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IsoRay Inc. (NYSEMKT:ISR)

F2Q08 (Qtr End 12/31/07) Earnings Call

February 11, 2008 4:30 pm ET

Executives

Rudy Barrio - Investor Counsel at Allen & Caron, Inc.

Jonathan Hunt - CFO and Treasurer

Roger Girard - Chairman, President and CEO

Analysts

Matt Kaplan - Punk, Ziegel & Company

Rosanne Russell - The Robbins Group

Patrick Dalton - Steinwolf Capital

Jeremy Hamblin - Seamark Capital

Operator

Greetings and welcome to the IsoRay Incorporated second quarter fiscal year 2008 Earnings Call. (Operator Instructions)

It is now my pleasure to introduce your host, Rudy Barrio. Thank you, Mr. Barrio. You may begin.

Rudy Barrio

Thank you, Rob. Good afternoon and welcome to the IsoRay earnings conference call where management will review the company's financial results for its second quarter ended December 31, 2007. As mentioned by Rob, I am Rudy Barrio of Allen & Caron.

Before we start this call, there are several items I'd like to cover. Most of you received a copy of the press release announcing the company's financial results, which was released this morning at 7.30 AM Eastern. If you did not receive a copy of the press release, please visit our website at www.allencaron.com where it is posted on the IsoRay Corporation within the client section, or you may call our office in New York at 212-691-8087, and we will email it to you right away. It is also posted on Yahoo Finance.

In addition, this call is being recorded. An audio replay of this call may be accessed for 10 days through February 21 by calling 877-660-6853, using passcode 286 and conference ID number 273560. Callers outside the US and Canada should dial 201-612-7415 using the same passcode 286. This call is also being broadcasted live over the Internet and may be accessed via the company's website at www.isoray.com or via Precision IR through www.investorcalendar.com. A replay of this webcast will also be available through February 21 on each of those websites.

Also, I've been asked to make the following statement. This presentation contains statement concerning IsoRay's expectations, plans, objectives, future financial performances and other statements that are not historical facts. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, a listener can identify these forward-looking statements by words such as estimate, expect, anticipate, intend, plan, believe, forecast, should, could and similar expressions.

Forward-looking statements involve risks and uncertainties that may cause actual results or outcomes to differ materially from those included in the forward-looking statements. Factors that may cause actual results to differ materially from those included in the forward-looking statements include but are not limited to physician acceptance, training and use of IsoRay's products, IsoRay's ability to successfully manufacture, market and sell its products, IsoRay's ability to manufacture its products in sufficient quantity to meet demand within required delivery time periods while meeting its quality control standards, IsoRay's ability to obtain a sufficient supply of barium from the reactors in Russia, IsoRay's ability to enforce its intellectual property rights, whether additional studies support the conclusions of early clinical studies, IsoRay's ability to reduce cost and increase revenue, whether a physician's response to IsoRay's educational initiatives will be favorable, whether centers are able to obtain licenses required to use Cesium-131 and whether centers are successful in obtaining such licenses will result in additional sales of IsoRay's products, IsoRay's ability to negotiate favorable [current] agreement in the Russian markets and complete construction of a proposed Russian production facility, successful completion of future research and development activities, changing levels of demand for IsoRay's current and proposed future products in specific markets worldwide, changes in reimbursement rates, changes in laws and regulations applicable to our product in the United States and in our proposed future markets, our ability to attract and retain qualified sales personnel, and other presently unknown and unforeseen factors. Other risk factors are detailed from time to time in our reports to the Securities and Exchange Commission.

Any forward-looking statements speaks only as of the date of which such statement is made, and we undertake no obligation to update the information contained in any forward-looking statement to reflect development or circumstances occurring after the statement is made.

With us this afternoon are Roger Girard, Chairman and CEO; and Jonathan Hunt, CFO of IsoRay. Jonathan will open with a review of the numbers, and after, Roger will provide additional statements. Then the call will move into the Q&A.

I'd now like to turn the call over to Jonathan. Good afternoon, Jonathan.

Jonathan Hunt

Thank you and good afternoon, everyone. As you know, this was a challenging quarter. So let me go through the numbers with you in some greater detail.

Revenue was approximately $1.8 million for the quarter ended December 31, 2007, an increase of 24% over the second quarter of fiscal year 2007. During the quarter, the company sold its Proxcelan seeds to 53 different medical centers as compared to 33 medical centers in the second quarter of fiscal year 2007.

The increase in revenue is related to the increased number of centers ordering as compared to the second quarter of fiscal year 2007. Revenue for the six months ended December 31, 2007 was approximately $3.6 million, an increase of 48% over the six months ended December 31, 2006.

During the six month ended December 31, 2007, the company sold its Proxcelan seeds to 65 different medical centers as compared to 35 during the same period of 2006. Gross loss for the quarter ended December 31, 2007 was $483,451, which represents a decrease in gross loss of $510,210 from the quarter ended December 31, 2006. The increase in gross loss is due the company's higher revenues being more than offset by higher production costs and the cost of decommissioning the company's old production facility.

Gross loss for the six months ended December 31, 2007 was $633,234, representing an increase of 59% compared to the six months ended December 31, 2006. The increase is due to the increase in production cost more than offsetting the increase in revenues, start-up cost of our new production facility that were previously discussed in our first quarter conference call and decommissioning the company's old production facility.

During the quarter ended December 31, 2007 the company removed all radioactive residual and a tenant improvement from its old production facility and returned the facility to the lessor. The company had an asset retirement obligation of $135,120 accrued for this facility. The total cost incurred to decommission the facility were $274,163 resulting in an additional expense of $139,043. This is included in cost of products sold.

The additional expense is mainly due to unanticipated construction costs to return the facility to its previous state. The company originally believed that the lessor would retain many of resold improvements in the building, but the lessor instead required their removal resulting in additional expense.

Also impacting increased cost of production during the quarter ended December 31, 2007 was increased ordering of isotope in order to meet an internally generated sales forecast that the company ultimately did not meet. Due to the short half life of the isotope, the increased quantities decayed; were not usable in production in a work sense. In early January 2008, the production department reviewed its stocking levels and reduced the number of production ancillaries in an effort to reduce cost.

Net loss for the quarter ended December 31, 2007 was approximately $2.8 million, a decrease of 45% over the second quarter of fiscal year 2007. Net loss for the six months ended December 31, 2007 was approximately $4.9 million, which represents an increase of 2% over the net loss for the corresponding period of 2006.

Finally, as of December 31, 2007, the company had cash and cash equivalents of approximately $3.5 million and short-term investments of approximately $8.7 million. The company had approximately $3.6 million of cash and $7.6 million of short-term investments as of February 4, 2008. Currently, management believes that the company's monthly required cash operating expenditures are approximately $600,000, excluding capital expenditure requirements.

The company's cash operating expenditures were higher than this level during the six months ended December 31, 2007, but this was mainly due to expenditures necessary to make the new facility operational, maintaining operations at the previous facility during the transition, decommissioning the previous facility and increased ordering of isotopes that eventually decayed and was expensed, as discussed earlier.

This ends my prepared comments regarding the second quarter results. But I will be pleased to answer your questions in the Q&A session. I will now turn the call over to Roger who will review some of our business highlights. Roger?

Roger Girard

Thank you, Jonathan. Good afternoon and welcome. There are several important and encouraging developments that occurred this quarter. I'd like to address them in the following order, and then come back to take each one in turn in detail.

First, revenue was up year-to-year. Second, purchasing medical centers, those buying our products are up year-to-year. Third, RAM licenses received, submitted and sites in the process are significantly higher. Fourth, the launching of new educational initiatives. Fifth, our clinical trials continue to accrue valuable data. Sixth, as you can see in Q, we've had increased costs for the quarter which I will address. Finally, I'll speak about the Russian agreement and its importance to IsoRay.

You will see from the view of our financial statement in the Form 10-Q, our sales for second fiscal quarter 2008 showed a significant increase to 24% over the second fiscal quarter 2007 and up 48% for the first six months of the year.

During the three months ended December 31st, 2007, the company sold its Proxcelan seeds to 53 different medical centers, as compared to 33 medical centers during the corresponding period of 2006. The sales cycle funnel has 53 current users with 91 additional centers, of which 14 received their RAM license, 27 have submitted a license application to amend their radiation license to include Cesium-131, with the balance of 50 committed to use Proxcelan in the next 30 days to nine months. This represents a significant increase in a number of centers that will be able to order Proxcelan in the coming months.

IsoRay has in place, an exceptional, well trained professional sales force. In the second fiscal quarter of 2008, we had 11 sales representatives. But due to a change in strategy to target specific key accounts, we have reduced that number to seven, retaining a core of superiorly trained and focused individuals with expertise not only in sales, but also with the appropriate implant techniques for successfully implanting Cesium-131.

IsoRay continues to build on its commitment to educational initiatives, the first of three Proxcelan Cesium-131 workshops scheduled in 2008 was held on January 24th and 25th at the Chicago Prostate Cancer Center. The workshop was held in a center founded by Dr. Brian Moran, his staff and guest speaker William Bice. The workshop was limited to 23 attendees, in order for each physician to be able to view live cases in the operating room and discuss techniques directly with Dr. Moran.

IsoRay will use this template for workshops on all of its markets in 2008 and beyond. Dr. Steve Kirchman, IsoRay's Medical Director, has also been instrumental in the education of his colleagues. In the future, we will use his expertise with site visits for hands-on training and using the latest live webcast technology to provide physicians the opportunity to participate in proper real time methods to implant Cesium-131.

Physicians tend to be slow adopters of new technology and we believe that this hands-on approach is very important to put in their products in a real time perspective and providing each physician a form to address questions they may have.

This year, we'll be reporting Cesium-131's two year clinical data. The main protocols currently underway on this data are; our mono therapy protocol, which includes 100 patients in a multi-institutional trial. This is an observation trial that tracks PSA control rates and side effects. Data is maturing and reaching the three-year mark for the first enrollees. An ongoing data is scheduled to be published at ABS this coming May.

The second is a combination therapy protocol, which includes 100 patients in a multi-institutional trial studying Cesium-131, in combination with external beam. This protocol is still enrolling patients and is observing control of PSA and morbidity. The third major protocol is Cesium-131 versus Iodine-125 in a randomized trial. A site initiated trial at Chicago Prostate. This enrollment is almost complete, data is scheduled to be presented at ABS in May also.

And finally, the last major protocol is being done at North Shore-Long Island Health Systems at Huntington Hospital. A site initiated trial consisting of dosimetric comparison of Cesium-131 and Palladium-103. This study is ongoing with continued data which is also being presented in May at ABS. We are very encouraged by the volume of clinical data scheduled for presentation at ABS in May. I believe there will be a total of nine different posters, podiums, pods or papers which have already been accepted for presentation at ABS on Cesium-131.

We have observed that many doctors hesitate to adopt new technology until more definitive clinical evidence is published. Commonly, they expect clinical evidence starting at three years. IsoRay is just beginning to collect clinical data from its three years under numerous protocols currently underway. We are well into the process of removing any hesitation or doubt many doctors may have.

As you are aware, our sales revenue is slightly down from the previous quarter. There are reasons for the difficulties we've had in achieving market penetration at the rate we expected. It is not true to the performance of our iso Cesium-131, which has been implanted in approximately 2,300 patients to-date with excellent results. However, the adoption rate by physicians has been more cautious than expected. Management still believes that sales will increase as the adoption rate of our product increases.

I've addressed several actions that we believe will help our ongoing adoption rate. You should also note that our product costs were significantly higher than anticipated for the second fiscal quarter of 2008. Higher headcounts based on anticipated sales, an increase in material cost due to lower volume of seeds sold, capital cost of our new facility and the cost of decommission our old facility resulted in a greater loss than anticipated.

When the announcement of IsoRay's participation in newly formed Russian limited liability company, UralDial, LLC, the new medical isotope manufacturing and distribution company in Yekaterinburg, there have been questions regarding IsoRay's decision to spend time, energy and money on this initiative.

First, let me say that three years ago we signed an exclusive contract with the Russian Institute of Nuclear Materials which is approved by the Russian government. In return for this exclusive contract regarding use of their reactors in providing IsoRay with raw materials from Russia, IsoRay would have to set up distribution in Russia within four years to maintain the exclusivity.

We have been laying groundwork for the formation of this new operation for the past three years. It supports our strategy in a number of ways, including using enriched barium, diversifying our source suppliers, and essentially marks the opening of an entirely new international market for Proxcelan C brachytherapy. The Russian government understands the benefit of brachytherapy using Cesium-131 as an effective treatment option for prostrate cancer and understands the great potential of this new venture.

As we go on a tour as a company, we will, from time to time, have quarters that do not meet our expectations or yours. It has taken longer than anticipated to convince physicians to switch from products they have been using in excess of 15 years to what is now being proven as a new and better approach to treat prostrate cancer.

We believe these changes that we are making, significant progress in our opportunity pipelines, supported by educational initiatives to gain this new allegiance and it will grow our sales. We appreciate your support as we lay the foundation for IsoRay to develop into a significant player within the national and international brachytherapy market.

Thank you. And now, we'll take your questions.

Question-and-Answer session

Operator

(Operator Instructions). Our first question is from the line of Matt Kaplan with Punk, Ziegel & Company. Please proceed with your question.

Matt Kaplan - Punk, Ziegel & Company

Hi, Roger. Thanks for taking my questions.

Roger Girard

Hi, Matt. Thank you, and welcome.

Matt Kaplan - Punk, Ziegel & Company

First, when do you think you'll start to see some impact from some of the new initiatives that you have in terms of -- obviously, you're going to have the data coming out at ADS, coming out early in the spring, but some of the other initiatives in terms of increasing the adoption and use of the product?

Roger Girard

Well, I really can't say. What I can say is this is that from part of our initiatives, we have moved back to the lesson that's announced that we are starting to use enriched barium, which will be available. The first shipment, I believe, arrives the second or third week of March, and that begins to help us on our cost cutting and efficiency initiative. It will also help the throughput in the production here in our plant in Richland.

So, I believe that these initiatives we'll be starting, and that's the first one. And we'll be ripping the benefits of that in mid March.

Matt Kaplan - Punk, Ziegel & Company

But in terms of the educational programs and the educational initiatives that you have, and then, also really, the refocusing and the upsell force and the maturation of the data that you have coming, when do you think this is going to start to really give you more traction to grow the sales?

Roger Girard

Well, obviously we can't say specifically when that will happen. My observation is that from our first Cesium school, it was very successful -- it has kind of a ripple effect already, and we have now just announced our second school in May, and there are people already signing up for that. So there is no doubt in my estimation it will have an effect on IsoRay going forward in a positive way. Other than that, I can't really and as far as focusing the salespeople, here's what I can say about that: As everyone knows, salespeople are a unique breed, and to find a team like we now have in process where people are in place with people who are really focused, really intelligent, have experience, and really understand Cesium -- that is going to also absolutely benefit. And it has taken a while. We've struggled, as you all know -- I would imagine I've spoken to most all of you on this conference call.

As you know, developing an educated, aggressive sales force has been a real task, and we've struggled, but we finally had arrived there. I like our sales force, our sales manager, Eric Knipfer, is doing an outstanding job, and what we have done really is that we've poured a lot of time, energy, money and education into the sales staff to get them where they are today, and I'm excited that that will inure into ultimately positive things for IsoRay.

Matt Kaplan - Punk, Ziegel & Company

And just two other quick questions, with respect to the wind down of the old facility and the transition for the new facility, do you expect any additional costs associated with either the ramp-up of the new facility or additional costs associated with the wind down of the older facility?

Roger Girard

Jonathan, would you like to answer that?

Jonathan Hunt

Yeah, we actually turned the old facility back to LESSOR in mid-December. So we do not expect any more costs related to that facility.

Roger Girard

And the new facility just, I think, we are signing our last work order on that for some very specific equipments. So, that should be wrapped up too.

Matt Kaplan - Punk, Ziegel & Company

Great. And then last question is, production projections, it appeared you had some difficulty projecting how much isotopes you would need during different parts of the quarter. And you ordered more than you needed. What are you doing to fix those estimates and see that that doesn't occur again?

Roger Girard

Let me explain to you what happened there. Now this was a real nightmare because, remember how we were transitioned in two radioactive places of production, and we were transposing two into one? But in order to not miss a shipment and to not make a mistake, what we had to do is we had to double up on the isotope, and in many cases, we had to double up on employees. And so we had some additional expenses. Probably when you build a facility like this, you probably really don't have an idea how difficult is this to be able to never miss an order. And the unique thing about IsoRay, remember, it's the just in time shipments. We take a prescription, we fill it, and we ship in a very short-lived isotope. I believe in 2300 cases or thereabout; we have not missed one shipment.

Matt Kaplan - Punk, Ziegel & Company

Will the physician be an issue when the quarter's going forward (inaudible)?

Roger Girard

In fourth quarter, when the quarter is going forward. I don't, of course, forecasting your demand and forecasting the amount of isotope. I don't believe it will be the same issue. We are getting more historical data. We are getting better at it. Our whole staff, our whole production staff is doing, I think, an outstanding job now, and we are getting much more efficient with the isotope. Our new plant is amazing. We really have to appreciate it. It's the state of the art facility and the efficiencies that we'll be able to achieve, in my estimation, will certainly help our cost of goods and our gross margin.

Matt Kaplan - Punk, Ziegel & Company

Thanks, Roger.

Jonathan Hunt

Thanks, Matt.

Operator

Our next question comes from the line of [Rosanne Russell with The Robbins Group].

Rosanne Russell - The Robbins Group

Good afternoon, gentleman.

Roger Girard

Hi, Rosen.

Rosanne Russell - The Robbins Group

A few questions, first of all, you mentioned the nine posters, talks papers, et cetera, that are going to be at ABS on Cesium. Are any of those going to have the data going back three years? I was a little unclear on to whether this data exists yet or not.

Roger Girard

Well, with all this data we have, at that show will be 28 months. That's the oldest data. So, no, it won't go back three years, but it will be 28-months data.

Rosanne Russell - The Robbins Group

All right. Then it will be coming up then in another 8 months on the 36-months magic data?

Roger Girard

Right. And what we've found, as I think everyone has found, is that the significant timeline on this clinical data is three years. And one thing that we did, who knows that if it was right, we only have the historical evidence of that. But as everyone knows, we started out with computer modeling. We had never been in an implanted Cesium in a human being before. And so on October of '04, we started with our first implant just on computer modeling.

And the realization at the time was we thought possibly that would be enough to convince the physicians, doctors, physicists, et cetera, that they would not need the clinical data. But that therein laid the difficult area that really what most clinicians, most doctors, most physicists needs is they want absolute data. Show me the data. And now we're starting to collect that data from many different areas and its compelling data. You can read it. A lot of it has already been published preliminarily, preliminary results and its only getting better.

Rosanne Russell - The Robbins Group

Okay. On a slightly different topic, I hope to get a better sense for the reorders in every uptick. I know that in past years sometimes, and in past quarters sometimes, you've given a break-out of how many revenue-generating sites, how many license in-progress sites, and how many pre-licensing process sites. Is there anything like that available now for this quarter?

Roger Girard

Yes. I have right here. There are a total of 53 sites, and I'll have just a second to read them. Let me get it for you. Here we are. In the December quarter ending 2007 -- this is, in my estimation, maybe the most significant factor in today's meeting -- and that is that we went year-over-year from 33 sites for the quarter, the same quarter in 2006 to 53 user sites in 2007.

But another significant factor in the same time period, we had 14 new facilities receive their RAM license. In other words, they are all ready to order now. All they have to do is identify an account, and start. And we had 27 who had submitted during the quarter license or application to amend their radiation license to include Cesium-131.

And so, we had a total of 91 people, 91 centers, 91 doctors, 91 customers from our perspective that are in the process, either have their RAM license and are ready to go, 27 which are submitted and the other 50 are in the process of getting there. So that's a significant number.

Rosanne Russell - The Robbins Group

Okay. It looks [like that it's got] 14 new licenses.

Roger Girard

Right.

Rosanne Russell - The Robbins Group

27 submitted.

Roger Girard

Right.

Rosanne Russell - The Robbins Group

And then what's the other category?

Roger Girard

And there is 50 who have committed to amend their radiation license to include Cesium and start using it in the time period of 30 days to 9 months.

Rosanne Russell - The Robbins Group

So that's the pre-licensing process?

Roger Girard

That's the pre-licensing process.

Rosanne Russell - The Robbins Group

Okay.

Roger Girard

And a pre-licensing process, it depends on the state, how long they'll take. Some of them are quick in California, may take nine months. But in other states, they are much quicker than that.

Rosanne Russell - The Robbins Group

Now, in the past we also had a category called the revenue-generating sites, which may have been sites that order during that quarter, or they may have been sites that order during the quarter plus the new licenses?

Roger Girard

I think originally we started out some time ago. We were talking about the sites who were ordering. I don't have that number right in front of me. But I think the last quarter; I don't remember exactly where that was.

Rosanne Russell - The Robbins Group

But that's not the same as the 53 that ordered during the quarter?

Roger Girard

No. The 53 ordered during the quarter those are revenue size, too. But I thought you are asking a question about cumulatively.

Rosanne Russell - The Robbins Group

Yes, cumulatively would be good to know. And also I'm just trying to reconcile it back to the format which the pipeline was presented a couple of quarters ago.

Roger Girard

Well, cumulatively in the last quarter, 53 user sites, 53 people ordered the isotope in the quarter we just completed; in other words, our second quarter.

Rosanne Russell - The Robbins Group

Okay.

Roger Girard

The 53 that we have is separate from the 91 that we've talked about.

Rosanne Russell - The Robbins Group

Yes, I understand.

Roger Girard

Okay. What I can say is for the quarter, last quarter we had 53 sites that ordered during that quarter.

Rosanne Russell - The Robbins Group

Okay. Can you give us any color as to how long a customer typically waits before reordering? These 53 orders that came in this quarter, will we see another 53 orders next quarter from these guys or wait a couple of quarters?

Roger Girard

Okay. If I had a magic ball, I would answer that question, which I don't. What happens is it varies. We had one specific doctor who was 18 months between his last order and this order. And so I would say it varies anywhere typically from 90 days now to up to 18 months when they order, or maybe they order several. They follow their patients, watching very carefully, watch their PSA, watch all the morbidity, the side effects, the toxicity everything and ultimately watch their PSA. I mean, that's pretty standard operating procedure, and we've seen a tremendous drop in the PSA, which has come out and is coming out in the future protocols that we just talked about. So, everything from here looks very, very good.

Rosanne Russell - The Robbins Group

Okay. I don't suppose you could give us something like breakdown of how much of the revenues this quarter came from new customers and how much was reorders?

Roger Girard

I don't have that. I don't think Jonathon does…

Jonathan Hunt

No.

Roger Girard

No, Jonathan doesn't have that either.

Rosanne Russell - The Robbins Group

Okay. One last question, then I'll hop off. What law firm are you using to negotiate the Russian joint venture?

Roger Girard

We are using the Robinson Group, out of Seattle. Bill Robinson is the senior guy there, and he is thought of, probably one of the nation's experts on Russian Law, and you could go on his website and find out a lot about him. He lectures and teaches, he spent a lot of time in Russia, I think he has done about a 100 -- I don't remember right now, over a 150 of these transactions so far in his career.

Rosanne Russell - The Robbins Group

Was he working with one of the major firms in Russia before that, like Catherine Park or any of those?

Roger Girard

No, I don't think so. Although I know he works very closely with major Russian firms.

Rosanne Russell - The Robbins Group

Okay. Thanks very much.

Roger Girard

Thank you, Rosanne.

Operator

Our next question is from the line of [Patrick Dalton with Steinwolf Capital].

Patrick Dalton - Steinwolf Capital

Good afternoon. I was going to ask about --

Roger Girard

Hey Patrick, how are you?

Patrick Dalton - Steinwolf Capital

Good, how are you?

Roger Girard

Good.

Patrick Dalton - Steinwolf Capital

I was going to ask about the barium decay, but if you could give us some color on penetration in practices, what's the range of doctors that are seeing, as a percentage of brachytherapy treatments? Are the both of your customers prescribing 25%, 30%?

Roger Girard

Okay. Let me give you a little color, and kind of set this up. First of all, initially there was no roadmap. So, initially we identified there are some arguably 1500 centers which use some kind of radioactive brachytherapy of one sort of another. Then we broke that down and after we sort of went out and beat around pretty good. We broke that down and said, okay, if we were the centers, who were the 15% and 20%, doing 80% of the business. So, we broke it down, and now that's our focal point. In other words, those nodes of clinicians, which are doing like Dr. Moran and Dr. Wesson, Dr. Kurtzman, Dr. (inaudible) et cetera, et cetera. Those are key factors or key customers that we are really focused on. We have stopped traveling 300 miles to call on somebody who might use it, might not. Now with our education going on and now with the collateral such as the protocols etcetera, we have a number of physicians as we just talked about here, who are interested in using Cesium.

So, when we go to him, they start out less use, as essentially mentioned by Dr. Moran and Dr. Kurtzman. Let's use those two as an example that we are mentioning here today. Dr. Kurtzman, as you know, is our Medical Director. He is exclusive with the Cesium, he only implants now with Cesium-131. He was not a pushover. This guy was tough to get started. He really questioned about the things. But he found the exceptional results, and the ease of use of Proxcelan, and so he moved a 100%.

Well, on the opposite of the scale, there are doctors who have had tried it and for whatever reason, they are very cautious about moving along the line of go-ahead exclusive, or using it maybe 25% or 50% of their practice. There are still those who are too extreme. But what we are finding is that, many doctors now, when I say many, our target is some 200 doctors thereabouts is our primary target. In those doctors, a lot of those doctors, they may do 150 to 200 cases a year, and what we are finding out is most them are using a Cesium not once they tried out and use it, we are finding it now they are starting to incorporate it into their practice. And so what we are seeing is more organic growth. We are starting to see that happen all over the country. And so there is a slow take-up initially. Now we are starting to see people who are starting to use more than just a few cases. And we believe, as they go forward, these people, like for example, Dr. Moran. Dr. Moran in '06, he used almost 2% of his cases with Cesium, a little less about 1.8% with Cesium. In '07, that moved up to 6% or 8%. And we would anticipate in '08, the year we are in, I am sure according to what he has said publicly, that that will increase. So that's the kind of uptick. But rarely do we find people who just jump in right now with both feet and say, this is it for me, this is all I am going to do. They have to understand the isotope. They have to get comfortable with it. They have to see the results. And once that happens, the organic growth is happening and we believe it will only increase across the country.

Patrick Dalton - Steinwolf Capital

And then also how is reimbursement looking at this point?

Roger Girard

That is a very, very interesting question. Reimbursement, right now, as far as we're concerned is great. It's a pass-through. It's excellent. That's going to be really up to Congress to decide how reimbursement and what they're going to reimburse for brachytherapy seeds, and that includes iodine, palladium and cesium. They are going to decide at the end of June. They are supposed to decide right now it's a pass-through -- they are supposed to decide whether its going to be fixed, whether its going to be continue as a pass-through.

And from our perspective, I mean we like the pass-through. That's very good for us. I would suppose if they go to a fixed price, we'll fine there too. But we like the pass-through. We like that. We think its good for the industry, and we would encourage them and are encouraging them to our lobbies, et cetera to continue with the pass-through. But if they don't, I'm sure we'll be fine too.

Patrick Dalton - Steinwolf Capital

And how is private reimbursement looking at this point?

Roger Girard

Well, that's spotty. Private reimbursement is spotty in all areas of medicine, and we are no exception. I mean the private reimbursement is probably going to become a bigger factor in much of medicine, including brachytherapy. So, we'll have to wait and see on that, Patrick.

Patrick Dalton - Steinwolf Capital

Okay. That's it.

Operator

Our final question for today comes from the line of Jeremy Hamblin with Seamark Capital.

Roger Girard

Jeremy, how are you?

Jeremy Hamblin - Seamark Capital

Good afternoon. Sorry about that. I think I had my mic off.

Roger Girard

That's not likely, Jeremy.

Jeremy Hamblin - Seamark Capital

I know. I was trying to be quiet while the other questions were asked. I wanted to, actually, Jonathan, could you just go over the cost of product sales and kind of the one-off items that were included within that $2.2 million for this quarter between the cost of the decayed isotope, and then the cost of the decommissioning of the facility? Can you just give me those figures again?

Jonathan Hunt

Let's see. The additional expense associated with the decommissioning of the facility was $139,000.

Jeremy Hamblin - Seamark Capital

$139,000 okay. And what about the approximate cost of the unused isotope?

Jonathan Hunt

I actually do not have that with me.

Jeremy Hamblin - Seamark Capital

Roger, do you have a sense of that? Really what I'm getting after a little bit, I'm trying to reconcile, the last two quarters have really represented a little bit of a troubling trend in your cost of product sales. And you really haven't had a tremendous jump in your total sales, but you have seen a tremendous jump in your cost of product sales.

And I'm trying to see if I can kind of decompose that into a component parts as to where that additional cost is coming from, because I know that, Roger, you've talked about bringing total cost of product sales down. So, I'm trying to also understand when we can expect to start to see that number come in line with where your product sales are going?

Roger Girard

Well, let me give you just a little bit of overview. This is an important question and it's a question we spend endless amount of time on here on driving the topline, driving revenue. I mean the focus is intense.

But, on the other hand, it is how do we cut cost, cut production cost and become more efficient? And it's not a question that is answered. I have the figures, Jeremy. They haven't been published. So obviously, I can't give in to you. But I will tell you there was a significant wastage of the isotope.

There also was a significant wastage of time, simply because when you have two facilities -- and in September, we made the switch. But until we got the decommissioning, understand we were petrified about decommissioning. I mean none of us had ever decommissioned a plant before that would shot radioactive or had radioactive material in.

And that was a real risk, and one of our goals was to make sure that we mitigated the risk that we didn't allow some kind of difficulty or disaster or problem, which would cost us a lot of money to happen. And it didn't and we got out. The staff, everybody did a great job. We got out.

As I've told you, and I've told everyone before, we have, we must -- we have no choice -- we must cut costs. And we are doing that. And we are doing that not next year. That cutting cost is at hand. And as I mentioned earlier, the first one starts with enriched barium. Well, actually before that, it starts with a facility here.

When you got everything, you've got all employees in your own facility under one roof and streamlined, we cut labor costs, as Jonathon mentioned. We cut just about everywhere on the production side, including now becoming more efficient with the cores, more efficient with the welding, and so the efficiency along with the cutting of costs and that takes me right back to Russia and the enriched barium and the cost that's going to save us. It's pretty substantial, and I believe that you'll see that start to take effect and we were very focused on it, and I think you'll see it take effect and we would be very pleased with the results.

Jeremy Hamblin - Seamark Capital

So, I could expect to see that in the next couple of quarters or are we talking four, five quarters out?

Roger Girard

Well, you know, what I was saying that. But, let me just repeat what I said. It is our absolute focus and we have already started our enriched targets, our first one those in the reactor.

Jeremy Hamblin - Seamark Capital

In March?

Roger Girard

No, it's in next week, and we actually shipped seeds within enriched barium, the second or third week of March.

Jeremy Hamblin - Seamark Capital

Okay, fair enough.

Roger Girard

Yes, please, I mean, I can't give you forward-looking things here, but I think you are going to understand this. You know me, I mean we are in this to win, and one of the ways to win it is to cut costs, and that's why the Russian initiative is so significant for us.

Jeremy Hamblin - Seamark Capital

Okay. Let me switch gears then a little bit, I wanted to just hone in on your just over $12 million cash balance and get a sense for that you spent approximately, lets see, about $7 million in cash, over the last two quarters. I just wanted to strip out what the CapEx spend of that $7 million is versus your operational cash burn? Get a sense for that.

Jonathan Hunt

Jeremy, we have filed the 10-Q, so you should be able to pull that up. The core CapEx for the six months ended December 31 was just under $3 million.

Jeremy Hamblin - Seamark Capital

Okay. And so should I take that then as the other four was true operational burn? Or is there other one-off item that would be included within that.

Jonathan Hunt

Yeah. In operations it is about $4.7 million. So on the cash flow statement, net cash used by operating activity is $4.7 million that would include a lot of the items that we talked about in terms of the decommissioning of the facility, the isotope, et cetera.

Jeremy Hamblin - Seamark Capital

Fair enough. And then I also wanted to ask about these educational seminars that you are doing, and Roger, get a sense for what you expect the total costs to be to do that over the course of that? How many do you plan to do? How often, and what do you think the total cost of the company will be over the next 12 months?

Roger Girard

Okay. I will be glad to answer that from what I know now. First of all, we have been planning these for about a year.

Jeremy Hamblin - Seamark Capital

Okay.

Roger Girard

And to get in the right situation, you can go into New York and blow out $100,000 a session. Or you could then do as we've done this last time and do it. Dr. Moran was excited in his beautiful new facility in Chicago. It's a perfect teaching place with a little auditorium and lots of operating rooms, and we're doing this on a low-end. Its amazing, how little we're spending on this. So, and then we're going to bring in Dr. Kurtzman. So Dr. Moran is going to do pre-plans, and he will do three of those the next month, and at the end of May, and then he'll do one in a fall. So he will do three. And then Dr. Kurtzman is going to do a whole series. But Dr. Kurtzman is going to do two things. One, he will do pre-planning like Dr. Moran in centers around the country, where we will go into a setting, maybe an ACS or specific private setting where we can do in, where they wanted to come in, they would like to more about Cesium, and they invited, then we invite doctors from all over the country and soon to be all over the world. We will invite them in for a one-day seminar.

So basic is a cost of minimal. We go to places that are easy to get to and have some good fares, and we only bring in as many people because we want these to be hands on -- to the 23 doctors, physicians. The 23 doctors who are either doctors or physicists that were in Chicago. All got to be hands on. They all got to be in an operating room.

Back to Dr. Kurtzman, what we're also going to do with him is set him up with telecasting and he will be able to do real-time from Los Gatos, we are setting up the cameras in all of the T1s etcetera at Los Gatos. And Los Gatos will be able then to do one-on-ones live real-time all over the country. And also, we will be doing training in other countries using Dr. Kurtzman and Dr. Moran on these telecasting.

So we're going to approach it both ways. And when it's done, it's really supplemented our sales, it supplemented the things that we need to do, and that's the educational, get people comfortable with this isotope. There's no doubt that you are comfortable with the isotope. Most of you on the call have talked to physicians. If you are comfortable with this isotope, it's a great isotope. It's different than [I&I], different than CDs. You've got to get comfortable with it. Once you're comfortable with it, the results are phenomenal.

I will tell you, Jeremy, we couldn't get the same return on revenue having sales people out there doing this. This is something that Lori Woods, Lisa Mayfield, have been really instrumental on. They've done just an outstanding job. So our cost factor is very small for the results that we get.

On the post -- what do you call it, post -- you ask how do you like the class, what are they going to do, are they going to use Cesium, all 23 of them said they either have switched, are switching or absolutely were going to switch. We had nobody on the cuts, nobody wavering. Every one of them was part of the future of Cesium.

Jeremy Hamblin - Seamark Capital

Okay. So, in terms with the total cost, it sounds like it's not very substantial?

Jonathan Hunt

I thought it well. I said what I said, and I think you understand from that. It's an excellent, excellent value and a great way for us to multiply our sales force without having sales people in paying that cost.

Jeremy Hamblin - Seamark Capital

Okay, last question then. Obviously December was a pretty disappointing quarter in terms of the sales numbers.

Jonathan Hunt

Yes.

Jeremy Hamblin - Seamark Capital

What are the trends that you're seeing so far? We're half way through this quarter. Do you feel better about where the direction of where the sales teams are? How can you manage in the future being that you are tied pretty strongly to a couple of larger centers out there? Is there going to be a way to manage those dips from those centers in the future? Are you going to be able to manage the cost side better and kind of what is the sense that you are getting so far going forward now that you've mentioned the number of new licenses that you have in place and centers that are ordering? Can you give me a sense for that?

Roger Girard

Jeremy, I appreciate the question and I have people waiting and hollering and saying, no, no, I can't answer you directly on that. Let me just say this. As far as going forward, we have some, if you take [Padada] and Wesson and Moran and Kurtzman and a few others, they do a big percentage of our business.

Now, when you go, and all of a sudden you have a great quarter going, all of a sudden you get a month that's a holiday season and for whatever reason, the stars don't align and it falls and your sales fall. That hurts you. And that's why we cannot just focus on the last quarter and without going further on that, because obviously I'm very bullish on Cesium. I'm very bullish, I've said it in my stuff here. I believe that the revenue, the sales are going to be reflective of this very focused initiative that we've with some brash knuckles salesman. Guys like Rob (inaudible) out there, who most of you know, these guys who are tough, smart, intelligent know how to sell, know how to educate, know how to program, know the software and the new initiative, the new educational initiative. We hope to end and all the people who have in the queue here and still having just few major usage. We anticipate obviously increasing that fairly, substantially, and obviously from our standpoint, we'd like to do that as soon as possible. So having said that, there will still be some bounce in the quarters.

For example, we know the industry knows. June, second-half of June watch out. You better have all of your business in the first-half because the second-half is going to be horrible. And I'll tell you again, I'll never be fooled again on December. After December 15th that's it, and that's not just for IsoRay, I mean that's for the industry. We've gotten hit twice by that, and that's the last time we're going to get hit by it.

So what I'm saying to you is simply this: with our initiatives that we have in place, this is a much different company than it was a year ago. A much different company than it was last June. We have really focused, really gotten tough, really gotten specific, and now we are really understanding the efficiencies we can achieve, and I believe that we are doing those initiatives. So we can never take out all the bump; the whole industry cannot take out the bump. But I think we can level with that by having a bigger data, a bigger customer base support model.

Jeremy Hamblin - Seamark Capital

And I would suspect also that once Russia gets going that that would also help to smooth out the peaks and valleys a little bit. Is that fair?

Roger Girard

Well, you will have to make the decision on that. But I think that's a pretty, I don't know, it is looking to me very logical, but I really can't comment on Russia because we are not there yet, and we haven't shipped anything there yet. Although you saw the place, you saw the market size. We all know what Russia is, so.

Jeremy Hamblin - Seamark Capital

Okay.

Roger Girard

No secret about that. It is what it is. And their men's' health initiative is very strong, and we have two of our executives in here right now over there to further this. So we are totally committed to that, I think it has been in public now. We are committed -- it is the markup that we think is significant.

Jeremy Hamblin - Seamark Capital

All right. Thank you, and good luck, gentlemen in executing the strategy.

Roger Girard

Thank you, we will. We appreciate very much your time. We appreciate your patience. We appreciate that you are supporting us, all of you and, as I think as one [good steward] said to another one, don't give up this year. So we will talk to you soon.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: IsoRay Incorporated F2Q08 (Qtr End 12/31/07) Earnings Call Transcript
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