form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
______________
FORM
10-Q
(Mark
One)
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
|
For
the quarterly period ended
|
MARCH 31, 2008
|
|
OR
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
|
For
the transition period from
|
|
to
|
|
Commission
file number 000-29449
POSITRON
CORPORATION
(Exact
Name of Small Business Issuer as specified in its charter)
|
Texas
|
76-0083622
|
|
(State
or Other Jurisdiction of Incorporation or
Organization)
|
(IRS
Employer Identification
No.)
|
|
1304
Langham Creek Drive, Suite 300,
Houston,
Texas
|
77084
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Issuer’s
Telephone Number, Including Area Code: (281) 492-7100
|
N/A
|
|
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
|
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90
days. Yes Q
No ¨
Indicate
by check mark whether the registrant is a larger accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one)
|
Large
accelerated
filer ¨
|
Accelerated
filer
¨
|
|
Non-accelerated
filer
¨
|
Smaller
reporting company Q
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨
No Q
The
numbers of shares outstanding of each of the issuer's classes of common equity,
as of May 20, 2008, are as follows:
|
Class
of Securities
|
|
Shares
Outstanding
|
|
Common
Stock, $0.01 par value
|
|
116,240,384
|
Transitional
Small Business Disclosure Format (check one): Yes ¨
No Q
POSITRON
CORPORATION
FOR
THE QUARTER ENDED MARCH 31, 2008
TABLE
OF CONTENTS
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|
Page
|
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|
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3
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|
|
|
|
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3
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|
|
|
|
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4
|
|
|
|
|
|
5
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|
|
|
|
|
6
|
|
|
|
|
|
19
|
|
|
|
|
|
22
|
|
|
|
|
|
22
|
|
|
|
|
|
23
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|
|
|
|
|
23
|
|
|
|
|
|
23
|
|
|
|
|
|
23
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|
|
|
|
|
23
|
|
|
|
|
|
23
|
|
|
|
|
|
23
|
POSITRON
CORPORATION AND SUBSIDIARIES
(In
thousands, except share data)
|
|
|
March
31, 2008
(Unaudited)
|
|
|
December
31, 2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
184 |
|
|
$ |
192 |
|
|
Accounts
receivable
|
|
|
180 |
|
|
|
222 |
|
|
Inventories
|
|
|
1,079 |
|
|
|
1,172 |
|
|
Due
from affiliates
|
|
|
362 |
|
|
|
355 |
|
|
Prepaid
expenses
|
|
|
97 |
|
|
|
106 |
|
|
Other
current assets
|
|
|
31 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
1,933 |
|
|
|
2,071 |
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in Joint Venture
|
|
|
-- |
|
|
|
-- |
|
|
Property
and equipment, net
|
|
|
54 |
|
|
|
56 |
|
|
Other
assets
|
|
|
128 |
|
|
|
150 |
|
|
Total
assets
|
|
$ |
2,115 |
|
|
$ |
2,277 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable, trade and accrued liabilities
|
|
$ |
2,147 |
|
|
$ |
2,314 |
|
|
Customer
deposits
|
|
|
468 |
|
|
|
397 |
|
|
Unearned
revenue
|
|
|
126 |
|
|
|
90 |
|
|
Due
to affiliates
|
|
|
1,755 |
|
|
|
1,346 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
4,496 |
|
|
|
4,147 |
|
|
|
|
|
|
|
|
|
|
|
|
Obligation
under capital lease
|
|
|
-- |
|
|
|
13 |
|
|
Convertible
notes payable, less discount of $1,163 and
$1,165
|
|
|
206 |
|
|
|
135 |
|
|
Deposits
of unissued securities
|
|
|
39 |
|
|
|
375 |
|
|
Derivative
liabilities for convertible debentures
|
|
|
2,201 |
|
|
|
2,550 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
6,942 |
|
|
|
7,220 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficit: Series A Preferred Stock: $1.00 par value; 8%
cumulative, convertible, redeemable; 5,450,000 shares authorized;
457,599 and 464,319 shares issued and outstanding
|
|
|
458 |
|
|
|
464 |
|
|
Series
B Preferred Stock: $1.00 par value; convertible, redeemable 9,000,000
shares authorized; 6,088,611 shares issued and 5,926,111
outstanding
|
|
|
6,087 |
|
|
|
5,926 |
|
|
Series
G Preferred Stock: $1.00 par value; 8%
cumulative, convertible, redeemable; 3,000,000 shares authorized;
111,391 shares outstanding
|
|
|
29 |
|
|
|
29 |
|
|
Common
Stock: $0.01 par value; 800,000,000 shares authorized;
114,490,384, and 102,555,302 shares outstanding
|
|
|
1,145 |
|
|
|
1,026 |
|
|
Additional
paid-in capital
|
|
|
65,259 |
|
|
|
64,314 |
|
|
Other
comprehensive loss
|
|
|
(86 |
) |
|
|
(82 |
) |
|
Accumulated
deficit
|
|
|
(77,704 |
) |
|
|
(76,605 |
) |
|
Treasury
Stock: 60,156 common shares at cost
|
|
|
(15 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ deficit
|
|
|
(4,827 |
) |
|
|
(4,943 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ deficit
|
|
$ |
2,115 |
|
|
$ |
2,277 |
|
See
accompanying notes
POSITRON
CORPORATION AND SUBSIDIARIES
(In
thousands, except per share data)
(Unaudited)
|
|
|
Three
Months Ended
|
|
|
|
|
March
31, 2008
|
|
|
March 31,
2007
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
426 |
|
|
$ |
1,201 |
|
|
|
|
|
|
|
|
|
|
|
|
Costs
of sales
|
|
|
548 |
|
|
|
822 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit (loss)
|
|
|
(122 |
) |
|
|
379 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
285 |
|
|
|
353 |
|
|
Selling
and marketing
|
|
|
38 |
|
|
|
269 |
|
|
General
and administrative
|
|
|
1,041 |
|
|
|
812 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,364 |
|
|
|
1,434 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,486 |
) |
|
|
(1,055 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(78 |
) |
|
|
(33 |
) |
|
Derivative
gains (losses)
|
|
|
465 |
|
|
|
(34 |
) |
|
Equity
in losses of joint ventures
|
|
|
-- |
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
387 |
|
|
|
(89 |
) |
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes and majority interest
|
|
|
(1,099 |
) |
|
|
(1,144 |
) |
|
|
|
|
|
|
|
|
|
|
|
Majority
interest in loss of subsidiary
|
|
|
-- |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(1,099 |
) |
|
|
(1,119 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,099 |
) |
|
$ |
(1,119 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation loss
|
|
|
(4 |
) |
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$ |
(1,103 |
) |
|
$ |
(1,140 |
) |
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of basic and diluted common shares
outstanding
|
|
|
106,428 |
|
|
|
87,083 |
|
POSITRON CORPORATION AND
SUBSIDIARIES
(In
thousands)
(Unaudited)
|
|
|
Three
Months Ended
|
|
|
|
|
March
31, 2008
|
|
|
March
31, 2007
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,099 |
) |
|
$ |
(1,119 |
) |
|
Adjustment
to reconcile net loss to net cash used in operating
activities
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
7 |
|
|
|
15 |
|
|
Amortization
of loan costs, debt discount and beneficial conversion
features
|
|
|
94 |
|
|
|
18 |
|
|
Stock
based compensation
|
|
|
1 |
|
|
|
103 |
|
|
Gain
(loss) on derivative liabilities
|
|
|
(464 |
) |
|
|
34 |
|
|
Common
stock issued for services
|
|
|
425 |
|
|
|
90 |
|
|
Equity
in losses of joint ventures
|
|
|
-- |
|
|
|
22 |
|
|
Majority
interest in losses of consolidated subsidiary
|
|
|
-- |
|
|
|
(25 |
) |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
39 |
|
|
|
(32 |
) |
|
Inventory
|
|
|
56 |
|
|
|
49 |
|
|
Prepaid
expenses
|
|
|
7 |
|
|
|
(49 |
) |
|
Other
current assets
|
|
|
(8 |
) |
|
|
(3 |
) |
|
Accounts
payable and accrued liabilities
|
|
|
83 |
|
|
|
(116 |
) |
|
Customer
deposits
|
|
|
81 |
|
|
|
(115 |
) |
|
Unearned
revenue
|
|
|
36 |
|
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(742 |
) |
|
|
(1,156 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(3 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(3 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable to an affiliated entity
|
|
|
410 |
|
|
|
-- |
|
|
Payments
of notes payable
|
|
|
-- |
|
|
|
(512 |
) |
|
Proceeds
from private placements
|
|
|
-- |
|
|
|
1,903 |
|
|
Payments
for common stock
|
|
|
50 |
|
|
|
-- |
|
|
Payments
for preferred stock
|
|
|
314 |
|
|
|
-- |
|
|
Capital
lease payments
|
|
|
(18 |
) |
|
|
(1 |
) |
|
Repayments
of advances to affiliated entities
|
|
|
5 |
|
|
|
131 |
|
|
Advance
to affiliated entities
|
|
|
(14 |
) |
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
747 |
|
|
|
1,521 |
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(10 |
) |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(8 |
) |
|
|
357 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
192 |
|
|
|
115 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$ |
184 |
|
|
$ |
472 |
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
-- |
|
|
$ |
-- |
|
|
Income
taxes paid
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
disclosures
|
|
|
|
|
|
|
|
|
|
Convertible
debenture discount with corresponding increase to paid in capital for
value of warrants
|
|
$ |
366 |
|
|
$ |
-- |
|
|
Convertible
debenture discount with corresponding increase to derivative liabilities
for beneficial conversion feature
|
|
$ |
285 |
|
|
$ |
-- |
|
|
Conversion
of debentures to common stock
|
|
$ |
46 |
|
|
$ |
-- |
|
|
Conversion
of accrued interest to convertible notes payable
|
|
$ |
116 |
|
|
$ |
-- |
|
|
Conversion
of Series A Preferred Stock to common stock
|
|
$ |
6 |
|
|
$ |
-- |
|
See
accompanying notes
POSITRON
CORPORATION AND SUBSIDIARIES
The
accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles and the rules of the
U.S. Securities and Exchange Commission, and should be read in conjunction with
the audited financial statements and notes thereto contained in the Annual
Report on Form 10-KSB for Positron Corporation (the “Registrant” or the
“Company”) for the year ended December 31, 2007. In the opinion of management,
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of financial position, results of operations and cash flows
for the interim periods presented have been reflected herein. The
results of operations for interim periods are not necessarily indicative of the
results to be expected for the full year. Notes to the financial
statements which would substantially duplicate the disclosures contained in the
audited financial statements for the most recent fiscal year ended December 31,
2007, as reported in the Form 10-KSB, have been omitted.
For the
three months ended March 31, 2008 and 2007, the financial statements include the
transactions of Positron Corporation, and is wholly-owned subsidiary, Imaging
Pet Technologies, Inc. (“IPT”). All Intercompany transactions and balances have
been eliminated.
Foreign
Currency Translation
For
the three months ended March 31, 2008 and 2007 the accounts of the
Company’s subsidiary, IPT, were maintained, and its consolidated financial
statements were expressed in Canadian dollars. Such consolidated financial
statements were translated into U.S. Dollars (USD) in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation.” According to the Statement, all assets and liabilities were
translated at the exchange rate on the balance sheet date, stockholder's equity
are translated at the historical rates and statement of operations items are
translated at the weighted average exchange rates. The resulting translation
adjustments are reported under other comprehensive income in accordance with
SFAS No. 130, "Reporting Comprehensive Income”.
Cash
Equivalents and Short-term Investments
For the
purposes of reporting cash flows, the Company considers highly liquid, temporary
cash investments with an original maturity period of three months or less to be
cash equivalents. Short-term investments include certificates of
deposits, commercial paper and other highly liquid investments that do not meet
the criteria of cash equivalents. Cash equivalents and short-term
investments are stated at cost plus accrued interest which approximates fair
value.
Concentrations
of Credit Risk
Cash and
accounts receivable are the primary financial instruments that subject the
Company to concentrations of credit risk. The Company maintains its
cash in banks or other financial institutions selected based upon management's
assessment of the bank's financial stability. Cash balances
periodically exceed the $100,000 federal depository insurance
limit.
Accounts
receivable arise primarily from transactions with customers in the medical
industry located throughout the world, but concentrated in the United States,
Canada and Japan. The Company provides a reserve for accounts where
collectibility is uncertain. Collateral is generally not required for
credit granted.
Inventory
Inventories
are stated at the lower of cost or market. Cost is determined using the first-in,
first-out (FIFO) method of inventory valuation.
Property
and Equipment
Property
and equipment are recorded at cost and depreciated for financial statement
purposes using the straight-line method over estimated useful lives of three to
seven years, and declining balance methods for IPT’s computer software. Gains or
losses on dispositions are included in the statement of operations in the period
incurred. Maintenance and repairs are charged to expense as
incurred.
Impairment of Long-Lived
Assets
Periodically,
the Company evaluates the carrying value of its plant and equipment, and
long-lived assets, which includes patents and other intangible assets, by
comparing the anticipated future net cash flows associated with those assets to
the related net book value. If an impairment is indicated as a result
of such reviews, the Company would remove the impairment based on the fair
market value of the assets, using techniques such as projected future discounted
cash flows or third party valuations.
Revenue
Recognition
Revenues
from POSICAMTM system
contracts, IPT’s PulseCDC™ compact digital cardiac camera (sold under the IS2
brand name) and other nuclear imaging devices are recognized when all
significant costs have been incurred and the system has been shipped to the
customer. Revenues from maintenance contracts are recognized over the
term of the contract. Service revenues are recognized upon
performance of the services.
Stock-Based
Compensation
The
Company accounts for its share based compensation expense in accordance with
SFAS 123 (“SFAS 123R”), “Share-Based Payment”, which requires
companies to expense the fair value of employee stock options and similar
awards.
Warranty
Costs
The
Company accrues for the cost of product warranty on
POSICAMTM
systems, Pulse CDC gamma cameras and other nuclear imaging devices at the time
of shipment. Warranty periods generally range up to a maximum of one
year but may extend for longer periods. After warranty expiration
many customers execute service contracts to cover their
systems. Service contract periods vary with some customers on month
to month contracts and others on quarterly and annual
contracts. Revenue collected in advance of the service period
is deferred and recognized over the term of the contract. Service costs under
the contracts are expensed as incurred. For the three months ended
March 31, 2008 and 2007, service costs charged to expense were $89,138 and
$96,608, respectively. During the three months ended March 31, 2008 and 2007 the
Company did not have any Posicam systems under warranty. Warranty
expense for Pulse CDC gamma systems sold by IPT was $25,819 and $40,567
for the three months ended March 31, 2008 and 2007,
respectively.
Loss
Per Common Share
Basic
loss per common share is calculated by dividing net income by the weighted
average common shares outstanding during the period. Stock options
and warrants are not included in the computation of the weighted average number
of shares outstanding for dilutive net loss per common share during each of the
period presented in the Statement of Operations and Comprehensive Income, as the
effect would be antidilutive.
Income
Taxes
The
Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes”. Under Statement No.
109, the asset and liability method is used in accounting for income
taxes. Deferred taxes are recognized for temporary differences
between the bases of assets and liabilities for financial statement and income
tax purposes. The temporary differences relate primarily to net
operating loss carryforwards. A valuation allowance is recorded for
deferred tax assets when it is more likely than not that some or all of the
deferred tax assets will not be realized through future operations.
Fair
Value of Financial Instruments
The
Company includes fair value information in the notes to the financial statements
when the fair value of its financial instruments is different from the book
value. When the book value approximates fair value, no additional
disclosure is made.
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, Fair Value Measurements. SFAS No. 157 provides enhanced guidance for using
fair value to measure assets and liabilities. The standard also requires
expanded disclosures about the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value and the
effect of fair value measurements on earnings. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The adoption of Statement No. 157
does not materially impact the Company’s financial statements
New
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141(R), 'Business Combinations -
Revised,' that improves the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. To accomplish
that, this statement establishes principles and requirements how the acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree, recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase, and determines what information
to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. The changes to current
practice resulting from the application of SFAS No. 141(R) are effective for
financial statements issued for fiscal years beginning after December 15, 2008.
The adoption of SFAS No. 141(R) before December 15, 2008 is prohibited. The
Company has not determined the effect, if any, that may result from the adoption
of SFAS No. 141(R) on its financial statements.
Management
does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on the
accompanying financial statements.
Since
inception, the Company has expended substantial resources on research and
development. Consequently, the Company has sustained substantial
losses. Due to the limited number of systems sold or placed into
service each year, revenues have fluctuated significantly from year to
year. At March 31, 2008, the Company had an accumulated deficit of
$77,704,000 and a stockholder’s deficit of $4,827,000. The Company
will need to increase system sales and apply the research and development
advancements to achieve profitability in the future. Through the Company’s joint
venture with Neusoft Medical Systems, the Company intends to significantly
reduce, overall costs to manufacture and deliver PET systems. In addition, the
Company expects increased revenue from its IPT SPECT camera subsidiary to come
from new sales campaigns and service division. The Company expects that these
developments will have a positive impact on the PET, PET/CT and SPECT device
products, sales and service volumes.
The
Company had cash and cash equivalents of $184,000 at March 31,
2008. At the same date, the Company had accounts payable and accrued
liabilities of $2,147,000. In addition, debt service and working
capital requirements for the upcoming year may reach beyond current cash
balances. The Company plans to continue to raise funds as required
through equity and debt financings to sustain business
operations. These factors raise substantial doubt about the Company’s
ability to continue as a going concern.
There can
be no assurance that the Company will be successful in implementing its business
plan and ultimately achieving operational profitability. The
Company’s long-term viability as a going concern is dependent on its ability to
1) achieve adequate profitability and cash flows from operations to sustain its
operations, 2) control costs and expand revenues from existing or new business
and 3) meet current commitments and fund the continuation of its business
operation in the near future.
|
4.
|
Imaging Pet
Technologies – Business
Acquisition
|
The
Company and Quantum Molecular Pharmaceuticals Inc., a Canadian
radiopharmaceutical corporation (“QMP”) acquired all of the operating assets of
IS2 Medical Systems Inc., a developer and manufacturer of nuclear imaging
devices based in Ottawa, Ontario, Canada (“IS2”) through a minority-owned
subsidiary of the Company, Imaging PET Technologies, Inc. (“IPT”). The Company
and QMP hold 49.9% and 50.1%, respectively, of the total registered capital of
IPT. On May 8, 2006, to finalize certain obligations of QMP related to the
Quantum Molecular Technologies Joint Venture, the Company agreed to issue
650,000 shares of its Series B Convertible Preferred Stock (the “Series B”) to
IPT in exchange for a promissory note in the amount of $1,300,000. See, Quantum Molecular
Technologies, below.
On June
5, 2006, IPT completed the acquisition of IS2 through a series of events which
resulted in the net assets of IS2 being transferred to IPT. On April
28, 2006, debenture holders and promissory note holders of IS2 were put on
notice that IS2 was in default of its covenants relating to revenue
targets. In turn, the debenture/note holders demanded
payment. On May 29, 2006, the debentures and notes totaling
$1,435,727 were assigned to IPT by the holders in exchange for
$1,000,000. The original holders assigned their security agreements
to IPT who exercised those agreements immediately and assumed the net assets of
IS2. In addition to the net assets, IPT assumed leases and
contracts. Employment contracts were established with IPT upon
acquisition.
On
January 26, 2007, the Company executed and consummated a Securities Purchase
Agreement (the “Agreement”) with Imagin Diagnostic Centres, Inc. (“IMAGIN”), to
acquire 11,523,000 shares of common stock of IPT. The Shares represented the
remaining 50.1% of IPT’s issued and outstanding common stock. As a result of the
acquisition of the Shares, the Company owns 100% of the common stock of IPT. As
consideration for the shares, the Company and IMAGIN agreed to cancel a
promissory note in the principal amount of $2,400,000 made by IMAGIN subsidiary,
QMP and later assigned to IMAGIN. As of the date of the Agreement, the Company
had been advised by IMAGIN that it had acquired all of QMP’s interest in IPT as
well as QMP's other holdings of the Company's related
securities.
The
acquisition of the remaining 50.1% of IPT on January 26, 2007 was accounted for
using the purchase method of accounting. Initially, the excess of the
purchase price over the amounts allocated to the assets acquired and liabilities
assumed has been recorded as goodwill. Total goodwill recorded for
this acquisition was $2,592,256. Under Statement of Financial
Accounting Standards No. 142, “Goodwill and Other Intangible
Assets” (“SFAS No. 142”), goodwill and certain intangible assets are
deemed to have indefinite lives and are no longer amortized, but are reviewed at
least annually for impairment using the “fair value” methodology.
Goodwill
Impairment
Under
FASB Statement No. 142, Goodwill and Other Intangible Assets
(“SFAS 142”), goodwill and certain intangible assets are deemed to have
indefinite lives and are no longer amortized, but are reviewed at least annually
for impairment. Other identifiable intangible assets are amortized over their
estimated useful lives. SFAS 142 requires that goodwill be tested for impairment
annually, utilizing the “fair value” methodology. The Company has adopted
December 31st as the date of the annual impairment test for
goodwill.
Goodwill
impairment is determined using a two-step process. The first step of the
goodwill impairment test is used to identify potential impairment by comparing
the fair value of a reporting unit with the net book value (of carrying amount),
including goodwill. If the fair value of the reporting unit exceeds the carrying
amount, goodwill of the reporting unit is considered not impaired and the second
step of the impairment test is unnecessary. If the carrying amount of the
reporting unit exceeds the fair value, the second step of the goodwill
impairment test is performed to measure the amount of impairment loss, if any.
The second step of the goodwill impairment test compares the implied fair value
of the reporting unit's goodwill with the carrying amount of that goodwill. If
the carrying amount of the reporting unit's goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an amount equal to
that excess. The implied fair value of goodwill is determined in the same manner
as the amount of goodwill recognized in a business combination. Accordingly, the
fair value of the reporting unit is allocated to all of the assets and
liabilities of that unit as if the reporting unit had been acquired in a
business combination and the fair value of the reporting unit was the purchase
price paid to acquire the reporting unit. The fair value of the IPT reporting
unit was determined using an income approach. Under the income approach, the
fair value of a reporting unit is calculated based on the present value of
estimated future cash flows. The present value of future cash flows uses our
estimates of revenue for the reporting unit, driven by assumed growth rates and
estimated costs as well as appropriate discount rates.
In
performing the first step of the fiscal 2007 goodwill impairment test,
management determined there was an indicator of impairment in the IPT goodwill
because the carrying value of the reporting unit exceeded its estimated fair
value.
In
performing the second step of the goodwill impairment test, the Company
allocated the estimated fair values of the IPT reporting unit determined in step
one of the impairment test, to the assets and liabilities as if a new
acquisition were being accounted for in accordance with
SFAS 141.
Determining
the fair value of the reporting unit under the first step of the goodwill
impairment test and determining the fair value of individual assets and
liabilities of a reporting unit under the second step of the goodwill impairment
test is judgmental in nature and often involves the use of significant estimates
and assumptions. Since the fair value of the IPT reporting unit was derived from
projected revenues associated solely with developed technologies, which were
identified as intangible assets in the original purchase accounting allocation,
the fair value of the reporting unit was hypothetically all allocated to
developed technologies, with no remaining value to assign to goodwill.
Based on the Company’s annual review of goodwill in 2007, for the year
ended December 31, 2007 Company recorded an impairment charge of $2,592,256, for
the IPT reporting unit which represented the entire goodwill
balance.
|
5.
|
Quantum Molecular
Technologies
|
On
December 28, 2005, the Company entered into a Memorandum of Understanding with
Imagin Diagnostic Centres, Inc. (“IMAGIN”) and Quantum Molecular Pharmaceutical,
Inc. ("QMP"), a Canadian company and majority-owned subsidiary of
IMAGIN. The Memorandum provides that the parties will form a joint
venture to be called Quantum Molecular Technologies JV (the “QMT
JV”). Initially, the joint venture would be owned 20%, 29% and 51% by
the Company, IMAGIN and QMP, respectively. The Company had the right
to increase its interest in the joint venture to a maximum of 51% by the
issuance to QMP of up to 150 million shares of the Company's common
stock. In consideration for the Company's 20% interest in the joint
venture, the Company was obligated to loan to the joint venture sufficient
funds, in the form of senior debt, to meet the joint venture's capital
requirements as determined by the Company. In turn, IMAGIN and QMP
had committed to purchase up to $4 million in preferred equity in the
Company.
On May 8,
2006, the Company amended certain aspects of the QMT JV transaction. Whereas the
Company originally held 20% of the interests of the QMT JV, QMP and IMAGIN
assigned 100% of their interest to the Company. Additionally, the
investment amount QMP and IMAGIN originally committed to in the amount of
$4,000,000 was restated to $2,400,000 to reflect the assignment of the QMT JV
interests and participation by the Company in the IPT joint venture acquisition
and subsequent financing. The $2,400,000 investment is in the form of a
promissory note to the Company. In exchange for the assignment of QMT
JV interests and the investment, the Company issued 3,450,000 shares of Series B
Convertible Preferred Stock, convertible into 345,000,000 shares of the
Company’s common stock to QMP and IMAGIN, pro rata.
On April
13, 2006, the QMT JV was incorporated under the name Quantum Molecular
Technologies, Inc. (“QMT”) and acquired certain intangible assets in the form of
capitalized research and development costs from IMAGIN for a note payable in the
amount of $368,755. As discussed above, on May 8, 2006 the
Company acquired 100% of the IMAGIN and QMP interests in
QMT. QMT had limited operating activity during the period
between April 13, 2006 and May 8, 2006, as such the Company has consolidated
100% of the operations of QMT from the date of acquisition.
On
January 26, 2007, IPT acquired all of the outstanding capital stock of QMT from
Positron for the purchase price of $2,800,000 in the form of a promissory
note. The non-interest bearing promissory note is payable on or
before July 1, 2008 and is secured by a pledge of all of the issued and
outstanding shares of QMT.
Using
concepts and research and development activities conceived and to be implemented
by Dr. Irving Weinberg, QMT is developing certain next generation technologies
including PET-enabled surgical tools and solid-state photo detector technology,
which have implications in both molecular imaging and PET and which could have
further application in the military and aerospace segments. The first
solid-state detector technology patent has been filed by QMT. The
Company will have the right to manufacture and sell any PET products developed
by QMT in exchange for royalty payments still to be negotiated.
Inventories
at March 31, 2008 and December 31, 2007 consisted of the following (in
thousands):
|
|
|
March
31, 2008
|
|
|
Dec.
31, 2007
|
|
|
Raw
materials and service parts
|
|
$ |
1,287 |
|
|
$ |
1,004 |
|
|
Work
in progress
|
|
|
185 |
|
|
|
379 |
|
|
|
|
|
1,472 |
|
|
|
1,383 |
|
|
Less:
Reserve for obsolete inventory
|
|
|
(393 |
) |
|
|
(211 |
) |
|
Total
|
|
$ |
1,079 |
|
|
$ |
1,172 |
|
Due from
affiliates at March 31, 2008 and December 31, 2007 consisted of the following
(in thousands):
|
|
|
March
31, 2008
|
|
|
Dec.
31, 2007
|
|
|
Imagin
Diagnostic Centres, Inc.
|
|
$ |
10 |
|
|
$ |
11 |
|
|
Imagin
Nuclear Partners, Inc.
|
|
|
313 |
|
|
|
320 |
|
|
Neusoft
Positron Medical Systems Co., Ltd.
|
|
|
39 |
|
|
|
24 |
|
|
|
|
$ |
362 |
|
|
$ |
355 |
|
|
8.
|
Investment in Joint
Ventures
|
Neusoft Positron Medical
Systems Co. Ltd.
On
September 30, 2005 the Company entered into a Joint Venture Contract with
Neusoft Medical Systems Co., Inc. of Shenyang, Lianoning Province, People's
Republic of China ("Neusoft"). Pursuant to the Joint Venture Contract
the parties formed a jointly-owned company, Neusoft Positron Medical Systems
Co., Ltd. (the "JV Company"), to engage in the manufacturing of PET and CT/PET
medical imaging equipment. The JV Company received its business
license and was organized in September 2005.
The
Company and Neusoft are active in researching, developing, manufacturing,
marketing and/or selling Positron Emission Tomography ("PET") technology and
both parties seek to mutually benefit from each other's strengths, and
intend to cooperate in the research, development and manufacturing of PET
technology. The purpose and scope of the JV Company's technology
business is to research, develop and manufacture Positron Emission Tomography
systems (PET), and an integrated X-ray Computed Tomography system (CT) and PET
system (PET/CT), and to otherwise provide relevant technical consultation and
services.
The
parties to the joint venture contributed an aggregate of US $2,000,000 in
capital contributions. Neusoft's aggregate contribution to the capital of the JV
Company is 67.5% of the total registered capital of the Company, or US$
1,350,000, and was made in cash. The Company's aggregate contribution to the
capital of the JV Company is 32.5% of the total registered capital of the
Company, or US$ 650,000, of which US$ 250,000 was made in cash, and US$ 400,000
was made in the form of a technology license. The Company has
transferred to the JV Company certain of its PET technology, while Neusoft made
available to the JV Company certain CT technology for the development and
production of an integrated PET/CT system. The parties will share the
profits, losses and risks of the JV Company in proportion to and, in the event
of losses, to the extent of their respective contributions to the registered
capital of the JV Company. For the three months ended March 31, 2008
and 2007, the JV Company had net losses of $292,000 and $382,000, respectively.
For the three months ended March 31, 2007, the Company recorded losses related
to its investment of $22,000. At March 31, 2008, the Company’s investment in
NPMS was zero. The Company’s share of NPMS losses in excess of its investment
approximates $420,000 as of March 31, 2008.
|
9.
|
Property and
Equipment
|
Property
and equipment at March 31, 2008 and December 31, 2007 consisted of the following
(in thousands):
|
|
|
March
31, 2008
|
|
|
Dec.
31, 2007
|
|
|
Furniture
and fixtures
|
|
$ |
130 |
|
|
$ |
130 |
|
|
Computers
and peripherals
|
|
|
91 |
|
|
|
89 |
|
|
Machinery
and equipment
|
|
|
28 |
|
|
|
32 |
|
|
Subtotal
|
|
|
249 |
|
|
|
251 |
|
|
Less:
accumulated depreciation
|
|
|
(195 |
) |
|
|
(195 |
) |
|
Total
|
|
$ |
54 |
|
|
$ |
56 |
|
Other
assets at March 31, 2008 and December 31, 2007 consisted of the following (in
thousands):
|
|
|
2008
|
|
|
2007
|
|
|
Intangible
assets
|
|
|
42 |
|
|
|
45 |
|
|
Deferred
loan costs
|
|
|
86 |
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
128 |
|
|
$ |
150 |
|
|
11.
|
Accounts Payable and
Accrued Liabilities
|
Accounts
payable and accrued liabilities at March 31, 2008 and December 31, 2007
consisted of the following (in thousands):
|
|
|
2008
|
|
|
2007
|
|
|
Trade
accounts payable
|
|
$ |
1,544 |
|
|
$ |
1,529 |
|
|
Accrued
royalties
|
|
|
229 |
|
|
|
311 |
|
|
Accrued
interest
|
|
|
24 |
|
|
|
139 |
|
|
Sales
taxes payable
|
|
|
103 |
|
|
|
103 |
|
|
Accrued
compensation
|
|
|
93 |
|
|
|
63 |
|
|
Accrued
property taxes
|
|
|
47 |
|
|
|
45 |
|
|
Accrued
professional fees
|
|
|
57 |
|
|
|
25 |
|
|
Accrued
warranty costs
|
|
|
50 |
|
|
|
84 |
|
|
Other
|
|
|
-- |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,147 |
|
|
$ |
2,314 |
|
|
12.
|
Secured Convertible
Notes Payable
|
Pursuant
to the terms of a Security Agreement and a Registration Rights Agreement (the
“Agreements”) dated May 23, 2006, the Company agreed to issue to private
investors (the “Investors”) callable secured convertible notes (the
“Debentures”) in the amount of $2,000,000, with interest at the rate of 6%
annually. The Debentures are convertible into shares of the Company’s
Common Stock at the product of the “Applicable Percentage” and the average of
the lowest three (3) trading prices for the common stock during the twenty (20)
day period prior to conversion. Applicable Percentage is 50%; provided, however
that the percentage shall be increased to (i) 55% in the event that a
Registration Statement is filed within thirty days of the closing of the
transaction and (ii) 65% in the event the Registration Statement becomes
effective within one hundred and twenty days of the closing of the
transaction. The Company filed a Registration Statement on June 20,
2006. The Company may repay principal and interest in cash in the
event that the price of the Company’s Common Stock is below $0.20 on the last
business day of a month. Pursuant to the terms of the Agreements, the
Company issued to the Investors warrants to purchase 30,000,000 shares of Common
Stock at an exercise price of $0.15 per share. These warrants are exercisable
seven (7) years from the closing of the transaction.
On May
23, 2006 the Company issued Debentures in the amount of $700,000 with a maturity
date of May 23, 2009. On June 21, 2006 the Company issued Debentures in the
amount of $600,000 with a maturity date of June 21, 2009. Pursuant to
the terms of the Agreements, the Company shall issue Debentures and receive the
third traunch in the amount of $700,000 when the Registration Statement is
declared effective by the Securities and Exchange Commission. The Registration
Statement filed to register common stock issuable upon conversion of the
Debentures had yet to be declared effective. Accordingly, the Company
has not received the third traunch of funding from the
Investors. Legal and other fees incurred in conjunction with
the Debentures issued on May 23, 2006 and June 21, 2006 were $130,000 and
$90,000, respectively and are being amortized over the maturity periods of the
Debentures.
At the
date of issuance, the beneficial conversion features had an estimated initial
fair value of $2,268,000, of which $381,000 was recorded as a discount to the
debt and $1,887,000 was immediately charged to derivative losses and recorded as
a liability on the consolidated balance sheet. The estimated fair value of the
beneficial conversion features was determined using the Black Scholes Valuation
Method based on the fair value of the Company’s common stock of $0.125; risk
free rate of return of 5.125%; dividend yield of 0%; the conversion
price as defined in the debt agreement; 3 year term to maturity; and a
volatility factor of 168%. The debt discount is being amortized over the term of
the Convertible Debentures using the effective interest method.
On
January 4, 2008 the Investors converted debentures in the amount of $40,986 into
872,052 shares of the Company’s common stock at a price of $0.047 per
share. Additionally, on March 6, 2008, the Investors converted
debentures in the amount of $5,500 into 250,000 shares of common stock at a
price of $0.022 per share. The conversions resulted in a reduction of $41,512 to
the unamortized debt discount.
At March
31, 2008, the beneficial conversion features had an estimated fair value of
$1,916,535. In valuing the beneficial conversion features at March 31, 2008, the
Company used the closing price of its common stock of $0.055, risk free rate of
return of 2.125%; dividend yield of 0%; the conversion price as defined in the
debt agreement; remaining term to maturity; and a volatility factor of 121%. For
the three months ended March 31, 2008 and 2007, the Company had derivative gains
(losses) from the beneficial conversion features in the Convertible Debentures
of $633,000 and ($34,000), respectively.
At the
date of issuance, the warrants issued with the Convertible Debentures had an
estimated initial fair value of $919,000 which was recorded as a discount to the
debt. The warrants were valued using the Black Scholes Valuation
Method based on the fair value of the Company’s common stock of $0.125; an
exercise price of $0.15; a 7 year term; risk free rate of return of 5.125%;
dividend yield of 0%;and a volatility factor of 168%. The discount, which was
recorded as an increase to additional paid-in capital, is being amortized over
the term of the Convertible Notes using the effective interest
method.
Accrued Interest Converted
To Notes
On
January 31, 2008, the Investors converted accrued interest of $115,900 related
to the Debentures into three Callable Secured Convertible Notes (the “Notes”)
with interest at the rate of 2% annually. The Notes are convertible
into shares of the Company’s Common Stock at the product of the “Applicable
Percentage” and the average of the lowest three (3) trading prices for the
common stock during the twenty (20) day period prior to conversion. Applicable
Percentage is 50%.
At the
date of issuance, the beneficial conversion features had an estimated initial
fair value of $284,589, of which $115,900 was recorded as a discount to the debt
and $168,689 was immediately charged to derivative losses and recorded as a
liability on the consolidated balance sheet. The estimated fair value of the
beneficial conversion features was determined using the Black Scholes Valuation
Method based on the fair value of the Company’s common stock of $0.065; risk
free rate of return of 2.125%; dividend yield of 0%; the conversion
price as defined in the debt agreement; 3 year term to maturity; and a
volatility factor of 237%. The debt discount is being amortized over the term of
the Convertible Debentures using the effective interest method.
Advance from Related
Party
During
the year ended December 31, 2007, the Company received non-interest bearing
advances from its affiliate, Imagin Molecular Corporation, (“IMGM”) totaling
$1,346,000. Positron’s President and Director, Joseph Oliverio and
its Chief Financial Officer and Director, Corey Conn are both officers and
directors of IMGM.
On April
10, 2008, the Company and its affiliate, IMGM, formalized the advances of
$1,346,000 from IMGM in the form of a promissory note bearing interest at 8% per
annum, due on December 31, 2008 ( the “Note”). The Note is secured by a pledge
of 100,000,000 shares of Positron’s common stock, par value $0.001, (the
“Pledged Shares”) in accordance with a Stock Pledge Agreement (the “Pledge”).
Upon a default of the Note or the Pledge, IMGM may sell the Pledged Shares to
repay any and all amounts due under the Note.
During
the three months ended March 31, 2008, IMGM advanced an additional $370,000 to
the Company. The Company and IMGM have yet to finalize the terms of
the advances. At March 31, 2008 the total amount owed to IMGM was
$1,716,000.
Series A
Preferred
In
February, March and May of 1996, the Company issued 3,075,318 shares of Series A
8% Cumulative Convertible Redeemable Preferred Stock $1.00 par value (“Series A
Preferred Stock”) and Redeemable common stock Purchase Warrants to purchase
1,537,696 shares of the Company’s Common Stock. The net proceeds of
the private placement were approximately $2,972,000. Subject to
adjustment based on issuance of shares at less than fair market value,
each
share of the Series A Preferred Stock was initially convertible into one share
of common stock.
Each
Redeemable common stock Purchase Warrant is exercisable at a price of $2.00 per
share of common stock. Eight percent (8%) dividends on the Series A
Preferred Stock may be paid in cash or in Series A Preferred Stock at the
discretion of the Company. The Series A Preferred Stock is senior to
the Company’s common stock in liquidation. Holders of the Series A
Preferred stock may vote on an as if converted basis on any matter requiring
shareholder vote. While the Series A Preferred Stock is outstanding
or any dividends thereon remain unpaid, no common stock dividends may be paid or
declared by the Company. The Series A Preferred Stock may be redeemed
in whole or in part, at the option of the Company, at any time subsequent to
March 1998 at a price of $1.46 per share plus any undeclared and/or unpaid
dividends to the date of redemption. Redemption requires at least 30
days advanced notice and notice may only be given if the Company’s common stock
has closed above $2.00 per share for the twenty consecutive trading days prior
to the notice.
On March
6, 2008 a shareholder converted 6,720 shares of Series A Preferred Stock plus
accrued interest into 16,922 shares of the Company’s common stock, par value
$0.01 per share. The fair market value of the common stock on the
date of conversion was $0.05 per share. At March 31, 2008 there were 457,599
shares of Series A Preferred Stock were outstanding.
Series B
Preferred
On
September 30, 2006 the Board of Directors authorized a new series of preferred
stock designated Series B Preferred Stock. The number of shares
authorized was 9,000,000. Each share of Series B Preferred Stock
$1.00 par value is convertible into 100 shares of the Company’s Common Stock.
The Series B Preferred Stock is senior to the Company’s Common Stock and junior
in priority to the Company’s A, C, and G Preferred Stock in liquidation. Holders
of the Series B Preferred Stock are entitled to 100 votes per share on all
matters requiring shareholder vote. While Series B Preferred Stock is
outstanding no Common Stock dividends may be paid or declared by the
Company. The Series B Preferred Stock may be redeemed in whole or in
part, at the option of the Company, at any time at a price of $1.00 per
share. As of March 31, 2008 6,088,611 shares of Series B Preferred
Stock were outstanding.
On August
15, 2007, the Registrant consummated an exchange with holders of the Class A
Preferred Shares (the "Class A Shares") of the Registrant's wholly-owned
subsidiary, Imaging PET Technologies, Inc., an Ontario corporation
("IPT"). The Registrant issued 136,250 shares of its Series B
Convertible Redeemable Preferred Stock, par value $1.00 per share (the "Series
B"), and IPT exchanged 650,000 shares of its previously issued shares of Series
B, to holders of IPT's Class A Shares (the "Class A Holders"). The
Class A Holders had previously subscribed for the Class A Preferred Shares in an
offering pursuant to the exemptions under the Canadian securities
law.
During
the three months ended March 31, 2008, the Company issued 162,500 shares of its
Series B Preferred Stock in a private placement to investors for
$650,000. For every two shares of Series B Preferred purchased, the
Company issued a warrant exercisable for 100 shares of common stock at an
exercise price of $0.10 per shares. The warrants were valued using the Black
Scholes Valuation Method based on the fair value of the Company’s common stock
of $0.06; an exercise price of $0.10; a 2 year term; risk free rate of return
of 2.125%; dividend yield of 0%;and a volatility factor of 181%. The
fair value of the warrants of $365,517 was recorded as an increase to Additional
paid-in capital – stock warrants.
Series G
Preferred
In 2006,
the Company issued 204,482 Units in a private placement. Each Unit consists of
one share of a new series of preferred stock designated Series G Preferred Stock
and a warrant exercisable for 50 shares of common stock (the "Units"). The
purchase price was $5.50 per Unit, with $5.00 of the Unit purchase price
allocated to the purchase of the share of Series G Preferred Stock and $0.50
allocated to the purchase of the warrant, for a total offering amount of
$1,124,650. The net proceeds of the private placement were approximately
$1,096,000.
The
Company has designated 3,000,000 shares of preferred stock as Series G Preferred
Stock $1.00 par value. Each share of Series G Preferred Stock is convertible
into 100 shares of common stock. Eight percent dividends accrue on the Series G
Preferred Stock and may be paid in cash or in Common Stock in the Company's
discretion. The Series G Preferred Stock is senior to the Company's common stock
and junior in priority to the Registrant's Series A, C, D, E and F Preferred
Stock in liquidation. Except as required by law and in the case of various
actions affecting the rights of the Series G Preferred Stock, holders of the
Series G Preferred Stock are not entitled to vote on matters requiring
shareholder vote. While the Series G Preferred Stock is outstanding or any
dividends thereon remain unpaid, no common stock dividends may be paid or
declared by the Company. The Series G Preferred Stock may be redeemed in whole
or in part, at the option of the Company, at any time at a price of $5.00 per
share plus any undeclared and/or unpaid dividends to the date of
redemption.
On April
11, 2007, 93,091 shares of Series G Preferred were converted into 9,309,100
shares of Positron common stock. As of March 31, 2008, 111,391 shares
of Series G Preferred Stock remained outstanding.
Basic
loss per common share is based on the weighted average number of common shares
outstanding in each period and earnings adjusted for preferred stock dividend
requirements. Diluted earnings per common share assume that any
dilutive convertible preferred shares outstanding at the beginning of each
period were converted at those dates, with related interest, preferred stock
dividend requirements and outstanding common shares adjusted
accordingly. It also assumes that outstanding common shares were
increased by shares issuable upon exercise of those stock options and warrants
for which market price exceeds exercise price, less shares which could have been
purchased by the Company with related proceeds. The convertible
preferred stock and outstanding stock options and warrants were not included in
the computation of diluted earnings per common share for the three month periods
ended March 31, 2008 and 2007 since it would have resulted in an antidilutive
effect.
The
following table sets forth the computation of basic and diluted earnings per
share.
|
|
|
Three
Months Ended
|
|
|
|
|
March
31, 2008
|
|
|
March 30,
2007
|
|
|
Basic
and diluted loss
|
|
$ |
(1,099 |
) |
|
$ |
(1,119 |
) |
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share-weighted average shares
outstanding
|
|
|
106,428 |
|
|
|
87,083 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
Anti-dilutive
securities not included in net loss per share calculation) as of March 31, 2008
and 2007 (in thousands):
|
|
|
2008
|
|
|
2007
|
|
|
Convertible
Series A Preferred Stock
|
|
|
458 |
|
|
|
464 |
|
|
Convertible
Series B Preferred Stock
|
|
|
608,861 |
|
|
|
573.986 |
|
|
Convertible
Series G Preferred Stock
|
|
|
11,139 |
|
|
|
20,448 |
|
|
Stock
Warrants
|
|
|
65,749 |
|
|
|
58,124 |
|
|
Stock
Options
|
|
|
19,425 |
|
|
|
19,425 |
|
|
|
|
|
705,632 |
|
|
|
672,447 |
|
|
15.
|
Stock Based
Compensation
|
Total
stock-based compensation expense related to currently outstanding options was
approximately $1,000 and $103,000 for the three months ended March 31, 2008 and
2007, respectively.
For all
of the Company’s stock-based compensation plans, the fair value of each grant
was estimated at the date of grant using the Black-Scholes option-pricing model.
Black-Scholes utilizes assumptions related to volatility, the risk-free interest
rate, the dividend yield (which is assumed to be zero, as the Company has not
paid cash dividends to date and does not currently expect to pay cash dividends)
and the expected term of the option. Expected volatilities utilized in the model
are based mainly on the historical volatility of the Company’s stock price over
a period commensurate with the expected life of the share option as well as
other factors. The risk-free interest rate is derived from the zero-coupon U.S.
government issues with a remaining term equal to the expected life at the time
of grant. .
The
Company issued 8,500,000 and 1,000,000 shares of common stock to consultants
under its stock incentive plans during the three months ended March 31, 2008 and
2007, respectively. Accordingly the Company recorded consulting expense equal to
the fair market value of the shares issued of $425,000 and $90,000 during the
three months ended March 31, 2008 and 2007, respectively.
|
16.
|
Segment Information
and Major Customers
|
The
Company has operations in the United States and Canada. Selected financial data
by geographic area was as follows:
|
|
|
Three
Months Ended
|
|
|
|
|
March
31, 2008
|
|
|
March 31,
2007
|
|
|
United
States
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
203 |
|
|
$ |
226 |
|
|
Operating
expenses
|
|
|
980 |
|
|
|
596 |
|
|
Net
loss
|
|
|
(546 |
) |
|
|
(571 |
) |
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
223 |
|
|
$ |
975 |
|
|
Operating
expenses
|
|
|
384 |
|
|
|
838 |
|
|
Net
loss
|
|
|
(553 |
) |
|
|
(548 |
) |
The
Company believes that all of its material operations are conducted in the
servicing and sales of medical imaging devices and it currently reports as a
single segment.
During
the three months ended March 31, 2008, the Company had a limited number of
customers as follows:
|
Number
of customers
|
40
|
|
Customers
accounting for more than 10%
of revenues
|
1
|
|
Percent
of revenues derived from largest
customer
|
36%
|
The
Company is including the following cautionary statement in this Quarterly Report
on Form 10-Q to make applicable and utilize the safe harbor provision of the
Private Securities Litigation Reform Act of 1995 regarding any forward-looking
statements made by, or on behalf of, the Company. Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events or performance and underlying assumptions and other statements,
which are other than statements of historical facts. Certain
statements contained herein are forward-looking statements and, accordingly,
involve risks and uncertainties, which could cause actual results or outcomes to
differ materially from those expressed in the forward-looking
statements.
The
Company’s expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitations, examination of historical operating trends, data contained in
records and other data available from third parties, but there can be no
assurance that the Company’s expectations, beliefs or projections will result,
or be achieved, or be accomplished.
Positron
Corporation (the “Company”) was incorporated in 1983 and commenced commercial
operations during 1986. The Company designs, markets and services its
POSICAMTM system
advanced medical imaging devices, utilizing positron emission tomography (“PET”)
technology, and through its wholly-owned subsidiary IPT markets the IS2
PulseCDCTM
compact digital cardiac camera. Since the commencement of
commercial operations and prior to the acquisition of IPT in 2006, revenues have
been generated primarily from the sale and service contract revenues derived
from the Company’s POSICAM™ system, 11 of which are currently in operation in
certain medical facilities in the United States and 6 are operating in
international medical institutions. The Company has never been able to sell its
POSICAM™ systems in sufficient quantities to achieve operating
profitability. For this reason, in 2005 the Company entered into a
joint venture with Neusoft Medical Systems Co., Inc. of Shenyang, Lianoning
Province, People's Republic of China. Through the joint venture the
Company believes it can modernize and upgrade its technology and lower
production costs of its systems.
Neusoft Positron Medical
Systems Co. Ltd.
The
Company’s joint venture with Neusoft Medical Systems Co., Inc. of Shenyang,
Lianoning Province, People's Republic of China ("Neusoft"), named Neusoft
Positron Medical Systems Co., Ltd. ("NPMS"), is active in the development and
manufacture of Positron Emission Tomography systems (PET), and an integrated
X-ray Computed Tomography system (CT) and PET system (PET/CT). These
systems utilize the Company’s patented and proprietary technology, an imaging
technique which assesses the biochemistry, cellular metabolism and physiology of
organs and tissues, as well as producing anatomical and structural
images. Targeted markets include medical facilities and diagnostic
centers located throughout the world. POSICAMTM systems
are used by physicians as diagnostic and treatment evaluation tools in the areas
of cardiology, neurology and oncology. The Company faces competition principally
from three other companies which specialize in advanced medical imaging
equipment. To date NPMS has not produced a PET or CT system for
sale. NPMS will be required to make a submission to the United States
Food and Drug Administration for approval of its system modernization to the
POSICAMTM
systems. The Company anticipates that the submission will be made
late in 2008. FDA review time for similar submissions is typically four
months.
Results of
Operations
The
consolidated results of operations for the three month periods ended March 31,
2008 and March 2007 included the results of Positron Corporation and its
wholly-owned subsidiary Imaging Pet Technologies (“IPT”) and IPT’s wholly-owned
subsidiary Quantum Molecular Technologies (“QMT”). The Company
acquired a 49.9% interest in IPT in May 2006 and the remaining 50.1% in January
2007.
Comparison of the Results of
Operations for the Three Months ended March 31, 2008 and
2007
The
Company experienced a net loss of $1,099,000 for the three months ended March
31, 2008 compared to a loss of $1,119,000 for the same quarter in
2007. Although revenues decreased significantly for the three months
ended March 31, 2008 compared to the same period in 2007, the net loss was
comparable due to a significant derivative gain included in other
income.
Revenues -
Revenues for the three months ended March 31, 2008 were $426,000 as compared to
$1,201,000 for the three months ended March 31, 2007. The significant
decrease is due primarily to a drop in sales of IPT gamma
cameras. The Company sold six (6) camera totaling $875,000 during the
three months ended March 31, 2007 while for the same period in 2008, only one
camera was sold with revenue recorded at $155,000. The decrease in
unit sales is
attributed to the late 2007 change in the Company’s sales and marketing efforts
from a third party distribution model to an internal sales force and the time
required to ramp up its efforts. Service revenue for the three months
ended March 31, 2008 and 2007 totaled $271,000 and $326,000,
respectively. The 17% drop is explained in large part by the
non-renewal of service contracts by three of the Company’s customers. Those
customers are now billed for time and materials on a per call
basis.
The
Company recorded gross loss for the three months ended March 31, 2008 of
$122,000 and recorded gross profit of $379,000 for the same period in 2007. The
current loss is due to the decrease in system revenues and the fact that fixed
overhead was absorbed by the sale of only a single machine.
Operating
Expenses -
Operating expenses for the three months ended March 31, 2008 were $1,364,000
compared to$1,434,000 for the three months ended March 31, 2007.
Research
and development costs for the three months ended March 31, 2008 were $285,000
compared to $353,000 for the three months ended March 30, 2007. For
the three months ended March 31, 2008, IPT’s wholly-owned subsidiary, QMT, had
research expenses of $11,000 compared to $175,000 during the three months ended
March 31, 2007. Research have decreased upon the
successful completion of the Company’s Phase I development of its solid state
photo detector with Kotura, Inc. QMT is developing certain next
generation technologies including PET-enabled surgical tools and solid-state
photo detector technology, which may have implications in both molecular imaging
and PET and which could have further application in the military and aerospace
segments.
Sales
and marketing expense for the three months ended March 31, 2008 decreased to
$38,000 from $269,000 for the same period in 2007. IPT’s sales and
marketing expenses were $19,000 and $260,000 for the three months ended March
31, 2008 and 2007, respectively. The Company has significantly reduced sales and
marketing costs at IPT by
shifting costs to the parent company, Positron, as the Company integrates its
sales and marketing efforts as one medical imaging company in preparation of the
late 2008 availability of its PET device.
General
and administrative expenses during the three months ended March 31, 2008 were
$1,041,000 as compared $812,000 during the same period in 2007. The Company also
recorded consulting fees by issuing common stock for services performed in the
amount of $425,000 for the three months ended March 31, 2008 as compared to
$90,000 for the three months ended March 31, 2007.
Other Income
(Expenses) -
Interest expense of $78,000 for the three months ended March 31, 2008 was an
increase of $45,000 over interest expense recorded during the same period in
2007. The increase related to the amortization of debt discount for
the convertible debentures. Interest expense related to the debt
discount was $71,000 in the first quarter of 2008 compared to $14,000 for the
same quarter in 2007. The Company also recorded derivative gains of
$465,000 for the three months ended March 31, 2008 and derivative losses of
$34,000 for the three months ended March 31, 2007. Derivative gains, which
relate to beneficial conversion features in convertible debentures, resulted
from changes in variables used to calculate fair market value using the Black
Scholes Model. Reduction in both the Company’s stock price and the volatility of
the stock price yielded a significantly lower fair market value of the
conversion features thus reducing the derivative liability. For the
three months ended March 30, 2007, the Company recorded equity in the losses of
joint ventures including NPMS of $22,000. No loss was recorded during the three
months ended March 31, 2008 as the investment in NPMS had been written down to
zero under the equity method of accounting during the first quarter of
2007.
Liquidity
and Capital Reserves
At March
31, 2008, the Company had current assets of $1,933,000 and current liabilities
of $4,496,000 compared to December 31, 2007 when the Company had current assets
and current liabilities of $2,071,000 and $4,147,000,
respectively. The increase in current liabilities over December 31,
2007 is due to additional funds of $370,000 advanced to the Company by Imagin
Molecular Corporation (“IMGM”), a related party. In addition to these funds, the
Company owes IMGM $1,346,000 from advance made during the year ended December
31, 2007. The Company and IMGM executed a note payable for $1,346,000 on April
10, 2008, which accrues interest at 8% and is due on December 31,
2008.
Cash and
cash equivalents at March 31, 2008 were $184,000 and accounts receivable were
$180,000.
Net cash
used in operating activities was $742,000 and $1,156,000 for the three months
ended March 31, 2008 and 2007, respectively. The decrease is attributable in
large part to decreases in both research and development and selling expenses at
IPT.
Net cash
provided by financing activities were $747,000 and $1,903,000 for the three
months ended March 31, 2008 and 2007, respectively. During the three months
ended March 31, 2007 the Company raised $1,903,000 from a private placement of
its Series B Preferred Shares and paid $512,000 to Imagin Diagnostic
Centres, a related party, for amounts advanced to Quantum Molecular
Technologies. During the three months ended March 31, 2008 the Company issued
Series B Preferred Shares for $650,000, of which $336,000 was received in 2007
while $314,000 was received during the first quarter of 2008. The Company also
issued common stock to unrelated investors for $50,000.
Since
inception, the Company has expended substantial resources on research and
development. Consequently, we have sustained substantial losses. Due
to the limited number of systems sold or placed into service each year, revenues
have fluctuated significantly from year to year. The Company had an
accumulated deficit of $77,704,000 at March 31, 2008. The Company
will need to increase system sales and apply the research and development
advancements to achieve profitability in the future. Through the Company’s joint
venture with Neusoft Medical Systems, PET system material cost of goods and
labor costs will be significantly lower. In addition, the Company expects
increased revenue from its IPT SPECT camera subsidiary to come from new sales
campaigns and the service division. The Company expects that these developments
will have a positive impact on the PET, PET/CT and SPECT device products, sales
& service volumes and increased net margins.
The
Company’s current financial condition raises doubt as to its ability to continue
as a going concern. The report of the Company’s independent public
accountants, which accompanied the financial statements for the year ended
December 31, 2007, was qualified with respect to that risk. If the
Company is unable to obtain debt or equity financing to meet its cash needs it
may have to severely limit or cease business activities or may seek protection
from creditors under the bankruptcy laws.
As a result of its operations in Canada
and the Peoples Republic of China, the Company is exposed to various market
risks, including changes in interest rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as interest rates
and foreign currency exchange rates. The Company does not anticipate that these
risks will adversely affect the Company’s operations. Accordingly,
the Company does not enter into derivatives or other financial instruments for
trading or speculative purposes. The Company also has not entered into financial
instruments to manage and reduce the impact of changes in interest rates and
foreign currency exchange rates, although we may enter into such transactions in
the future.
Our
management is responsible for establishing and maintaining disclosure controls
and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 as amended (the “Exchange Act”)), designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commission’s rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
an issuer in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the issuer’s management, including its principal
executive officer or officers and principal financial officer or officers, or
persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
The
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures as of March 31, 2008 (the “Evaluation Date”).
Such evaluation was conducted under the supervision and with the participation
of the Company’s principal executive officer who also is our principal financial
officer. Management is aware that there is a lack of segregation of
duties due to the small number of employees dealing with general administrative
and financial matters. However, at this time, management has decided that
considering the employees involved, the control procedures in place, and the
outsourcing of certain financial functions, the risks associated with such lack
of segregation are low and the potential benefits of adding additional employees
to clearly segregate duties do not justify the expenses associated with such
increases. Management will periodically reevaluate this situation. If the volume
of the business increases and sufficient capital is secured, it is our intention
to increase staffing to mitigate the current lack of segregation of duties
within the general administrative and financial functions.
There
have been no changes in the Company’s internal controls over financial reporting
that occurred during the Company’s most recent fiscal quarter, that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal controls over financial reporting.
From time
to time the Company may be involved in various legal actions in the normal
course of business for which the Company maintains insurance. The
Company is currently not aware of any material litigation affecting the
Company.
None
None
None
ITEM
5 – OTHER INFORMATION
|
|
Exhibit
|
Description
of the Exhibit
|
|
|
|
Chairman
of the Board Certification of Periodic Financial Report Pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
Chief
Financial Officer Certification of Periodic Financial Report Pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
Chairman
of the Board Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
Chief
Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
POSITRON
CORPORATION
|
|
|
|
|
|
|
|
Date: May
20, 2008
|
/s/
Patrick G. Rooney |
|
|
|
Patrick
G. Rooney
|
|
|
Chairman
of the Board
|
|
|
|
|
|
|
|
Date: May
20, 2008
|
/s/ Corey N. Conn
|
|
|
|
Corey
N. Conn
|
|
|
Chief
Financial Officer
|
24