and exclusively on the holder's own professional tax and investment advisors with respect to any and all such matters (and is not relying, in any manner, on any Participating Company or any of its employees or representatives). Finally, the holder understands and agrees that any and all tax consequences resulting from the Option and its grant, exercise, vesting or any payment with respect thereto, and the sale or other taxable disposition of the shares of Stock acquired pursuant to the Plan, is solely and exclusively the responsibility of the holder without any expectation or understanding that any Participating Company or any of its employees or representatives will pay or reimburse such holder for such taxes or other items.
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¨ Incentive Stock Option | Participant: | ||
¨ Nonstatutory Stock Option | |||
Date: |
STOCK OPTION EXERCISE NOTICE
IsoRay, Inc.
Attention: Chief Financial Officer
Ladies and Gentlemen:
1. Option. I was granted an option (the “Option”) to purchase shares of the common stock (the “Shares”) of IsoRay, Inc. (the “Company”) pursuant to the Company’s 2014 Employee Stock Option Plan (the “Plan”), my Notice of Grant of Stock Option (the “Notice”) and my Stock Option Agreement (the “Option Agreement”) as follows:
Date of Option Grant: | |||
Number of Option Shares: | |||
Exercise Price per Share: | $ |
2. Exercise of Option. I hereby elect to exercise the Option to purchase the following number of Shares, all of which are Vested Shares, in accordance with the Notice and the Option Agreement:
Shares Purchased: | |||
Exercise Price (Shares X Price per Share) | $ |
3. Payments. I enclose payment in full of the total exercise price for the Shares in the following form(s), as authorized by my Option Agreement:
¨ Cash: | $ | ||
¨ Check: | $ | ||
¨ Tender of Company Stock: | Contact Company | ||
¨ Cashless Exercise: | Contact Company |
4. Tax Withholding. I authorize payroll withholding and otherwise will make adequate provision for the federal, state, local and foreign tax withholding obligations of the Company, if any, in connection with the Option. If I am exercising a Nonstatutory Stock Option, I enclose payment in full of my withholding taxes, if any, as follows:
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(Contact Company for amount of tax due.)
¨ Cash: | $ | ||
¨ Check: | $ |
I understand that ownership of the Shares will not be transferred to me until the total Exercise Price and all applicable withholding taxes have been paid.
5. | Participant Information. |
My address is: | |
My Social Security Number is: |
6. Notice of Disqualifying Disposition. If the Option is an Incentive Stock Option, I agree that I will promptly notify the Chief Financial Officer of the Company if I transfer any of the Shares within one (1) year from the date I exercise all or part of the Option or within two (2) years of the Date of Option Grant.
7. Tax Consequences. I understand that there may be adverse federal or state tax consequences as a result of my purchase or disposition of the Shares. I also acknowledge that I have been advised to consult with a tax advisor in connection with the purchase of disposition of the Shares. I am not relying on the Company for tax advice.
8. Binding Effect. I agree that the Shares are being acquired in accordance with and subject to the terms, provisions and conditions of the Option Agreement, to all of which I hereby expressly assent. This Agreement shall inure to the benefit of and be binding upon my heirs, executors, administrators, successors and assigns.
I understand that I am purchasing the Shares pursuant to the terms of the Plan, the Notice and my Option Agreement, copies of which I have received and carefully read and understand.
Very truly yours, | |
(Signature) |
Receipt of the above is hereby acknowledged.
ISORAY, INC.
By: | ||
Title: | ||
Dated: |
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ISORAY, INC.
NOTICE OF GRANT OF STOCK OPTION
(the “Participant”) has been granted an option (the “Option”) to purchase certain shares of Stock of IsoRay, Inc. pursuant to the IsoRay, Inc. 2014 Employee Stock Option Plan (the “Plan”), as follows:
Date of Option Grant: | |
Number of Option Shares: | |
Exercise Price: | $ |
Initial Exercise Date: | Date of Option Grant |
Initial Vesting Date: | |
Option Expiration Date: | The date ten (10) years from the Date of Option Grant. |
Tax Status of Option: | Stock Option. (Enter “Incentive” or “Nonstatutory.” If blank, this Option will be a Nonstatutory Stock Option.) |
Vested Shares: Except as provided in the Stock Option Agreement, the number of Vested Shares (disregarding any resulting fractional share) as of any date is determined by multiplying the Number of Option Shares by the “Vested Ratio” determined as of such date as follows:
Vested Ratio | ||
Prior to Initial Vesting Date | 0 | |
On Initial Vesting Date, provided the Participant’s Service has not terminated prior to such date | 1/3 | |
Plus: | ||
For each additional full twelve months of the Participant’s continuous Service from Initial Vesting Date until the Vested Ratio equals 1/1, an additional | 1/3 |
By their signatures below, the Company and the Participant agree that the Option is governed by this Notice and by the provisions of the Plan and the Stock Option Agreement, both of which are attached to and made a part of this document. The Participant acknowledges receipt of copies of the Plan and the Stock Option Agreement, represents that the Participant has read and is familiar with their provisions, and hereby accepts the Option subject to all of their terms and conditions.
ISORAY, INC. | PARTICIPANT | ||
By: | |||
Signature | |||
Its: | |||
Date | |||
Address: | |||
Address | |||
ATTACHMENTS: | 2014 Employee Stock Option Plan, as amended to the Date of Option Grant; Stock Option Agreement and Exercise Notice |
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Exhibit 31.1
CERTIFICATION
I, Dwight Babcock 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 15, 2014
/s/ Dwight Babcock | |
Dwight Babcock | |
Chief Executive Officer | |
(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
I, Brien L. Ragle 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 15, 2014
/s/ Brien L. Ragle | |
Brien L. Ragle | |
Chief Financial Officer | |
(Principal Financial and Accounting Officer) |
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, 2014 (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 15, 2014 | ||
/s/ Dwight Babcock | ||
DWIGHT BABCOCK | ||
CHIEF EXECUTIVE OFFICER (Principal Executive Officer) | ||
Dated: May 15, 2014 | ||
/s/ Brien Ragle | ||
BRIEN RAGLE | ||
CHIEF FINANCIAL OFFICER (Principal Financial and Accounting Officer) |
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