Isolytic damage is basically just a second type of damage. You have your normal weapon damage, then you have your isolytic damage. The only difference between the two is with mitigation. Normal mitigation doesn't work against isolytic damage, there is a new type of mitigation for it (Isolytic Defense).
Isolytic Damage: (Total Standard Damage * Isolytic Damage Bonus) / (1 + Opponents Isolytic Defense)
So if your ship doesn't have Isolytic defense, you have none of that damage mitigated, like with this armada.
So basically, if your ship does 10,000 damage, and you have 1% isolytic damage, you'll do 100 isolytic damage. Then any isolytic defense is taken away from that.
Isolytic Cascade is a seperate ability. When it procs, it increases the final isolytic damage total. So when you have Isolytic Cascade your Isolytic Damage is increased and is both multiplied and then added when it comes to Isolytic Damage.
Again, lets do the example where your ship does 10,000 normal damage. So then you add in your isolytic cascade to that. With Janeway above as an example at 10%, you'll increase your isolytic damage by 10% and then ADD another 10% isolytic damage. So it both multiplies your existing damage and then adds even more isolytic damage. So 1% isolytic damage is 100 damage again, you increase it by 10% to 110 damage (100*1.1=110) and THEN add another 10% isolytic damage from her so another 1,000 damage to that for a total of 1,110 extra damage.
So in the end your isolytic damage is effectively 11.1% (10% from Janeway's Cascade + Normal Isolytic 1% increased by 10% from Janeway's Cascade to 1.1%). So Cascade has TWO abilities. It adds to Isolytic Damage AND increases the isolytic damage you already have.
So the steps:
Isolytic Damage including Cascade = ((Total Standard Damage * Isolytic Damage Bonus)*(1 + Isolytic Cascade Bonus) + (Total Standard Damage * Isolytic Cascade Bonus))/ (1 + Opponents Isolytic Defense)