POSC Positron Corporation (PK)

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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-K for Positron Corporation (the “Registrant” or the “Company”) for the year ended December 31, 2011. 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, 2011, as reported in the Form 10-K, have been omitted.

In preparing the interim unaudited consolidated financial statements, management was required to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the financial reporting date and throughout the periods being reported upon. Certain of the estimates result from judgments that can be subjective and complex and consequently actual results may differ from these estimates.

All significant intercompany balances and transactions have been eliminated.

For a summary of significant accounting policies (which have not changed from December 31, 2011), see the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amount of revenues and expenses during the reporting period.  Actual results could differ from these estimates.

Intangible assets

The Company has goodwill and identified intangible assets with determinable lives as of September 30, 2012. Identified intangible assets consist of patents acquired in MIT acquisition on January 17, 2012 (see Note 4). The goodwill and patents were reported at fair value of $346,000 and $14,000, respectively, under the purchase accounting with patents being amortized on a straight-line basis over the remaining useful life of 6 years. Amortization expense of identified intangibles is expected to be approximately $2,333 in each of the next six years. As of September 30, 2012, the amortization expense related to the Company’s identified intangible assets was immaterial. Goodwill is not amortized under generally accepted accounting principles.

The Company accounts for its goodwill in accordance with the Accounting Standards Codification (“ASC”) 350-20, Intangibles – Goodwill and Other. Goodwill represents the excess of the fair value of consideration paid over the fair value of identified net assets recognized and represents the future economic benefits arising from assets acquired that could not be individually identified and separately recognized. The Company assesses the carrying amount of goodwill by testing the goodwill for impairment at least annually and whenever events or changes in circumstances or a triggering event indicate that the carrying amount may not be recoverable. If the carrying amount of a reporting unit exceeds its fair value, the Company is required to measure the possible goodwill impairment based upon an allocation of the estimate of fair value of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including any previously unrecognized intangible assets (Step Two Analysis). The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities (“carrying amount”) is the implied fair value of goodwill. An impairment loss is recognized to the extent that a reporting unit’s recorded goodwill exceeds the implied fair value of goodwill. There have been no triggering events in the nine months ended September 30, 2012 and therefore, no goodwill impairment was recorded.

The Company also reviews its identified intangible assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. The Company assesses recoverability by reference to future cash flows from the products underlying these intangible assets. If these estimates change in the future, the Company may be required to record impairment charges for these assets. As of September 30, 2012, no impairment was recorded.

Debt discount

Costs incurred with parties who are providing long-term financing, which generally include the value of warrants or the fair value of an embedded derivative conversion feature, are reflected as a debt discount and are amortized over the life of the related debt. The debt discount attributable to the warrants issued with convertible debentures during the nine months ended September 30, 2012 and 2011 was $259,000 and $273,000, respectively. The debt discount attributable to the embedded conversion derivative liability during the nine months ended September 30, 2012 and 2011 was $451,000 and $1,427,000, respectively. The Company also recorded the accretion of debt discount of $737,000 and $764,000 during the nine months ended September 30, 2012 and 2011, respectively. The total unaccreted debt discount was $2,252,000 and $966,000 at September 30, 2012 and December 31, 2011, respectively.

Fair value of financial instruments

The carrying value of cash and cash equivalents, accounts receivable, prepaids, deposits, accounts payable and accrued liabilities, common stock payable, and unearned revenue, approximate their fair values because of the short-term nature of these instruments.  Management believes the Company is not exposed to significant interest or credit risks arising from these financial instruments.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.

The following table presents the embedded conversion derivative liability, the Company’s only financial liability measured and recorded at fair value on the Company’s consolidated balance sheets on a recurring basis and their level within the fair value hierarchy as of September 30, 2012 (in thousands) :

The following table reconciles, for the nine months ended September 30, 2012 , the beginning and ending balances for financial instruments that are recognized at fair value in the consolidated financial statements (in thousands) :

The fair value of the conversion features are calculated at the time of issuance and the Company records a derivative liability for the calculated value using a Black-Scholes option-pricing model . Changes in the fair value of the derivative liability are recorded in other income (expense) in the consolidated statements of operations. Upon conversion of the convertible debt to stock, the Company reclassifies the related embedded conversion derivative liability to paid- in capital. Since the fair value of the embedded conversion derivative liability exceeded the carrying value of the convertible debentures on the issuance date, the convertible debentures were recorded at a full discount. The Company recognizes expense for accretion of the convertible debentures discount over the term of the notes. The Company has considered the provisions of ASC 480, Distinguishing Liabilities from Equity , as the conversion feature embedded in each debenture could result in the note principal being converted to a variable number of the Company’s common shares.

The derivatives were valued using the Black-Scholes option pricing model with the following assumptions:

Revenue Recognition

The Company’s revenues are currently derived from the sale of medical equipment products, maintenance contracts and service revenues. Revenues from maintenance contracts are recognized over the term of the contract. Service revenues are recognized upon performance of the services. The Company recognizes revenues from the sale of medical equipment products when earned. Specifically, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred (or services have been rendered), the price is fixed or determinable, and collectability is reasonably assured. The Company obtains a signed customer acceptance after installation is complete for the sale of its Attrius® systems.

In multiple-element arrangements, revenue is allocated to each element based on their relative selling prices. Relative selling prices are based first on vendor specific objective evidence (VSOE), then on third-party evidence of selling price (TPE) when VSOE does not exist, and then on estimated selling price (ESP) when VSOE and TPE do not exist. Because the Company has neither VSOE nor TPE for its products, the allocation of revenue has been based on the Company’s ESPs. The objective of ESP is to determine the price at which the Company would transact a sale if the product was sold on a stand-alone basis. The Company determines ESP by considering the facts and circumstances of the product being sold.

Recent Accounting Pronouncements

Recently issued or adopted accounting pronouncements are not expected to, or did not have, a material impact on our financial position, results of operations or cash flows.

Since inception, the Company has expended substantial resources on research and development and sustained losses. Due to the limited number of systems sold or placed into service each year, revenues have fluctuated significantly from year to year and have not been sufficient to be operationally profitable. The Company had an accumulated deficit of $114,139,000 and a stockholders’ deficit of $4,591,000 at September 30, 2012. The Company will need to increase sales and apply the research and development advancements to achieve profitability in the future. The Company expects to experience a significant increase in sales of the Attrius® Positron Emission Tomography (“PET”) system and additional service agreements; it also expects recurring revenue from the sale of radiopharmaceuticals through PosiRx™, its automated radiopharmaceutical system and sales of radiopharmaceutical radioisotope and radiopharmaceutical production and through PosiRx™, its automated vitual radiopharmaceutical system. The Company expects that these developments will have a positive impact on revenue and net margins.

At September 30, 2012, the Company had cash and cash equivalents of $1,058,000 and accounts payable and accrued liabilities of $1,796,000. Working capital requirements for the upcoming year will reach beyond our current cash balances. The Company plans to continue to raise funds as required through equity and debt financing 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 3) meet current commitments and fund the continuation of its business operation in the near future and 4) raise additional funds through debt and/or equity financings.

On January 17, 2012, the Company acquired Manhattan Isotope Technology LLC (“MIT”) upon consummation of a Membership Interest Purchase Agreement (the “Agreement”) with MIT and the interest-holders of MIT, whereby the Company acquired all of the issued and outstanding membership interests from the holders in exchange for: (i) the assumption of the liabilities of MIT; (ii) cash advances; (iii) earn-out payments equal to twenty percent (20%) of “Net Income” as defined in the Agreement; (iv) 5,000,000 common shares of Positron stock; and (v) entry into employment agreements with MIT’s employees.

In accordance with the transaction, the Company acquired the assets related to MIT’s business of refurbishing spent strontium-82/rubidium-82 and other radioisotope generators, recycling strontium-82 and other radioisotopes from generators, processing of strontium-82 and other radioisotopes, providing expertise in production of radioisotopes and radioisotopes services, including cash, equipment, leasehold improvements, patent, certain supply and distribution and other vendor contracts, goodwill and assumed liabilities including trade payables, accruals and a note payable with a commercial bank. The parties made customary representations, warranties and indemnities in the Agreement that are typical and consistent for a transaction of this size and scope.

The Company has included the financial results of MIT in the consolidated financial statements from the date of acquisition. MIT is included in the Radiopharmaceuticals operating segment. The Company incurred acquisition costs of approximately $13,000 in 2011 and $12,000 in 2012. The following table summarizes the consideration transferred to acquire MIT at the acquisition date:

The total purchase price for the MIT acquisition was allocated to the net tangible and intangible assets based upon their fair values as of January 17, 2012 as set forth below. The excess of the purchase price over the net assets was recorded as goodwill. The following table summarizes the fair values of the assets and liabilities assumed at the acquisition date.

The Company identified intangible assets associated with patents and assigned the fair value of $14,000. The useful life associated with these patents was 6 years.

The acquisition of MIT includes a contingent consideration arrangement that requires cash payments to the previous members equal to 20% of “Net Income” as defined in the Agreement through December 31, 2018. The range of the undiscounted amounts the Company could owe under this arrangement is between $0 and $3,000,000. The fair value of the contingent consideration on the acquisition date of approximately $205,000 was estimated based on the present value of projected payments which were based on projected net income through 2018. These calculations and projections are based on significant inputs not observable in the market, which ASC 820 refers to as Level 3 inputs. Key assumptions include a discount rate of 25 percent as well as an increasing level of revenues and expenses based on probability factors at the acquisition date.

The unaudited pro forma summary for the three months ended March 31, 2012, as if the business combination had occurred on January 1, 2012 is not materially different from total sales, loss from operations, net loss, and net loss per common share presented in the Company’s consolidated statements of operations herein.

At December 31, 2011, the Company had $560,000 (three Attrius® systems) in deposits paid to our joint venture partner, Neusoft Positron Medical Systems Co., Ltd., (“Neusoft”) for Attrius® systems for which the Company has sales contracts. These deposits were utilized during the nine months ended September 30, 2012.

Inventories at September 30, 2012 and December 31, 2011 consisted of the following (in thousands):

Inventories are stated at the lower of cost or market.  Cost is determined using the first-in, first-out (FIFO) method of inventory valuation.  The Company evaluated the reserve as of September 30, 2012 and December 31, 2011.

Property and equipment at September 30, 2012 and December 31, 2011 consisted of the following (in thousands):

Depreciation expense for the nine months ended September 30, 2012 and 2011 was $167,000 and $58,000, respectively.

Accounts payable and accrued liabilities at September 30, 2012 and December 31, 2011 consisted of the following (in thousands):

Customer deposits represent amounts paid to the Company by customers for devices in advance of manufacturing completion and/or shipment of the device to the customer.  Deposit amounts may vary depending on the contract.  Included in customer deposits at September 30, 2012 and December 31, 2011 were deposits of approximately $669,000 from a customer that had placed an order in 2007 for five Nuclear Pharm-Assist™ systems.  As of the date of this report, there can be no assurance that this customer will fulfill its order for these devices.

Also, included in customer deposits September 30, 2012 are $77,000 deposits on two used machines. At December 31, 2011, customer deposits included $733,000 of deposits on two Attrius® systems sale orders and two used machines.

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 assumes 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 and nine months ended September 30, 2012 and 2011, respectively since it would have resulted in an antidilutive effect.

The following table sets forth the computation of basic and diluted loss per share (in thousands, except per share data):

Anti-dilutive securities (based on conversions to common shares) not included in net loss per share calculation (in thousands):

Convertible Debentures

On January 12, 2012, the Company acquired a building in Westmont, Illinois, which the Company previously leased from a related party for corporate and administrative offices (see Note 15). As a part of the price consideration, the Company issued the related party a convertible debenture in the principal amount of $250,000, which shall be due on December 31, 2013 and bear interest at 8% per year payable quarterly in cash. In addition, the Company issued warrants (“Warrants”) to the related party to purchase 25,000,000 shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), at an exercise price of $0.01 per share and expiring on December 31, 2013. The related party is entitled to convert the accrued interest and principal of the convertible debentures into common stock of the Company at a conversion price equal to 55% of the lowest daily volume weighted average price for the three trading days preceding conversion.

During the nine months ended September 30, 2012, the Company issued an additional $2,400,000 of convertible debt which matures on December 31, 2013, of which $1,600,000 was to related parties. Of these issuances, $90,000 was repaid. In connection with these issuances the Company issued warrants (“Warrants”) to purchase 22,000,000 shares of the Company’s Common Stock, at an exercise price of $0.01 per share and expiring on December 31, 2013. The lender is entitled to convert the accrued interest and principal of the Convertible Debentures into common stock of the Company at a conversion price equal to 55% of the lowest daily volume weighted average price for the three trading days preceding conversion. Of this amount, $800,000 accrues interest at a rate of 8% per annum, and $1,600,000 is noninterest bearing.

Initial Accounting

Under the initial accounting, the Company separated the Convertible Debentures instrument into component parts of the Convertible Debt, the $0.01 Warrants and the embedded conversion derivative liability. The Company estimated the fair value of each component as of the date of the issuance. The fair value of the embedded conversion derivative liability exceeded the value of the Convertible Debt less the allocation of the liability to the $0.01 Warrants, which resulted in a debt discount of $2,310,000. The debt is accreted to interest expense over the life of the Convertible Debt.

The following is a summary of Convertible Debt and the initial accounting of the issuances (in thousands):

Convertible debentures as of September 30, 2012

During the three and nine months ended September 30, 2012, the Company recognized $287,000 and $755,000 of interest expense on the Convertible Debentures. During the same period of last year, the Company recognized $64,000 and $173,000 of interest expense. As of September 30, 2012 and December 31, 2011, accrued interest on Convertible Debentures was $81,718 and $50,156, respectively. Convertible Debentures outstanding as of September 30, 2012 and December 31, 2011 were as follows (in thousands):

On January 17, 2012, the Company assumed from MIT a note payable with Los Alamos National Bank (“LANB”) in the amount of $700,000. On February 10, 2012, MIT refinanced with LANB the principal and accrued interest of this note payable with a promissory note of $708,000, maturing on April 1, 2019. The monthly payment to LANB on the promissory note is $10,000, with the interest rate of 5.5% at September 30, 2012. The promissory note is guaranteed by the Company and secured by all assets of the Company. Total interest paid on the promissory note was $9,000 and $26,000 during the three months and nine months ended September 30, 2012, respectively. The note’s outstanding amount was $668,000 at September 30, 2012.

From time to time, the company receives advances from an unrelated party. These advances are unsecured, bear interest at 8% and there are no specific repayment terms. During the three months ended September 30, 2012, the Company made advances and repayments of these advances of $65,000 and $115,000, respectively. As of September 30, 2012, amounts due to this individual totaled $40,000.

Future maturities of notes payable are as follows:

2012

On January 4, 2012, the Company increased the number of the Company’s authorized shares of capital stock from 810,000,000 shares to 3,020,000,000 of which 3,000,000,000 shares will be common stock par value $0.01 per share (“Common Stock”) and 20,000,000 shares will be preferred stock par value $1.00 per share (“Preferred Stock”). Additionally on January 4, 2012, the Company accepted subscriptions in the amount of $150,000 and issued 15,000,000 shares of Common Stock. In connection with these Common Stock issuances, the Company also issued 15,000,000 warrants to purchase Common Stock of the Company, which will expire on December 31, 2013, and extended the expiration date of 20,000,000 warrants which had expired to December 31, 2013. Also on January 4, 2012, the Company issued 400,000 shares to a vendor for services rendered.

On January 9, 2012, the Company issued 1,400,000 shares to a vendor for services rendered.

On January 19, 2012, the Company converted 1,923,223 shares of Series B Convertible Preferred Stock into 192,322,258 shares of Common Stock. Also on January 19, 2012, the Company accepted subscriptions in the amount of $100,000 and issued 27,000,000 shares of Common Stock. Additionally, the Company issued 10,000,000 warrants to investors to purchase Common Stock of the Company, which will expire on December 31, 2013, and extended the expiration dates of 30,000,000 warrants which had expired to December 31, 2013. Furthermore, on January 19, 2012, the Company issued 5,000,000 shares in connection with the acquisition of MIT and 76,261 shares of Common Stock were issued for royalties. On January 19, 2012, the Company issued 25,000,000 shares of Common Stock and a convertible debenture due on December 31, 2013, with interest at the rate of 8%, to a related party as the purchase price for the office space previously leased by the Company. In addition, the Company issued 35,000,000 warrants, which entitle the related party to purchase shares of the Company’s common stock of the Company, which will expire on December 31, 2013.

On January 20, 2012, the Company accepted subscriptions in the amount of $50,000 and issued 5,000,000 shares of Common Stock. In connection with these Common Stock issuances, the Company also issued 5,000,000 warrants to purchase Common Stock of the Company, which will expire on December 31, 2013, and extended the expiration date of 7,500,000 warrants which had expired to December 31, 2013.

On March 1, 2012, the Company converted 603,711 shares of Series B Convertible Preferred Stock into 60,371,100 shares of Common Stock. Also on March 1, 2012, the Company issued 3,000,000 shares of Common Stock to a vendor for services rendered.

On March 14, 2012, the Company accepted subscriptions in the amount of $35,000 and issued 3,500,000 shares of Common Stock. In connection with these issuances, the Company also issued 3,500,000 warrants to investors to purchase Common Stock of the Company, which will expire on December 31, 2013, and extended the expiration date of 750,000 warrants which had expired to December 31, 2013. Also on March 14, 2012, the Company issued 1,200,000 shares of Common Stock to an employee for services, and 600,000 shares of Common Stock to a vendor for services rendered.

On April 5, 2012, the Company converted 634,000 shares of Series B Convertible Preferred Stock into 63,400,000 shares of Common Stock. The Company also accepted subscriptions in the amount of $28,000 and issued 2,800,000 shares of Common Stock. In connection with these Common Stock issuances, the Company also issued 3,100,000 warrants to purchase Common Stock of the Company, which will expire on December 31, 2013. Also on April 5, 2012, the Company issued 39,682,539 shares of Common Stock for repayment of convertible debt, and issued 2,208,750 shares of Common Stock to a vendor for services rendered.

On May 7, 2012, the Company issued 4,000,000 warrants in connection with a Convertible Debt issuance to a Lender to purchase Common Stock of the Company, which will expire on December 31, 2013.

On May 20, 2012, the Company issued 2,000,000 warrants to an investor to purchase Common Stock of the Company, which will expire on December 31, 2013.

On May 21, 2012, the Company converted 73,226 shares of Series B Convertible Preferred Stock into 7,322,636 shares of Common Stock. The Company also accepted subscriptions in the amount of $130,000 and issued 15,000,000 shares of Common Stock. In connection with these issuances, the Company issued 13,000,000 warrants to investors to purchase Common Stock of the Company, which will expire on December 31, 2013. In addition, the Company issued 175,000 shares of Common Stock to a vendor on May 21, 2012 for services rendered.

On May 29, 2012, the Company converted 231,190 shares of Series B Convertible Preferred Stock into 23,119,000 shares of Common Stock. The Company issued 18,181,818 shares of Common Stock for repayment of related party convertible debt.

On June 7, 2012, the Company issued 4,000,000 warrants in connection with a Convertible Debt issuance to a lender to purchase Common Stock of the Company, which will expire on December 31, 2013.

On June 19, 2012, the Company converted 16,667 shares of Series A Convertible Preferred Stock into 16,667 shares of Common Stock, converted 118,149 shares of Series B Convertible Preferred Stock into 11,814,878 shares of Common Stock, and converted 18,200 shares of Series G Convertible Preferred Stock into 2,020,000 shares of Common Stock. In addition, the Company issued 3,970,786 shares of Common Stock to a vendor for services rendered.

On July 17, 2012, the Company issued 1,000,000 shares of Common Stock to vendors for services rendered. The Company issued and additional 1,000,000 shares of Common Stock to a vendor for services rendered on July 18, 2012.

On August 21, 2012 the Company issued 1,000,000 shares of Common Stock to a vendor for services rendered.

On August 31, 2012, the Company converted 1,188,836 shares of Series B Convertible Preferred Stock into 118,883,629 shares of Common Stock. Also on August 31, the Company issued 2,000,000 shares to an investor who had purchased shares during the three months ended June 30, 2012 and which were included in stock payable as of June 30, 2012.

On September 10, 2012, the Company converted obligations totaling $45,605 into 10,000,000 shares of Common Stock. Of these shares, 6,666,667 shares are payable as of September 30, 2012. In connection with this issuance the Company recorded a loss on settlement of $54,395.

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.

On January 17, 2012, the Company granted certain employees options to purchase 177,600,000 shares of common stock at an exercise price of $0.01 per share. Fifty percent of the options vested immediately and the remaining fifty percent vest on January 17, 2013. The options expire on January 17, 2015. During the three and nine months ended September 30, 2012, 7,000,000 of these options were forfeited. During the three and nine months ended June 30, 2012, the Company recorded compensation expense of $223,000 and $1,511,000, respectively, for these stock options. The Company will record an additional $261,000 for these stock options, of which $222,000 will be recorded during the remainder of 2012 and $39,000 will be recorded in January 2013. At September 30, 2012, the remaining weighted average contractual term of these options is 2.30 years. The intrinsic value of these options on the grant date was $187,600 as the closing stock price on the grant date was $0.011. Fair market value using the Black-Scholes option-pricing model was determined using the following assumptions:

At December 31, 2011, the Company had a $250,000 receivable from Neusoft Positron Medical Systems (NPMS) for excess freight charges owed and had a $218,000 payable to NPMS for the purchase of an Attrius PET system.  Due to the continued supply delays in the rubidium market, the Company has experienced a significant drop in demand and has been unable to sell new machines.  Due to these conditions the NPMS’s production schedules have also been affected and therefore the Company has been unable to pursue the $250,000 receivable from NPMS and has charged off this balance.

At September 30, 2012 and December 31, 2011, the Company had a $35,000 unsecured noninterest bearing receivable from a stockholder.

The Company received advances of $40,000 and repayments of $23,000 ($20,000 of which was owed at December 31, 2011) to its Chief Executive Officer during the nine months ended September 30, 2012.

On January 12, 2012, the Company acquired a building in Westmont, Illinois, which the Company previously leased from a related party for corporate and administrative offices since 2010. The Company issued the related party 25,000,000 shares of common stock, which were valued at approximately $250,000 and a convertible debenture of $250,000, which shall be due on December 31, 2013 and bear interest at 8% per year payable quarterly in cash. In addition, the Company issued 35,000,000 warrants (“Warrants”), which entitle the related party to purchase shares of the Company’s common stock, par value $0.01 per share, at an exercise price of $0.01 per share and expiring on December 31, 2013. The related party is entitled to convert the accrued interest and principal of the Convertible Debentures into common stock of the Company at a conversion price equal to 55% of the lowest daily volume weighted average price for the three trading days preceding conversion. During the nine months ended September 30, 2012, the Company issued 18,181,818 shares of Common Stock for repayment of $100,000 of these Convertible Debentures. At December 31, 2011, the Company had $77,000 of deferred rent related to this building recorded as an asset in the financial statements, which was expensed during the nine months ended September 30, 2012, and as of September 30, 2012, the Company did not have deferred rent on its balance sheet.

During the three and nine months ended September 30, 2012, the Company recognized cost of revenues of approximately $622,000 related to the purchase of Attrius® PET systems from Neusoft, the Company’s joint venture.

Effective September 27, 2012, the Company issued convertible debentures totaling $1,600,000 to two related parties. The lender is entitled to convert the accrued interest and principal of the Convertible Debentures into common stock of the Company at a conversion price equal to 55% of the lowest daily volume weighted average price for the three trading days preceding conversion. These debentures are noninterest bearing.

On September 14, 2012, the Company received an unsecured advance of $25,000 from a related party, which accrues interest at 8% per annum.

On December 5, 2011, MIT entered into an operating lease with a third party for space for warehousing at a building in Lubbock, Texas. The Company will be required to make payments of $1,475 each month from December 1, 2011 through December 1, 2012.

On February 9, 2012, MIT entered into a financing agreement with a third party for certain lab research equipment, which was delivered on March 15, 2012. The Company was required to make the first payment of $22,862 upon signing the agreement and a monthly payment of $12,856 thereafter for the next five months.

Litigation

On June 8, 2012, the owner of the radiopharmaceutical manufacturing facilities the Company formerly leased in Crown Point, Indiana commenced an action to recover the use of property, alleging the aggregate amount of remaining payment under the lease is $312,000. The Company disputes the amount claimed and is vigorously defending the action. Monetary damages, if any, have not yet been awarded to the plaintiff.  

We have aggregated our operations into two reportable segments based upon product lines, manufacturing processes, marketing and management of our businesses: medical equipment and radiopharmaceuticals.  Our business segments operate in the nuclear medicine industry. The Company’s medical equipment segment is currently generating all revenues and the majority of all expenses as the radiopharmaceuticals segment is still in the development phase.

We evaluate a segment’s performance based primarily upon operating income before corporate expenses.  

Corporate assets consist primarily of cash but also include plant and equipment associated with our headquarters. These items (and income and expenses related to these items) are not allocated to the segments. Unallocated income/expenses include interest income, interest expense, debt extinguishment and refinancing costs and other (expense) income and certain expenses which are not considered related to either segment, but are instead considered general corporate expenses.

The following table represents sales, operating loss and total assets attributable to these business segments for the periods indicated (in thousands):

Management has evaluated all events that occurred after the balance sheet date through the date when these financial statements were issued to determine if they must be reported. Management of the Company has determined that there were reportable subsequent events to be disclosed as follows:  

On October 31. 2012, the Registrant consummated subscriptions in the aggregate amount of $1,600,000; $1,250,000 was invested by Patrick G. Rooney, the Registrant’s Chairman and Chief Executive Officer and $350,000 was invested by Corey Conn, the Registrant’s Chief Financial Officer and Director. Both investments took the form of a Convertible Debenture issued on similar terms for which the Registrant has recently accepted subscriptions for convertible debentures, except Messrs. Rooney and Conn both agreed to waive interest on the debentures. The debentures are due on December 31, 2013 and are convertible into shares of the Registrant’s common stock, par value $0.01 per share (the “Common Stock”) in an amount of principal not to exceed $500,000 in any one month period. A with recently accepted subscriptions, the conversion rate of the debentures is the daily weighted volume average price of the three trading days prior to a conversion, multiplied by 0.55.

On November 13, 2012, the Company finalized the subscriptions made by Patrick G. Rooney and Corey N. Conn, the Company’s Chairman and Chief Executive Officer and Chief Financial Officer and Director, respectively.  As with recently accepted subscriptions for convertible debentures, the Company issued Mr. Rooney warrants to purchase warrants (“Warrants”) to purchase 10,500,000 shares and to Mr. Conn, warrants to purchase 37,500,000 of the Company’s common stock, par value $0.01 per share (the “Common Stock”), at an exercise price of $0.01 per share and expiring on December 31, 2013.