Securities registered under Section 12(g)
of the Exchange Act: Common Stock, $0.01 par value.
Indicate by check mark whether the registrant
is a larger accelerated filer, an accelerated filer, a non-accelerated or a smaller reporting company filer. See the definition
of “large accelerated filer, accelerated filer and smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check
one)
The aggregate market value of voting common stock held by non-affiliates
of the registrant (assuming, for purposes of this calculation, without conceding, that all executive officers and directors are
“affiliates”) was $10,995,744.90 as of June 30, 2013, based on the closing sale price of such common stock as reported
on the OTC Bulletin Board.
There were 1,452,548,262 shares of the registrant’s common
stock, par value $0.01 per share, outstanding as of March 31, 2014.
PART I
Forward-Looking Statements
This report contains various forward-looking
statements regarding our business, financial condition, results of operations and future plans and projects. Forward-looking statements
discuss matters that are not historical facts and can be identified by the use of words such as “believes,” “expects,”
“anticipates,” “intends,” “estimates,” “projects,” “can,” “could,”
“may,” “will,” “would” or similar expressions. In this report, for example, we make forward-looking
statements regarding, among other things, our expectations about the rate of revenue growth in specific business segments and the
reasons for that growth and our profitability, our expectations regarding an increase in sales, strategic traction and sales and
marketing spending, uncertainties relating to our ability to compete, uncertainties relating to our ability to increase our market
share, changes in coverage and reimbursement policies of third-party payers and the effect on our ability to sell our products
and services, the existence and likelihood of strategic acquisitions and our ability to timely develop new products or services
that will be accepted by the market.
Although these forward-looking statements
reflect the good faith judgment of our management, such statements can only be based upon facts and factors currently known to
us. Forward-looking statements are inherently subject to risks and uncertainties, many of which are beyond our control. As a result,
our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors,
including those set forth below under the caption “Risk Factors.” For these statements, we claim the protection of
the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should not
unduly rely on these forward-looking statements, which speak only as of the date on which they were made. They give our expectations
regarding the future but are not guarantees. We undertake no obligation to update publicly or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, unless required by law.
Item 1. Business
Organization
Positron Corporation (the "Company"
or “Positron”), unless the context requires otherwise, in this report the terms “we,” “us”
and “our” refer to Positron Corporation.
Nature of Business
Positron Corporation is a nuclear medicine
healthcare company specializing in the field of cardiac Positron Emission Tomography (PET) imaging. Cardiac PET is the superior
method in diagnostic nuclear imaging for the detection of coronary artery disease (CAD).
Positron’s products and services
enable healthcare providers to more accurately diagnose disease and improve patient outcomes, while practicing cost effective medicine.
Positron is the only company that will provide an economical, end-to-end solution for PET myocardial perfusion imaging through
complementary product integration of PET imaging systems, radiopharmaceuticals and radioisotopes.
The Company believes that our unique proprietary
products, market position and vertically integrated strategy will lead to accelerated adoption and growth of the cardiac PET modality
in the U.S. and emerging markets. Through leadership within our field, Positron intends to gain a dominant market position with
strong earnings potential, ultimately becoming a sustained, long-term value creator for industry participants and our shareholders.
Our mission is to facilitate the stabilization,
security and growth of the cardiac PET industry by providing cardiologists with: an economical, high-quality, PET imaging system;
a reliable supply of radiopharmaceuticals for imaging procedures; and a comprehensive clinical, technical, support and service
program.
Corporate History
Positron Corporation was incorporated as
a Texas corporation in 1983 with offices in Westmont, Illinois, Fishers, Indiana, Lubbock, Texas and Niagara, New York.
On June 30, 2005, the Company entered into
a Joint Venture Contract with Neusoft Medical Systems Co., Inc. of Shenyang, in the 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 PET/CT medical imaging equipment. The JV Company received
its business license and was organized in September 2005.
On November 18, 2008,
Solaris Opportunity Fund, L.P. (“Solaris”) became the Company’s controlling shareholder, having
acquired approximately 60% of the Company’s voting capital stock at that time. Soloris exchanged its rights title and
interest in two notes receivable in the aggregate amount of $2,181,000 due from the Company (the “Notes”) and
100,000,000 shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”) pledged to
Solaris (the “Pledged Shares”) and retired advances made to the Company in the aggregate amount of $1,155,000,
for the issuance of 100,000 shares of the Company’s Series S Preferred Stock.
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”).
On January 17, 2012, the Company acquired
all of the membership interests and retained all employees of Manhattan Isotope Technology, LLC (“MIT”) based in Lubbock,
Texas. In exchange, MIT’s previous owners shall receive cash advances, shares of Positron Common Stock, the assumption of
certain indebtedness and earnout consideration of up to $3,500,000 based on 20 percent of the net income from sales relating to
radioisotope and radiopharmaceutical operations of MIT through December 31, 2018. MIT is the only commercial resource in the United
States with practical knowledge and experience in all stages of strontium-82 (Sr-82) production and spent generator lifecycle management.
Positron will focus on increasing Sr-82 supply through the processing of proton irradiated target material from domestic and foreign
suppliers and recycling Sr-82 from spent generators. MIT has become the first supplier to provide Active Pharmaceutical Ingredient
(API) grade Sr-82 in the U.S. besides the United States Department of Energy. In an effort to expand Positron’s radioisotope
product offerings, MIT possesses the unique and specialized expertise in the production of additional radioisotopes that are currently
only supplied by the U.S. Government.
On July 9, 2012, the Company received approval
of a Pledge Resolution for $15 Million in Tax Increment Financing (TIF) Bonds, from the City of Gary Redevelopment Commission,
of Indiana towards the development of Positron’s 70 MeV cyclotron project. In addition to the TIF incentives, the City of
Gary will assist in sourcing the appropriate allocation of New Market Tax Credits (NMTC) that could cover approximately $15 Million,
or 33%, of the estimated total development costs for the project. Positron seeks to raise approximately $65 million, in total,
for this project through a combination of debt, equity and incentives.
On June 27, 2011, the Company formed Positron
Isotope Corporation, a wholly-owned subsidiary, for the purpose of developing its cyclotron project in a wholly owned subsidiary.
The Company
Positron, a pioneer in cardiac PET, is
well-branded in the field of nuclear cardiology. Positron has gained significant traction in the industry based on its imaging
technology and strong commitment towards advancing cardiac care. Originally a research and development company, Positron has expanded
from a medical imaging device manufacturing to a company which is integrating the key components of the cardiac PET supply chain
and will be able to offer an end-to-end solution for the nuclear cardiology market. Led by an experienced management team, Positron
is moving towards becoming a true business enterprise with strong recurring revenue generating business model scalable to the global
marketplace.
The Company believes that its unique products,
market position and vertical integration strategy will stabilize and secure the supply chain, significantly reducing costs and
industry uncertainties; a substantial advantage, leading to further adoption and growth of the cardiac PET modality.
Positron is the only commercial resource
in the U.S. with practical knowledge and experience in all stages of Strontium-82 (Sr-82) production and spent generator lifecycle
management. Positron seeks to secure both the short and long-term supply of radioisotopes used in cardiac PET imaging. Currently,
the Company is producing Active Pharmaceutical Ingredient (API) grade Sr-82 at its Lubbock, Texas, facility from Sr-82 received
from foreign irradiated source suppliers. The Company intends to further supplement strontium resources by pursuing additional
supply agreements with all available domestic and foreign irradiated source suppliers and through recycling expired generators.
Positron seeks to secure a long-term North America supply of medical radioisotopes for cardiac PET imaging by building and operating
the world’s largest commercial high energy/high current cyclotron (70MeV) within the U.S. This 70 MeV cyclotron will be at
the heart of providing a reliable, dependable, and indigenous supply of radioisotopes, stabilizing and building confidence in the
PET market and nuclear medicine community overall. Securing a reliable supply of radioisotopes should also increase the demand
for Positron’s complementary products: pharmaceuticals, imaging equipment and services.
Positron’s business strategy is to
gain a dominant market share in the nuclear cardiac industry through the vertical integration of such key components as: imaging
technologies, clinical services, radiopharmaceutical and radioisotope processing, production, supply and distribution. Positron
intends to maximize market share by offering cost-effective, value added solutions to end-users that meet the current and future
market demands of nuclear cardiology.
Our Products and Key Components
The Company offers a range of products and services for nuclear
imaging community which are discussed below.
PET Imaging Systems: Support and Service
Attrius® is the only FDA approved dedicated
PET scanner optimized for cardiac imaging. Attrius® was named the “Most Innovative Device of 2010” by the renowned
business research and consulting firm Frost & Sullivan. The Attrius® provides a robust, cardiac specific imaging software
package designed to ensure effortless interpretation for today’s most challenging clinical cases for nuclear cardiologists.
Heart disease specific software includes the ability to monitor therapy, coronary artery overlay display, and open architecture
for new protocol development and customization and motion correction software. The Attrius® is targeted for cardiac clinics
and is designed to meet the performance, budget and space needs of the most demanding cardiologists.
Positron has further advanced its product
portfolio with the addition of Coronary Flow Reserve (CFR) software. The University of Texas Health Science Center at Houston has
received FDA approval for the CFR quantification software, to be used with Positron’s Attrius PET scanner. Positron is licensed
to distribute and support this software, a clear differentiator in patient diagnosis.
Positron offers a comprehensive world-class
clinical, technical, and service customer care plan, through its PosiStar® customer care services. PosiStar® includes:
24/7 clinical and service support; uptime guarantees; remote access diagnostic/maintenance; physician interpretation training;
billing training; nurse training; post-install physician over-reads; ICANL approval assistance; 6 months evaluation/assessment;
industry luminary collaboration, etc. PosiStar® is a fee-based service, typically for three to five years.
Radiopharmaceuticals: Manufacturing, Processing & Distribution
Positron intends to couple an Sr-82/Rb-82
generator with Attrius sales and utilize Positron’s current nuclear cardiology network. Initial efforts will be focused on
North America. This product is a key element of Positron’s strategy to vertically integrate the production and delivery of
a complete cardiac imaging solution: isotope (Sr-82), generator (Rb-82), and imaging system (Attrius®).
PosiRx® is a radiopharmaceutical system
that automates the elution, preparation and dispensing processes for radiopharmaceutical agents used in molecular imaging. It was
created to simplify and control the procedures associated with compounding radiopharmaceuticals. PosiRx® integrates features
that increase productivity while decreasing exposure and costs. Additionally, the PosiRx® assists in compliance with all current
USP-797 and ALARA exposure control requirements for the production of unit dose radiopharmaceuticals.
PosiRx® is the first system of its
kind to offer a complete and comprehensive automated solution, creating a more efficient and economical alternative to the current
pharmacy per dose model. PosiRx® is targeted for clinics and hospitals with average to high SPECT imaging and pharmaceutical
compounding volumes, in the U.S. and
abroad. With PosiRx®, Positron intends to exploit possibilities existing in the
SPECT imaging and pharmaceutical markets for both cardiology and oncology.
Radioisotopes: Production & Distribution
Positron, through MIT, has registered its
Drug Master File (DMF) for API grade Sr-82 with the FDA. This marks Positron’s entrance into the radioisotope market with
a high demand product as a precursor for PET radiopharmaceuticals. Positron is the only commercial resource in the U.S. that possesses
the practical experience and knowledge in all stages of Sr-82 production and spent generator lifecycle management. Currently, Positron
produces API grade strontium-82 from target material received from its foreign collaborators.
Positron plans to build and operate the
world’s largest commercial high energy/high current cyclotron (70MeV) within the U.S. The proposed facility will be unique
in that it will be capable of producing isotopes that are either not available or have very limited availability from other commercial
sources in the United States and the world. Positron seeks to secure the supply of radioisotopes used in cardiac PET imaging therefore
stabilizing and building confidence in the market. Securing a reliable supply of radioisotopes will increase demand for Positron’s
pharmaceuticals, imaging equipment and services provided to nuclear medicine practices.
The primary isotope to be produced is Sr-82,
which is currently in short supply world-wide and is only produced in the U.S. by the Department of Energy (“DOE”)
National Laboratories.
FINANCIAL SOLUTIONS
Positron intends to provide customers with
a variety of innovative risk mitigating financing programs, which are designed to minimize any barriers of entry, thus accelerating
the expansion of cardiac PET and further securing Positron’s position in the market.
Major developments and milestones achieved by Positron Corporation
during 2013 include:
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Executed a Know-How and License Agreement with the Institute of Nuclear Research (INR) of Troitsk, Russia, for the rubidium metal and "loop" technologies for Sr-82 production. Such technologies improve quality, significantly increase yield and decrease waste. Positron has exclusive rights to implement these technologies in North America.
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Positron and iThemba LABS (South Africa) entered into radioisotope supply agreement.
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Positron began processing Sr-82 from third party irradiators iThemba Labs, U.S.DOE and Arronax.
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Positron has been approved as a qualified supplier of API grade Sr-82 for Jubilant DraxImage.
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Positron introduced next generation PosiRx Pharmacy Automation System.
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Positron Radioiotope Facility received ISO 9001.
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Market Opportunity
Molecular Imaging Devices for Cardiology
Cardiovascular disease (CVD) is the leading
cause of death in the United States and constitutes 17% of overall national health expenditures (Forecasting the Future of Cardiovascular
Disease in the United States, American Heart Association, 2011). Direct CVD costs are projected to increase from $273 billion in
2010 to $818 billion in 2030, indirect costs (due to lost productivity) – from $172 billion in 2010 to $276 billion in 2030.
Diagnostic imaging facilitates the early
diagnosis of diseases and disorders, potentially minimizing the scope, cost and amount of care required, and potentially reducing
the need for more invasive procedures. Nuclear imaging uses very low-level radioactive material, called radiopharmaceuticals, injected
into a patient. The radiopharmaceuticals are specially formulated to concentrate temporarily in the specific part of the body to
be studied. The radiation signals emitted by the materials are then converted into an image of the body part or organ. Nuclear
imaging, in contrast to other diagnostic imaging modalities, shows not only the anatomy or structure of an organ or body part,
but also its function—including blood flow, organ function, metabolic activity and biochemical activity. In cardiology, nuclear
medicine provides the most accurate non-invasive tests for identifying narrowed coronary arteries, mild cholesterol build-up or
diffuse coronary vascular disease that are responsible for most heart attacks. Management of coronary disease (CAD) currently utilizes
noninvasive diagnostic testing as a ‘‘gatekeeper’’ and invasive coronary arteriography, when results are
abnormal, to provide a definitive diagnosis of CAD. There are two major modalities in nuclear medicine imaging, gamma cameras and
Positron Emission Tomography (PET), both of which are used for cardiovascular procedures. The most widely used imaging acquisition
technology utilizing gamma cameras is single photon emission computed tomography, or SPECT.
Though PET tests are much more accurate
and has been shown to reduce long-term costs, the nuclear cardiology imaging has been dominated by SPECT. This imbalance is a result
of lower prices of SPECT cameras and decades long preferable reimbursement rates for cardiac SPECT procedures. The Company believes
that recent dynamic market changes, including the dramatic increase of reimbursement rates for cardiac PET procedures, SPECT reimbursement
cuts and the world shortage of the molybdenum-99 isotope used in cardiac SPECT, will significantly improve the economics of cardiac
PET imaging and make PET technology much more competitive and appealing to cardiologists.
In myocardial perfusion imaging, PET has
been proven to be superior in sensitivity and specificity when compared to SPECT, the more commonly utilized modality. Cardiac
PET scans, with Rubidium-82 Chloride (Rb-82) or Nitrogen- 13 Ammonia (N-13), result in a lower patient radiation exposure and is
capable of performing superior quantitative measurements such as coronary flow reserve. Cardiac PET imaging has been shown to provide
a 50% reduction in invasive coronary arteriography and coronary artery bypass grafting, leading to a 30% costs savings and improved
clinical outcomes, when compared to SPECT (M.E. Merhige, M.D., et al.,
Journal Nuclear Medicine
2007; 48: 1069-1076).
SPECT IMAGING MODALITY
SPECT is a comparatively old technology
in a market that is mature if not oversaturated, with more than 85% of cameras purchased as replacements (Nuclear Medicine Market
Outlook Report, IMV, 2011). 31% of all SPECT and SPECT/CT cameras in the U.S., or approximately 4,100, are dedicated cardiac cameras.
According to market research company BIO-TECH
Systems, Inc. (
The U.S. Market for SPECT and PET Radiopharmaceuticals
, Report #360), in 2012, total sales of SPECT radiopharmaceuticals
were $719 million, among which, per our estimate, sales of major cardiac SPECT radiopharmaceuticals, Cardiolite, Myoview and sestamibi,
were approximately $575 million. BIO-TECH expects that sales of SPECT radiopharmaceuticals will be $1.7 billion by 2021, due primarily
to new products for imaging cancer entering the market. We expect cardiac SPECT radiopharmaceuticals may rise to $620-650 million
and be effectively flat thereafter.
Positron intends to enter this large SPECT
radiopharmaceutical market with PosiRx® - a radiopharmaceutical system that automates the elution, preparation and dispensing
processes for radiopharmaceutical agents used in molecular imaging. It was created to simplify and control the procedures associated
with compounding radiopharmaceuticals. PosiRx® integrates features that increase productivity while decreasing exposure and
costs. Additionally, the PosiRx® assists in compliance with all current USP-797 and ALARA exposure control requirements for
the production of unit dose radiopharmaceuticals. Currently, the PosiRx® has been developed for use specific to SPECT agents.
PET IMAGING MODALITY
PET is a younger and more advanced technology
than SPECT. In cardiology perfusion imaging, PET scanners, in particular Positron’s Attrius®, have superior sensitivity
and specificity compared to SPECT cameras, provide less radiation exposure and are capable of performing quantitative measurements.
Cardiac PET imaging has been shown to provide a 50% reduction in invasive coronary arteriography and coronary artery bypass grafting,
a 30% costs savings, and excellent clinical outcomes compared with SPECT (M.E. Merhige, et al.,
J Nucl Med
2007; 48: 1069-1076).
The cardiac PET equipment market is much
smaller than SPECT but has seen significant (25-30%) annual growth during the last decade and is expected to continue its expansion
at 20% average annual growth during the next five years. According to Bracco Diagnostics, there were approximately 170 dedicated
cardiac PET/PET/CT scanners in the U.S. in 2012.
For many years, a major constraint for
the cardiac PET market has been a high cost of PET and PET/CT. Positron Corporation has managed to reduce the buyers’ barrier
to entry by bringing to the market the Attrius® - the only cardiac dedicated PET system in the world. All other manufacturers
(GE, Philips, Siemens) offer PET/CT systems at a 200% - 300% higher price but comparable performance of cardiac studies. In 2010
and 2011, Positron’s share in sales of dedicated cardiac PET scanners was 14% and 17%, respectively. While we expect this
share to grow significantly in the next several years, Positron’s sales since 2011 have been negatively impacted by the shortage
of Rb-82 and Sr-82. This impact was a result of an unscheduled maintenance of the United States Department of Energy (DOE) accelerator
producing Sr-82, a pre-cursor to Rb-82, and by a voluntary recall of Sr-82/Rb-82 generators by Bracco Diagnostics for additional
testing. Though delivery of Bracco's generators to existing clients was restored in 2013, generators for new clients were not available,
which made sales of Attrius® impossible. We believe that situation may change rapidly in 2014 upon market entry of the DraxImage
generator, once FDA approved.
Another issue is that the increasing demand
for Sr-82 which is used as a parent isotope for production of Rb-82 in Sr-82/Rb-82 generators is beginning to outpace supply. Until
recently, the U.S. Department of Energy had been the only entity in the United States capable of providing this material. Positron
has registered its DMF with the FDA and has begun production of API grade strontium-82 through its subsidiary, MIT.
Positron has been working to secure the
supply of Sr-82 and to enter the fast growing market of PET radiopharmaceuticals. Positron seeks to build, own and operate a 70
MeV high-energy cyclotron that can produce enough Sr-82 to supply Sr-82/Rb-82 generators to current and future Positron customers,
optimally, customers with the Attrius® PET scanners. The cyclotron project is an expensive and lengthy project; however, if
completed, it may eliminate a potential limiting factor in cardiac PET market growth.
Positron’s acquisition of MIT has
additional advantages that we believe will help to resolve a potentially significant problem of limited waste facilities for spent
generators. Currently, waste management for spent generators is provided by DOE but capacity of its waste facilities will reach
their limits in the very near future. MIT has technologies and facilities to replace DOE in this role and is currently pursuing
this opportunity.
Competitive Strengths
We believe that our Company has the following competitive strengths:
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Well Known Name Among Cardiologists.
The high count-rate capability and sensitivity of Positron’s PET systems result in excellent diagnostic accuracy, faster imaging and ability to use short half-life radiopharmaceuticals, which made Positron’s PET systems a system of choice for certain cardiac applications.
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The Only PET System on the Market.
All major PET manufacturers have discontinued manufacturing of stand-alone PET systems, offering very expensive PET combined with Computerized Tomography (PET/CT) instead. In cardiac applications, the Positron’s Attrius® provides image quality comparable to PET/CT at significantly lower price. It also significantly reduces radiation exposure compared to PET/CT and even SPECT. A small footprint and affordable price makes it ideal for imaging clinics and hospitals.
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Cardiac Specific Software.
The Attrius® provides a robust, cardiac specific imaging software package designed to ensure effortless interpretation for today’s most challenging clinical cases for nuclear cardiologists. Heart disease specific software includes the ability to monitor therapy, coronary artery overlay display, and open architecture for new protocol development and customization and motion correction software.
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Unique Automated Radiopharmaceutical System.
Positron’s PosiRx® is a radiopharmaceutical system that automates the elution, preparation and dispensing processes for radiopharmaceutical agents used in molecular imaging. The PosiRx® system provides unprecedented “unit dose” flexibility to imaging providers at the touch of a button, 24/7. It was created to simplify and control the procedures associated with compounding radiopharmaceuticals. PosiRx® integrates features that increase productivity while decreasing exposure and costs.
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The only commercial entity in the U.S.
with a registered Drug Master File (DMF)
for producing Active Pharmaceutical Ingredient (API) grade Sr-82.
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Unique Knowledge and Expertise in Sr-82 Production
. The Company, through its wholly owned subsidiary MIT, is the only commercial resource in the United States with practical knowledge and experience in all stages of Sr-82 production.
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The Only Commercial Facility for refurbishment of Sr-82/Rb-82 generators in the U.S.
MIT’s current facility in Lubbock, Texas has the capacity to provide critical services necessary for the refurbishment of spent Sr-82/Rb-82 generators.
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Currently, the Only Commercial Source of Sr-82 in the U.S
. Using patented methods; MIT can recycle Sr-82 from spent Sr-82/Rb-82 generators at its facility in Lubbock, Texas, and process Sr-82 from foreign sources.
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Value-Added Offering of Complimentary Products to Customers.
The addition of complementary products, such as PET imaging systems, clinical and support services, radiopharmaceutical dispensing systems, radiopharmaceuticals and radioisotopes enhances the value of the offering to Positron’s customers, providing them a total solution in nuclear cardiology.
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Sales and Marketing
To market its equipment and services, Positron
employs an internal sales and marketing team dedicated to promote, educate and sell Positron products. Positron is also able to
rely on referrals from users of its existing base of installed scanners and cameras, trade show exhibits, trade journal advertisements,
clinical presentations at professional and industry conferences, and published articles in trade journals. The Company’s
sales personnel vary in geographic location and/or market expertise.
Positron sells and/or distributes its products
and services directly to end-users.
Customer Care, Service and Warranty
Positron has implemented PosiStar®,
a complete customer care plan that offers full clinical support from Positron’s experienced clinical and technical staff
and industry luminaries that consult for the Company or are affiliated through Positron’s customer network. PosiStar®
Customer Care provides: physician interpretation training; nurse training; billing and prior-authorization training; physician
over reads; post install, 24/7 clinical and service support; priority response with afterhours maintenance/service available; uptime
guarantees and software upgrades; and remote access diagnostic/maintenance capabilities.
The Company has field service engineers
who have primary responsibility for supporting and maintaining the Company’s installed equipment base. In addition, the Company
has field engineers involved in site planning, customer training, sales of hardware upgrades, sales and administration of service
contracts, telephone technical support and customer service.
The Company services customers of our systems
remotely through Internet access that facilitates real time system diagnosis without the need for a field service visit. When physical
repair is required, our modular part replacement capability allows our field service engineers to perform field repairs that minimize
customer downtime.
The Company typically
provides a one-year parts and labor warranty to purchasers of our equipment. Following the warranty period, the Company offers
purchasers a comprehensive service contract under which the Company provides all parts and labor, system software upgrades and
unlimited service calls.
The Company’s service goal is to
maintain maximum system uptime. Success of a clinical site is largely dependent on patient volume during normal working hours and,
therefore, equipment uptime and reliability are key factors in this success. Records compiled by the Company show an average uptime
of more than 98% for all installed PET scanners.
Due to the Company’s expertise and
access to parts, we expect to service all the PET scanners we sell.
Competition
The Company faces no direct competition
from other manufacturers of PET scanners as it offers the only commercial standalone PET scanner, Attrius®. However, the Company
has experienced competition from used PET/CT scanners although the remaining supply of used PET/CT systems is believed to be extremely
low. The Company does not believe that MRI and CT scan imaging represent significant competing technologies, but potentially complementary
technologies to PET, since PET, MRI and CT scans each provide information not available from the other modalities. Computed tomography
angiography (“CTA”) was once seen by some cardiologists to be competitive with PET myocardial perfusion imaging; however,
there is an increasing public concern about a high radiation exposure of CT and, currently, there is no substantial movement into
this modality.
In 2001-2002, GE, Siemens and Philips introduced
PET/CT systems that combine CT scanning and PET in one unit. Since then production of standalone PET scanners have been discontinued
and replaced by high priced PET/CT systems with costs much greater than Positron’s Attrius® PET system. PET/CT integrates
functional (PET) and structural (CT) information into a single scanning session, allowing fusion of the PET and CT images and thus
improving lesion localization and interpretation accuracy. The CT scan is also used for attenuation correction, ultimately leading
to high patient throughput. These combined advantages have rendered PET/CT a preferred imaging modality over standalone PET except
in the imaging of cardiac studies. All major PET manufacturers, except Positron, pursue the similar strategies of developing more
and more sophisticated and expensive whole-body PET/CT scanners. A hospital or medical imaging clinic with a whole-body PET/CT
device has flexibility of using the scanner for oncology, cardiology or neurology purposes. However, the redundancy of functions,
as well as the high price and large size, has negative impact on usage of PET scanners by specialty physicians (cardiologists,
neurologists, urologists, etc.).
Though PET/CT has been commercially accepted,
the need for the CT technology in myocardial perfusion imaging can be debated, due to the potential of increased radiation exposure
to the patient. PET/CT, compared to PET, only has a larger capital acquisition cost, more room required and more expensive ongoing
service expense. Significant limitations of cardiac PET/CT are respiratory motion and metallic artifacts, which can result in artifactual
PET defects in up to 40% of patients scanned, and these defects are moderate to severe in 23%. (
J
Nucl Med. 2007 Jul;48(7):1112-21
)
Interest in PET by cardiologists has increased significantly
since 2009 boosted by preferable reimbursement rates and shortage of Tc-99m, a major cardiac SPECT radiopharmaceutical. Positron
Corporation has been exploiting this rise of the demand by cardiologists and the lack of the supply of affordable PET systems on
the market by offering its cardiac specific, standalone Attrius® PET.
Currently radiopharmaceutical delivery
is dominated by Cardinal Health (160 nuclear pharmacies and 26 cyclotron-based PET radiopharmaceutical manufacturing facilities),
PETnet Solutions, a fully owned subsidiary of Siemens Medical Solutions USA (52 radiopharmacies and distribution centers), Triad
Isotopes (63 radiopharmacies after acquiring a Covidien’s network and 6 cyclotrons), and GE healthcare (31 radiopharmacies).
There are also approximately 73 independent radiopharmacies and 70 institutional radiopharmacies (affiliated with major medical
schools).
Radiopharmaceuticals for cardiac applications
are prepared in radiopharmaceutical generators, Tc-99m generators for SPECT (manufactured by Covidien and Lantheus) and Rb-82 generators
for PET (Bracco Diagnostics). Rb-82 has a half-life of 75 seconds, and Rb-82 generators are delivered by Bracco directly to end
users typically 13 times per year.
Tc-99m has a half-life of 6 hours, and
centralized radiopharmacies use Tc-99m generators to deliver unit doses of Tc-99m based radiopharmaceuticals to customers. Centralized
radiopharmacies incur very high fixed costs (approximately greater than $1.0 million per year) and freight costs (two-three times-a-day
deliveries to each client) and are affected by geographical factors: clients have to be in a 75 miles proximity to the pharmacy
due to a short half-life of Tc-99m. Positron Corporation’s PosiRx® does not have these limitations, as the radiopharmaceutical
unit dose drawing devices can be placed directly into physicians’ offices with once-a-week deliveries.
The Department of Energy is the only entity
in the U.S. that produces Sr-82 and refurbishes spent Sr-82/Rb-82 generators; according to current policies, DOE should not compete
with commercial companies.
Many of our competitors enjoy competitive
advantages over us, including: greater name recognition; greater financial, technical and service resources; established relationships
with healthcare professionals; established distribution networks; additional lines of products and the ability to offer rebates
or bundle products to offer discounts or incentives; and greater resources for product development and sales and marketing. See
“Item 1. Description of Business—Risk Associated with Business Activities—Substantial Competition and Effects
of Technological Change”.
Third party Reimbursement
Our customers typically rely on the Medicare
and Medicaid programs and private payers for reimbursement. As a result, demand for our products is dependent in part on the coverage
and reimbursement policies of these payers. Third party coverage and reimbursement is subject to extensive federal, state, local,
and foreign regulation, and private payer rules and policies. In many instances, the applicable regulations, policies and rules
have not been definitively interpreted by the regulatory authorities or the courts, and are open to a variety of interpretations
and are subject to change without notice.
The scopes of coverage and payment policies
vary among third-party private payers. For example, some payers will not reimburse a provider unless the provider has a contract
with the payer, and in many instances such payers will not enter into such contracts. Other payers prohibit reimbursement unless
physicians own or lease our scanners and cameras on a full-time basis, or meet certain accreditation or privileging standards.
Such requirements and limitations can significantly restrict the types of business models we can successfully utilize.
Medicare reimbursement rules impose many
standards and policies on the payment of services that our customers provide. For instance, the Medicare prohibition on the “mark-up”
of diagnostic tests can restrict what a physician may charge Medicare for diagnostic tests. Medicare also imposes medical necessity
and other standards on physician and facilities that bill Medicare for services.
Any limitation of Medicare, Medicaid or
private payer coverage for PET or SPECT procedures using will likely have a material adverse effect on the Company’s business,
financial condition, results of operations and cash flows.
Centers for Medicare & Medicaid Services
(CMS) released their 2014 Medicare Physician Fee Schedule, which outlines the payment rates for medical services paid to private
physicians in the outpatient office setting. This fee schedule stated that Myocardial PET perfusion imaging was increased to $1,310.60
per study. The Medicare Physician Fee Schedule also states that Cardiovascular SPECT reimbursement for outpatient cardiology practices
billing under CPT codes has been increased to $1,153.62.
Manufacturing
Our manufacturing strategy combines our
internal design expertise and proprietary process technology with strategic outsourcing to achieve cost efficiencies. All of the
Company’s PET scanners are manufactured through our joint venture, Neusoft Positron Medical Systems, at its development and
manufacturing facility in Shenyang, China. The manufacturing of the PosiRx® line takes place in Fishers, Indiana. The refurbishment
of spent Sr-82/Rb-82 generators, production, recycling and processing of Sr-82 from foreign vendors are performed at MIT’s
facility in Lubbock, Texas.
The Company expects to continue outsourcing
additional components and processes to gain efficiencies and cost savings. The Company expects to perform subassembly and final
system performance tests, packaging and labeling at our facility. The Company provides connectivity solutions which include consulting
and configured computers. The Company also sells accessories which are outsourced and include printers, equipment for handling
and measuring radioactive materials, and software for the cameras and systems.
The Company and its third-party manufacturers
are subject to the FDA’s Quality System Regulation, state regulations, and regulations promulgated by the European Union.
Joint Venture with Neusoft Medical Systems Co., Ltd.
On June 30, 2005, the Company entered
into a Joint Venture Contract with Neusoft Medical Systems Co., Inc. of Shenyang, in the 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. Neusoft's aggregate contribution to the capital of the JV Company was 67.5% of the total registered capital of the
Company, or US$1,350,000, and the Company's aggregate contribution consisted of cash in the amount of $250,000 and a
technology license valued at $400,000. Positron has transferred to the JV Company certain of its PET technology. During 2008-2009, as
a result of additional capital contributions by Neusoft, the Company’s share in JV Company decreased to 1%.
Under its Joint Venture Contract with Neusoft,
the Company has the exclusive right to sell PET system products developed by the JV Company in the U.S, Canada, and Mexico under
its registered trademarks. Neusoft has the exclusive right to sell products developed by the JV Company in China under its registered
trademarks. Each of Neusoft and the Company has the right to sell products developed by the JV Company in the countries and regions
worldwide with the exception of China, the U.S., Canada and Mexico, where select exclusive rights apply.
The joint venture obtained the FDA 510k
regulatory approval of Attrius® Cardiac PET in April 2009.
Research and Development
The Company’s research and development
expenses were approximately $564,000 and $940,000 for the years 2013 and 2012, respectively. The research and development activities
have been focused on development of radiopharmaceutical delivery systems and regulatory and quality systems compliance required
to offer radiopharmaceuticals, radiochemicals and radioisotopes into the marketplace. We continue to improve and/or customize our
radiopharmaceutical equipment to fit it to new products and meet unique user requirements. There have been significant resources
allocated in the initial start up, preparation, licensure and regulatory compliance of the Company’s radiopharmaceutical
manufacturing and radioisotope production facilities. We are also developing additional software and hardware for our PET and PET/CT
scanner for additional functions that enhance performance and diagnostic efficacy and also in preparation for new cardiac radiopharmaceuticals
that are in a pipeline of a major radiopharmaceutical manufacturer. These research and development activities are costly and critical
to the Company’s ability to maintain, develop and improve its “state of the art” products. The Company’s
inability to conduct such activities in the future may have a material adverse effect on the Company’s business as a whole.
Patent, Trademarks and Royalty Arrangements
The Company has three (3) patents covering
the solid-state quantum photodetector technology and configuration of imaging apparatus and systems, one (1) U.S. patents pertaining
to gamma cameras, and one (1) patent for PET radiopharmaceuticals infusion and shielding device. The Company has one (1) patent
and one (1) patent pending pertaining to specific features of the Company’s automated radiopharmaceutical system.
As of December 31, 2013, we hold trademark
registrations in the United States for the following marks: Positron®, Attrius®, PosiRx®, PosiStar®, Tech-Assist®
and Pulse CDC™."
The Company seeks to protect its trade
secrets and proprietary know-how through confidentiality agreements with its employees and consultants. The Company requires our
employees, consultants and advisors to enter into a confidentiality agreement containing provisions prohibiting the disclosure
of confidential information to anyone outside the Company, and requiring disclosure to the Company of any ideas, developments,
discoveries or investigations conceived during service and the assignment to the Company of patents and proprietary rights to such
matters related to the business and technology of the Company. Despite any measures taken to protect our intellectual property,
unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary.
Product Liability and Insurance
Medical device companies are subject to
a risk of product liability and other liability claims in the event that the use of their products results in personal injury claims.
The Company carries the appropriate commercial and business insurances coverage to mitigate this risk. The Company has not experienced
any product liability claims to date.
Employees
As of December 31, 2013, the Company employed
twenty-two (22) full-time employees. None of the Company’s employees are represented by a union.
Available Information
Positron Corporation is required to file
annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”).
Investors may read and copy any document that Positron Corporation files, including this Annual Report on Form 10-K, at the SEC’s
Public Reference Room at 450 F Street, N.W., Washington, DC 20549. Investors may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at
http://www.sec.gov
that
contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC,
from which investors can electronically access Positron’s SEC filings.
Item
1A. Risk Factors
Risk Associated with Business Activities
History of Losses
.
To date,
the Company has been unable to sell its products in quantities sufficient to be operationally profitable. Consequently, the Company
has sustained substantial losses. During the year ended December 31, 2013, the Company had a net loss of approximately $7,104,000
compared to a net loss of approximately $7,955,000 during 2012. At December 31, 2013, the Company had an accumulated deficit of
approximately $123,432,000. There can be no assurances that the Company will ever achieve the level of revenues needed to be operationally
profitable in the future and if profitability is achieved, that it will be sustained. Due to the limited number of products that
have been sold in each fiscal period, the Company’s revenues have fluctuated, and may likely continue to fluctuate significantly
from quarter to quarter and from year to year. The opinion of the Company’s independent auditors for the year ended December
31, 2013 expressed doubt as to the Company’s ability to continue as a going concern. The Company will need to obtain additional
capital and increase product sales to become profitable.
Recruiting and Retention of Qualified
Personnel.
The Company’s success is dependent to a significant degree upon the efforts of its executive officers
and key employees. The loss or unavailability of the services of any of its key personnel could have a material adverse effect
on the Company. The Company’s success is also dependent upon its ability to attract and retain qualified personnel in all
areas of its business, particularly management, research and development, sales and marketing and engineering. There can be no
assurance that the Company will be able to continue to hire and retain a sufficient number of qualified personnel. If the Company
is unable to retain and attract such qualified personnel, its business, operating results and cash flows could be adversely affected.
Working Capital.
The
Company had cash and cash equivalents of approximately $1,744,000 at December 31, 2013. The Company utilized $2,520,000 proceeds
from issuance of convertible debt and securities, and $2,285,000 proceeds from non-interest bearing advances to fund operating
activities during the year ended December 31, 2013. The Company had accounts payable and accrued liabilities of approximately $1,401,000
and a negative working capital of approximately $12,084,000. The Company believes that it may continue to experience operating
losses and accumulate deficits in the foreseeable future. If we are unable to obtain financing to meet our cash needs we may have
to severely limit or cease our business activities or may seek protection from our creditors under the bankruptcy laws.
Penny Stock Rules.
If
the shares of the Registrant's common stock are listed on The Nasdaq Stock Market or certain other national securities exchanges
and the price thereof is below $5.00, then subsequent purchases of such securities will be subject to the requirements of the penny
stock rules absent the availability of another exemption. The SEC has adopted rules that regulate broker-dealer practices in connection
with transactions in "penny stocks." Penny stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on The Nasdaq Stock Market). The penny stock rules
require a broker-dealer to deliver a standardized risk disclosure document required by the SEC, to provide the customer with current
bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly
account statements showing the market value of each penny stock held in the customer's account, to make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock
that becomes subject to the penny stock rules.
A Small Number of Large Stockholders
and Thinly Traded Market
.
A small number of our current stockholders hold a substantial number of shares of our
common stock that they may sell in the public market. In addition, our common stock is thinly traded and any significant sales
of our common stock may cause volatility in our common stock price. Sales by our current stockholders of a substantial number of
shares, or the expectation that such sale may occur, could significantly reduce the market price of our common stock. We have also
registered all shares of common stock that we may issue under our employee benefit plans. Accordingly, these shares can be freely
sold in the public market upon issuance, subject to restrictions under the securities laws. If any of these stockholders cause
a large number of securities to be sold in the public market, the sales could reduce the trading price of our common stock. These
sales also could impede our ability to raise capital in the future.
In addition, these stockholders, acting
together, will be able to significantly influence all matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combination transactions. The interests of this group of stockholders may
not always coincide with our interests or the interests of other stockholders, and they may act in a manner that advances their
best interests and not necessarily those of other stockholders. As a result of their actions, or inaction our stock price may decline.
Substantial Competition and Effects
of Technological Change
.
The industry in which the Company is engaged is subject to rapid and significant technological
change. There can be no assurance that Company’s systems can be upgraded to meet future innovations in the industry or that
new technologies will not emerge, or existing technologies will not be improved, which would render the Company’s products
obsolete or non-competitive. Many of our competitors enjoy significant competitive advantages over us, including: greater name
recognition; greater financial, technical and service resources; established relationships with healthcare professionals; established
distribution networks; additional lines of products and the ability to offer rebates or bundle products to offer discounts or incentives;
and greater resources for product development and sales and marketing. In addition, there can be no assurance that other established
medical imaging companies, any of which would likely have greater resources than the Company, will not enter the market. There
can be no assurance that the Company will be able to compete successfully against any of its competitors.
The downturn in the U.S. economy
.
Our revenues may be significantly impacted by the downturn in the U.S. economy. The slowing economy may also drive greater
pricing pressures from our competition, increase the rate at which we lose business, or lead to disruptions in our supply chain,
any of which would impede our ability to become profitable. Further, we cannot assure you that an improvement in economic conditions
will result in an immediate, if at all positive, improvement in our operating results or cash flows.
Dependence upon third-party suppliers
and the availability of certain radiopharmaceuticals.
We rely on a limited number of third parties to manufacture and supply
certain key components of our products. Alternative sources of production and supply may not be readily available. We have also
outsourced production of PET systems to a single contract manufacturer. If a disruption in the availability of parts, or in the
operations of these suppliers were to occur, our business could be materially affected. For this reason, we have backup plans in
place that are designed to prevent delays in production. If these plans are unsuccessful, delays in the production of systems for
an extended period of time could cause the loss of revenue, which could significantly harm our business and results of operations.
Our equipment leasing service will involve the use of certain radiopharmaceuticals. If we experience disruptions in the supply
of these radiopharmaceuticals, that will cause us to cancel services that would otherwise be provided. If we are unable to obtain
an adequate supply of the necessary radiopharmaceuticals, we may be unable to lease our equipment, and our business may be harmed.
No Assurance
of Market Acceptance.
The Company’s systems involve new technology that competes with more established technologies.
The purchase and installation of our system involves a significant capital expenditure on the part of the purchaser. A potential
purchaser of our system must have an available patient base that is large enough to provide the utilization rate needed to justify
such capital expenditure. There can be no assurance that the Company’s systems will be accepted by the target markets, or
that the Company’s sales of systems will increase or that the Company will be profitable.
Patents and Proprietary Technology
.
The Company holds certain patent and trade secret rights relating to various aspects of its technologies, which are of material
importance to the Company and its future prospects. Our pending U.S. and foreign patent applications, which include claims to material
aspects of our products and procedures that are not currently protected by issued patents, may not issue as patents in a form that
will be advantageous to us. Any patents we have obtained or do obtain may be challenged by re-examination or otherwise invalidated
or eventually found unenforceable. Both the patent application process and the process of managing patent disputes can be time
consuming and expensive. Competitors may attempt to challenge or invalidate our patents, or may be able to design alternative techniques
or devices that avoid infringement of our patents, or develop products with functionalities that are comparable to ours. In the
event a competitor infringes upon our patent or other intellectual property rights, litigation to enforce our intellectual property
rights or to defend our patents against challenge, even if successful, could be expensive and time consuming and could require
significant time and attention from our management. Furthermore, there can be no assurance that the Company’s products will
not infringe on any patents of others. We may not have sufficient resources to enforce our intellectual property rights or to defend
our patents against challenges from others.
In addition, the Company requires each
of its consultants to enter into a confidentiality agreement designed to assist in protecting the Company’s proprietary rights.
There can be no assurance that these agreements will provide meaningful protection or adequate remedies for the Company’s
trade secrets or proprietary know-how in the event of unauthorized use or disclosure of such information, or that others will not
independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company’s
trade secrets and proprietary know-how.
We Use Products that are Highly Regulated
.
In July 2011, Bracco Diagnostics Inc. voluntarily recalled its CardioGen-82 generator after the U.S. Food and Drug Administration
(“FDA”) found that certain patients who had undergone PET imaging scans with rubidium chloride injected from CardioGen-82
generator, the radioactive drug injected into a patient to evaluate the functions of the heart, received excessive yet non-harmful
amounts of the radiopharmaceutical. The recall was lifted in or about January 2012 and adversely affected the Company’s operations.
There can be no assurance that another, similar incident or a voluntary recall will not occur which would adversely affect the
Company’s business, financial conditions results of operations and cash flows.
Government Regulation
.
We are directly, or indirectly through our clients, subject to extensive regulation by both the federal government and the
states in which we conduct our business including: the federal Medicare and Medicaid anti-kickback laws, other Medicare laws, regulations,
rules, manual provisions, and policies that prescribe the requirements for coverage and payment for services performed by us and
our DIS customers; the federal False Claims statutes; the federal Health Insurance Portability and Accountability Act of 1996,
or HIPAA; the Stark Law; the Federal Food, Drug and Cosmetic Act; federal and state radioactive materials laws; state food and
drug and pharmacy laws and regulations; state laws that prohibit the practice of medicine by non-physicians and fee-splitting arrangements
between physicians and non-physicians; state scope-of-practice laws; and federal rules prohibiting the mark-up of diagnostic tests
to Medicare under certain circumstances. If our customers are unable or unwilling to comply with these statutes, regulations, rules
and policies, utilization rates of our services and products will decline and our business will be harmed.
We maintain a compliance program to identify
and correct any compliance issues and remain in compliance with all applicable laws, to train employees, to audit and monitor our
operations, and to achieve other compliance goals. Like most companies with compliance programs, we occasionally discover compliance
concerns. In such cases, we take responsive action including corrective measures when necessary. There can be no assurance that
our responsive actions will insulate us from liability associated with any detected compliance concerns.
If our past or present operations are found
to be in violation of any of the laws, regulations, rules or policies described above or the other laws or regulations to which
we or our customers are subject, we may be subject to civil and criminal penalties, damages, fines, exclusion from federal or state
health care programs, or the curtailment or restructuring of our operations. Similarly, if our customers are found to be non-compliant
with applicable laws, they may be subject to sanctions, which could have a negative impact on us. If we are excluded from federal
or state health care programs, our customers who participate in those programs could not do business with us. Any penalties, damages,
fines, curtailment or restructuring of our operations would adversely affect our ability to operate our business and our financial
results. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur
significant legal expenses, divert our management’s attention from the operation of our business, and damage our reputation.
All laws and regulations, including those
specifically applicable to the Company, are subject to change. The Company cannot predict what effect changes in laws and regulations
might have on its business. Failure to comply with applicable laws and regulatory requirements could have material adverse effect
on the Company’s business, financial conditions, results of operations and cash flows.
Further, sales of medical devices outside
the country may be subject to foreign regulatory requirements. These requirements vary widely from country to country. There is
no assurance that the time and effort required to meet those varying requirements may not adversely affect Positron’s ability
to distribute its systems in some countries.
No Dividends
.
The Company
has never paid cash dividends on its common stock and does not intend to pay cash dividends on its common stock in the foreseeable
future.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
In January 2012, the Company purchased
approximately 2,000 square feet of office space in Westmont, Illinois from a related party in which it uses for corporate and administrative
offices.
On April 19, 2010, the Company entered
into a lease agreement (the “Lease”) for PET parts and service and Clinical and Technical Cardiovascular PET Training
Institute. The amount of leased space at this location in Niagara, New York is approximately 3,125 square feet at a monthly rental
of $1,600.
The Company has a month to month operating
lease for its remaining Houston operations where the Company maintains inventory at times. Monthly rent for the facility is $1,000.
On July 7, 2011, the Company entered into
an operating lease with a third party for space for medical device assembly and warehousing at a building in Fishers, Indiana.
The Company will be required to make payments of $5,083 each month from December 1, 2011 through November 13, 2013, and $5,287
from December 1, 2013 through November 30, 2016. The amount of leased space at this location is approximately 9,761 square feet.
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 was required to make
payments of $1,475 each month from December 1, 2011 through December 1, 2012. The lease continues on a month to month basis.
Item
3. Legal Proceedings
On June 8, 2012, the owner of the radiopharmaceutical
manufacturing facility the Company formerly leased in Crown Point, Indiana commenced an action to recover the use of the premises
and the remaining rent due under the lease. On November 14, 2012, the owner was awarded a judgment against the Company in the amount
of $85,525.98 plus interest at the rate of 8%. The Company and the owner agreed to monthly payments in the minimum amount of $5,000
until the judgment is paid in its entirety.
In May, 2013, the Company was served
with a First Amended Complaint in an action commenced against its CEO and principal shareholder. The plaintiff in the action
is seeking to enforce a judgment against the CEO and principal shareholder and is seeking to have the
Company’s Westmont, Illinois offices, which it purchased from the CEO, reconveyed. The related party
defendants have disputed the basis of the judgment and the Company has denied the allegations in the Complaint and is
defending the action. The action is currently in the discovery stage.
From time to time, we are a party to legal
proceedings arising in the ordinary course of business. We are not currently a party to any other legal proceedings that we believe
could have a material adverse effect on financial condition or results of operations.
Item 4. Mine Safety
Disclosure
Not applicable.
Item 5. Market for
Common Equity and Related Stockholder Matters
Market Information
The Company’s common stock is currently
traded and quoted on the NASDAQ OTC Bulletin Board under the symbol POSC.
The following range of the high and low
reported closing sales prices for the Company’s common stock for each quarter in 2013 and 2012, all as reported on the NASDAQ
OTC Bulletin Board. These quotations reflect interdealer prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
|
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2013
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2012
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High
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|
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Low
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|
|
High
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|
Low
|
|
First Quarter
|
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$
|
0.01
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|
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$
|
0.01
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|
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$
|
0.02
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|
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$
|
0.01
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Second Quarter
|
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$
|
0.01
|
|
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$
|
0.01
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|
|
$
|
0.02
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|
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$
|
0.01
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Third Quarter
|
|
$
|
0.01
|
|
|
$
|
0.01
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|
|
$
|
0.01
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|
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$
|
0.01
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Fourth Quarter
|
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$
|
0.01
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$
|
0.01
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$
|
0.01
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$
|
0.01
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Holders
There were approximately 4,059 shareholders of common stock
as of March 31, 2014.
Dividends
Dividends payable to common shareholders,
if any, will be contingent upon our revenues and earnings, capital requirements and financial conditions. The payment of dividends,
if any, will be within the discretion of our Board of Directors. We presently intend to retain all earnings, if any, for use in
our business operations.
Description of Securities
Number of Authorized and Outstanding Shares.
The Company's Certificate of Formation, as amended, authorizes the issuance of 3,000,000,000 shares of common stock, $0.01 par
value per share (the “Common Stock”), of which 1,452,548,262 shares were outstanding on December 31, 2013. All of the
outstanding shares of Common Stock are fully paid and non-assessable.
Voting Rights. Holders of shares of Common
Stock are entitled to one vote for each share held of record on all matters to be voted on by the shareholders. Accordingly, the
holders of in excess of 50% of the aggregate number of shares of Common Stock outstanding will be able to elect all of the directors
of the Company and to approve or disapprove any other matter submitted to a vote of all shareholders. The holders of our Common
Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally
available. We have not paid any dividends since our inception, and we presently anticipate that all earnings, if any, will be retained
for development of our business. Any future disposition of dividends will be at the discretion of our Board of Directors and will
depend upon, among other things, our future earnings, operating and financial condition, capital requirements, and other factors.
Other. Holders of Common Stock have no
cumulative voting rights. Holders of Common Stock have no preemptive rights to purchase the Company's Common Stock. There are no
conversion rights or redemption or sinking fund provisions with respect to the Common Stock.
Transfer Agent. Shares of Common Stock
are registered at the transfer agent and are transferable at such office by the registered holder (or duly authorized attorney)
upon surrender of the Common Stock certificate, properly endorsed. No transfer shall be registered unless the Company is satisfied
that such transfer will not result in a violation of any applicable federal or state security laws. The Company’s transfer
agent for its Common Stock is Continental Stock Transfer & Trust Company, 17 Battery Place, 8th Floor, New York, NY 10004,
(212) 509-4000.
Description of Preferred Stock
The Company’s Certificate of Formation,
as amended, authorizes the issuance of 20,000,000 shares of preferred stock from time to time in one or more series. The Board
of Directors is authorized to determine, prior to issuing any such series of preferred stock and without any vote or action by
the shareholders, the rights, preferences, privileges and restrictions of the shares of such series, including dividend rights,
voting rights, terms of redemption, the provisions of any purchase, retirement or sinking fund to be provided for the shares of
any series, conversion and exchange rights, the preferences upon any distribution of the assets of the Company, including in the
event of voluntary or involuntary liquidation, dissolution or winding up of the Company, and the preferences and relative rights
among each series of preferred stock. The Board of Directors has designated the following series of preferred stock:
(i) 7,900,000 shares of Series A 8% Convertible
Redeemable Preferred Stock (“Series A”), of which 447,652 shares are outstanding. Holders of the Series A have no voting
rights but may vote on a converted basis on any matter requiring shareholder vote. The Series A is senior to the Company’s
Common Stock in liquidation. While the Series A is outstanding or any dividends thereon remain unpaid, no Common Stock dividends
may be paid or declared by the Company. The Series A 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.
(ii) 9,000,000 shares of Series B Preferred
Stock (“Series B”), of which 3,056,487 shares are outstanding. Holders of the Series B are entitled to 1 votes per
share on all matters requiring shareholder vote. Each share of Series B, $1.00 par value, is convertible into 1 shares of the Company’s
Common Stock. The Series B is senior to the Company’s Common Stock and junior in priority to the Company’s Series A
in liquidation. While the Series B is outstanding, no Common Stock dividends may be paid or declared by the Company. The Series
B 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.
(iii) 100,000 shares of Series S Convertible
Preferred Stock (“Series S”), of which 100,000 shares are outstanding. Holders of the Series S are entitled to 10,000
votes per share on all matters requiring shareholder vote. Each share of Series S, $1.00 par value per share, is convertible into
100 shares of the Company’s Common Stock, subject to adjustment. The Series S is senior to the Company’s Common Stock
and junior in priority to the Company’s Series A and Series B in liquidation. While Series S is outstanding, no Common Stock
dividends may be paid or declared by the Company.
(iv) 15,000,000 shares of Series H Junior
Convertible Preferred Stock (“Series H”), of which 12,500,000 are outstanding. Holders of the Series Have entitled
to 200 votes per share and all matter holders of Common Stock at the rate of the number of Series H shares being converted multiplied
by $0.10 and divided by seventy percent (70%) of the daily weighted average of three trading days prior to such conversion. The
Series H rank junior as to dividends and the distribution of assets of the Company to the Common Stock, the Series A, the Series
B and the Series S.
Penny Stock Rules
The Securities and Exchange Commission
has also adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are
generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges
or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities
is provided by the exchange or system).
Our shares are considered penny stock under
the Securities and Exchange Act. The shares will remain penny stocks for the foreseeable future. The classification of penny stock
makes it more difficult for a broker-dealer to sell the stock into a secondary market, which makes it more difficult for a purchaser
to liquidate his/her investment. Any broker-dealer engaged by the purchaser for the purpose of selling his or her shares in us
will be subject to Rules 15g-1 through 15g-10 of the Securities and Exchange Act. Rather than creating a need to comply with those
rules, some broker-dealers will refuse to attempt to sell penny stock.
The penny stock rules require a broker-dealer,
prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document,
which:
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Contains a description of the nature and level of risk in the market for penny stock in both public offerings and secondary trading.
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Contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the Securities Act of 1934, as amended.
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Contains a brief, clear, narrative description of a dealer market, including "bid" and "ask" price for the penny stock and the significance of the spread between the bid and ask price.
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Contains a toll-free telephone number for inquiries on disciplinary actions.
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Defines significant terms in the disclosure document or in the conduct of trading penny stocks.
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Contains such other information and is in such form (including language, type, size and format) as the Securities and Exchange Commission shall require by rule or regulation.
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The broker-dealer also must provide, prior
to effecting any transaction in a penny stock, to the customer:
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The bid and offer quotations for the penny stock.
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The compensation of the broker-dealer and its salesperson in the transaction.
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The number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock.
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Monthly account statements showing the market value of each penny stock held in the customer's account.
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In addition, the penny stock rules require
that prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment
of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated
copy of a written suitability statement. These disclosure requirements will have the effect of reducing the trading activity in
the secondary market for our stock because it will be subject to these penny stock rules. Therefore, stockholders may have difficulty
selling their securities.
Recent Sales of Unregistered Securities
During the fiscal years ended December
31, 2013, 2012 and 2011, the Company issued the following securities exempt from the registration requirements of the Securities
Act pursuant to Section 4(2) of the Securities Act. No underwriting or other compensation was paid in connection with these transactions:
2013
On December 6, 2013, the Company issued
a Convertible Debenture in the amount of $2,500,000, due on December 31, 2014, without interest and convertible into shares of
the Company’s Common Stock at the rate of the daily weighted volume average price of the three trading days prior to a conversion,
multiplied by 0.55.
On November 7, 2013, Patrick Rooney, the
Company’s Chairman and Chief Executive Officer, converted previously made advances in the amount of $500,000 into 5,000,000
shares of Series H Junior Convertible Preferred Stock (the “Series H Preferred Stock”).
On April 11, 2013, the Company accepted
subscriptions from Patrick Rooney, its Chairman and Chief Executive Officer, and Corey N. Conn, its Chief Financial Officer in
the amounts of $500,000 and $250,000 respectively for an aggregate investment of $750,000. In consideration of these subscriptions,
the Company issued 7,500,000 shares of its newly created Series H Junior Convertible Preferred Stock, par value $0.01 per share
(the “Series H Preferred Stock”).
On April 12, 2013, the Company issued 621,000
shares of common stock for consulting services. On the date of the issuance, the common stock had a fair market value of $0.008
per share.
2012
On October 31, 2012, the Company issued
two convertible debentures to Patrick Rooney, its Chairman and Chief Executive Officer and Corey Conn Chief Financial Officer,
in the amount of $1,600,000. In Connection with this subscription, on November 13, 2012, the Company issued Mr. Rooney warrants
to purchase 37,500,000 shares of common stock and Mr. Conn warrants to purchase 10,500,000 shares of common stock all at the exercise
price of $0.01 per share.
On September 10, 2012, the Company converted
obligations totaling $35,605 into 10,000,000 shares of Common Stock. Of these shares, 6,666,667 shares were payable as of September
30, 2012 and were issued in October 2012.
On August 31, 2012, the Company converted
1,888,836 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 August 21, 2012, the Company issued
1,000,000 shares of Common Stock to a vendor for services.
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. Both issuances were valued at $10,000.
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 settlement
of accounts payable.
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 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 18,181,181 ,
shares of Common Stock for repayment of related party convertible debt.
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, 2014. In addition,
the Company issued 175,000 shares of Common Stock to a vendor on May 21, 2012 for services rendered valued at $2,000.
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 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 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 settlement of accounts payable. The Company recorded $26,456 loss on the settlement.
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 valued at $20,000, and 600,000 shares of Common Stock to a vendor
for services rendered valued $10,000.
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 valued at $51,000.
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 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, 2014, and extended
the expiration dates of 30,000,000 warrants which had expired to December 31, 2014. 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, 2014,
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, 2014.
On January 9, 2012, the Company issued
1,400,000 shares to a vendor for services.
2011
In October 2011, the Company issued 500,000
shares of common stock for consulting services.
In October 2011, the Company issued 113,636
shares of its Series B Convertible Preferred Stock in exchange for the conversion of a promissory note in the aggregate principal
amount of $100,000.
In November 2011, the Company issued 100,000
shares of its Series B Convertible Preferred Stock for consulting services valued at $130,000.
During the quarter ending September 30,
2011, investors exercised warrants on preferred stock for which the Company received $270,000 in cash proceeds and issued 270,000
shares of Series B preferred stock. In addition, the Company received $250,000 in cash proceeds for warrants and issued 125,000
shares of Series B preferred stock, which were exercised at December 31, 2010, and recorded as receivable from warrants exercise
at December 31, 2010.
On August 2, 2011, the Company issued 3,000
shares of Series B stock to an unrelated party for consulting services valued at $9,000.
On July 15, 2011, the Company issued 500,000
shares of common stock to an unrelated party for consulting services valued at $17,000.
During the quarter ending June 30, 2011,
the Company issued 10,000,000 shares of common stock to an unrelated third party for consulting services valued at $290,000.
During the quarter ending June 30, 2011,
warrant holders exercised warrants on preferred stock for which the Company received $325,000 in cash proceeds and issued 130,000
shares of Series B preferred stock.
On June 21, 2011, the Company issued 11,500
shares of Series Preferred B stock to two unrelated parties for consulting services valued at $33,000.
On April 6, 2011 and May 27, 2011, the
Company issued 300,000 and 2,300,000 shares of common stock, respectively, to two, unrela
t
ed parties for consulting services
valued at $12,000 and $67,000, respectively.
On May 26, 2011, the Company issued 424,242
Series B Convertible Preferred Stock upon the conversion of certain convertible debentures in the aggregate amount of $700,000.
During the quarter ending March 31, 2011,
investors converted 20,000 shares of Series B Preferred Stock into 2,000,000 shares of common stock.
During the quarter ending March 31, 2011,
we received $575,000 for the exercise of warrants and issued 255,000 shares of Series B Preferred Stock in connection with the
exercise of these warrants.
On February 15, 2011, the Company issued
3,000 shares of Series B Preferred Stock to an unrelated party for consulting services. On the date of issuance, the common stock
had a fair market value of $0.04 per share. The Company recorded consulting fee expense of $12,000 for the issuance of the shares.
Unless noted above, the sales of the securities
identified above were made pursuant to privately negotiated transactions that did not involve a public offering of securities and,
accordingly, we believe that these transactions were exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) thereof and rules promulgated there under. Each of the above-referenced investors in our stock represented to us in
connection with their investment that they were “accredited investors” (as defined by Rule 501 under the Securities
Act) and were acquiring the shares for investment and not distribution, that they could bear the risks of the investment and could
hold the securities for an indefinite period of time. The investors received written disclosures that the securities had not been
registered under the Securities Act and that any resale must be made pursuant to a registration or an available exemption from
such registration. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act.
Item
6. Selected Financial Data
Not applicable for smaller reporting companies.
Item
7. Management’s Discussion and Analysis or Plan of Operation
The following discussion and analysis
of our financial condition and results of operations should be read in conjunction with our selected financial data and our financial
statements and the accompanying notes included in this annual report. The following discussion may contain forward-looking statements
that reflect our plans, estimates and beliefs and involve risks, uncertainties and assumptions. Our actual results could differ
materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences
include those discussed below and under the headings “Risk Factors” and “Forward-Looking Statements.”
Overview
Positron Corporation is a nuclear medicine
healthcare company specializing in the field of cardiac Positron Emission Tomography (PET) imaging. Cardiac PET is the superior
method in diagnostic nuclear imaging for the detection of coronary artery disease (CAD)
Positron’s products and services
enable healthcare providers to more accurately diagnose disease and improve patient outcomes, while practicing cost effective medicine.
Positron is the only company that will provide an economical, end-to-end solution for PET myocardial perfusion imaging through
complementary product integration of PET imaging systems, radiopharmaceuticals, and radioisotopes.
The Company believes its unique proprietary
products, market position and vertically integrated strategy will lead to accelerated adoption and growth of the cardiac PET modality
in the U.S. and emerging markets. Through leadership within our field, Positron intends to gain a dominant market position with
strong earnings potential, ultimately becoming a sustained, long-term value creator for industry participants and our shareholders.
The Company
Positron, a pioneer in cardiac PET, is
well branded in the field of nuclear cardiology. Founded in 1983, Positron has gained significant traction in the industry based
on its imaging technology and strong commitment towards advancing cardiac care. Originally a research & development company,
Positron’s business strategy has evolved and grown over the past several years. Positron has expanded from a medical imaging
device manufacturer to a nuclear healthcare company integrating the key components of the cardiac PET supply chain to provide an
end-to-end solution for the market. Led by an experienced management team, Positron has become a true business enterprise with
strong recurring revenue generating business model scalable to the global marketplace.
The Company believes that our unique products,
market position and vertical integration strategy will stabilize and secure the supply chain, significantly reducing costs and
industry uncertainties, a substantial advantage, leading to further adoption and growth of the cardiac PET modality.
Positron is the only commercial resource
in the U.S. with practical knowledge and experience in all stages of Sr-82 production and generator lifecycle management. Positron
seeks to secure both short and long-term supply of radioisotopes used in cardiac PET imaging. Currently, the Company is producing
Active Pharmaceutical Ingredient (API) grade Sr-82 at its Lubbock, Texas, facility from strontium received from foreign irradiated
source suppliers. The Company intends to further supplement strontium resources by pursuing additional supply agreements with all
domestic and foreign irradiated source suppliers, requesting increases in production schedules from third party suppliers, and
by recycling expired generators. Positron seeks to secure a long-term North America supply of medical radioisotopes for cardiac
PET imaging by building and operating the world’s largest commercial high-energy/high-current cyclotron (70MeV) within the
U.S. This 70 MeV cyclotron will be at the heart of providing a reliable, dependable, and indigenous supply of radioisotopes, stabilizing
and building confidence in the PET market and nuclear medicine community overall. Securing and delivering a reliable supply of
radioisotopes should also increase the demand for Positron’s complementary products.
Positron’s business strategy is to
gain a dominant market share through the vertical integration of such key components: imaging technologies, clinical services,
radiopharmaceutical and radioisotope processing, production, and distribution. Positron creates market efficiencies by integrating
these critical components. Positron intends to maximize market share by offering cost-effective, value added solutions to end-users
that meet the current and future nuclear cardiology market demands.
PET vs. SPECT
There are two main imaging modalities utilized in nuclear cardiology:
Single Photon Emission Computed Tomography, or SPECT, and Positron Emission Tomography, or PET.
In myocardial perfusion imaging, PET has
been proven to be superior in sensitivity and specificity when compared to SPECT, the more commonly utilized modality. Cardiac
PET scans, with Rb-82 Chloride or Nitrogen-13 Ammonia (N-13), result in a lower patient radiation exposure and is capable of performing
superior quantitative measurements such as coronary flow reserve. Cardiac PET imaging has been shown to provide a 50% reduction
in invasive coronary arteriography and coronary artery bypass grafting, leading to a 30% costs savings and improved clinical outcomes,
when compared to SPECT (M.E. Merhige, M.D., et al. Journal Nuclear Medicine 2007; 48:1069-1076).
The cardiac PET equipment market is much
smaller than SPECT, but has seen significant annual growth of 30% during the last decade. According to Bracco Diagnostics, there
were approximately 160 dedicated cardiac PET & PET/CT scanners performing nuclear cardiology within the U.S. in 2012, a tenfold
increase since 2006.
Barriers to entry
For many years, one of the major constraints
for adoption of this modality had been the high cost of PET and PET/CT scanners. Many practices and hospitals could not justify
the cost of a new system for cardiac studies. In 2010, Positron received FDA clearance to market and distribute its dedicated PET
system, which is optimized for nuclear cardiology. The Attrius is the only new, cost effective, dedicated PET system available
on the market. Other system manufacturers (GE, Philips, Siemens) offer PET/CT cameras, which have a 200%-300% higher purchase price;
PET/CT systems also possess attributes that may affect the accuracy of a perfusion study, leading to false positives.
Another more recent issue that has slowed
the growth of nuclear cardiology is the shortage of the key drugs utilized in both SPECT (Mo-99/Tc-99m) and PET imaging (Sr-82/Rb-82).
The Sr-82 isotope decays to produce the
Rb-82 tracer utilized in cardiac PET studies. Rb-82 is the most commonly used cardiac PET tracer in the United States. The FDA
approved Rb-82 in 1989 for use in the detection of coronary artery disease and the Health Care Financing Administration approved
reimbursement for Rb-82, PET MPI, in 1995 as a first line test in symptomatic patients. Rubidium is uniformly available through
generator production in the U.S. and is used in conjunction with an automatic infusion system.
Over the past five years the explosive
growth of cardiac PET imaging has driven a significant increase in the use of Sr-82/Rb-82 generators. The increasing demand for
Sr-82 is beginning to outpace supply. Until recently, the U.S. Department of Energy had been the only entity in the United States
capable of providing this material. In August of 2012, MIT submitted its DMF with the FDA and has begun production of API grade
strontium-82.
Due to the growing demand and limited supply,
the industry suffered a Sr-82 shortage in January 2011, effecting supply of Rb-82 generators. The same year Bracco Diagnostics
Inc., the sole market supplier of the Rb-82 generator, underwent a voluntary recall of generators, further stunting industry sales
and growth.
Positron is acutely focused on production
of Sr-82. Positron possesses certain resources and technical advantages, unique to MIT, which will increase current and future
strontium supply. Positron anticipates the cardiac PET market to rebound in Q2 2013, beginning with Bracco’s ability to now
accept new generator customers, and with accelerated expansion upon market entry of the DraxImage’s generator, once FDA approved.
70 MeV Cyclotron Project
Pursuing a strategy of complementary product
integration, Positron seeks to build and operate a high-energy cyclotron facility used primarily for the production of medical
diagnostic imaging and radiotherapy isotopes. The proposed 70MeV cyclotron is unique and capable of producing isotopes that are
not available, or have very limited availability, from other commercial sources in the United States.
The major isotope to be produced is Sr-82,
which is currently in short supply worldwide and is produced in the U.S. only by the U.S. Department of Energy (DOE) National Laboratories
in Los Alamos, New Mexico and Brookhaven, New York. Sr-82 is the parent isotope used in the production of Rb-82 generators for
PET myocardial perfusion imaging. Positron will have an access to a Rb-82 generator through a proprietary relationship with a major
manufacturer or its own Rb-82 generator and intends to utilize all Sr-82 produced by the facility to supply its cardiac PET client
base. This allows Positron to have a complete, integrated, supply chain. Positron’s captive customer base of Attrius®
owners and the existing robust PET users require a constant supply of radiopharmaceuticals manufactured from the Sr-82 radioisotope,
giving us a significant advantage against any potential commercial competition.
A key point in determining the competitive
landscape of U.S. Sr-82 production is the policy of the DOE to not compete with the private sector. While the DOE produces a majority
of Sr-82 in the world, once Sr-82 is reasonably available commercially, the DOE can be compelled to withdraw from the market.
With the recent growth of cardiac PET imaging,
the supply of isotopes is quickly moving towards capacity within the next one-three years. Annual demand for medical imaging products,
produced by a high-energy cyclotron, are currently estimated at over $20 million and is expected to reach $30-35 million over the
next few years, with continued growth estimated at 25-30% per year thereafter.
The DOE lists many isotopes for medical
treatment or diagnostics that are in short supply, some of which can be produced in a high-energy commercial accelerator. Moving
from R&D to clinical trials and then to commercial use, these isotopes will further expand the market. Additionally, using
secondary targets, a high-energy cyclotron can also produce low-energy isotopes, in conjunction with, the production of high-energy
isotopes, generating additional revenue. Positron Corporation can be a key market maker in all these segments and can enter the
market, essentially, without competition. The revenue potential and diversity inherent in this project is considerable.
Our Market
According to the U.S. Department of Health
and Human Services, there are more than 22,000 cardiovascular diseases specialists in the U.S., and their number will increase
to 31,000 by 2020. This is the target market for our products and services, as well as hospitals in the United States that performs
or could perform nuclear cardiac procedures and want to automate the delivery of radiopharmaceuticals. By adding complimentary
products, we are able to offer customers value added solutions which include low cost molecular imaging devices, maintenance service,
disease specific software, radiopharmaceutical unit doses drawing devices, and, potentially, radiopharmaceuticals agents for Cardiac
Nuclear Medicine.
Cardiac Nuclear medicine helps in the diagnosis,
management and prevention of cardiovascular disease (CVD) in patients. Radiopharmaceuticals are injected into a patient to provide
the most accurate, non-invasive test for identifying narrowed coronary arteries, mild cholesterol build-up or diffuse coronary
vascular disease, conditions that are responsible for almost all heart attacks.
Cardiovascular disease is the leading cause
of death in the United States and constitutes 17% of overall national health expenditures (Forecasting the Future of Cardiovascular
Disease in the United States, American Heart Association, 2011). Direct CVD costs are projected to increase from $273 Billion,
in 2010, to $818 Billion, in 2030; with indirect costs, due to lost productivity, expected to rise from $172 Billion to $276 Billion
by 2030.
Market Potential
The cardiac PET industry has an indisputable
need for a stable, efficient and economical environment. Through Positron’s leadership and vision to integrate each key segment
of the cardiac PET supply chain, the Company will stimulate growth and increase capacity to meet the needs of the global cardiac
PET market. Positron intends to become the premier product, services, and solutions provider in the nuclear cardiology industry.
Although the cardiac PET industry experienced
its most challenging year ever, it enabled the Company to aggressively pursue its strategy toward aggregating and integrating the
key components critical in securing the cardiac value chain. Positron is dedicated to lowering the barriers that have been constricting,
or could later constrict, the progress of medical advancements in cardiac PET. Through our efforts to supplement the supply of
key radioisotopes and our ability to offer innovative products and services, management has methodically positioned Positron to
become the industry’s only end-to-end solutions provider. PET is the future of nuclear cardiology.
We believe that Positron is the only company
with the critical components to vertically integrate the fragmented “single source supplier environment” that exists
in the cardiac PET market today and that these initiatives are intended to drive the Company towards consistent profitability and
cash flow.
Results of Operations
Consolidated results of operations for
the years ending December 31, 2013 and 2012 include Positron and its wholly-owned subsidiaries: Positron Isotope Corporation (“PIC”)
and Manhattan Isotope Technology LLC (“MIT”), since its acquisition on January 17, 2012.
Revenues
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Revenues for the year ended December 31, 2013 were approximately $1,630,000 as compared to $2,801,000 for the year ended
December 31, 2012. There were no PET systems sold during the year ended December 31, 2013 as compared to $1,142,000 in 2012, which accounted for the significant decrease in revenues. Sales of PET systems during
2013 have been negatively impacted by the shortage of Sr-82/Rb-82 generators supplied to cardiac imaging facilities by
Bracco Diagnostics due to the voluntary recall of their Rb-82 generator and limited production capacity or supply of the
parent isotope Sr-82.
Costs of Sales
- Costs
of sales for the year ended December 31, 2013 were approximately $1,206,000 compared to $1,972,000 for the year ended December
31, 2012. Costs were lower in 2012 principally due to the lower sales of the PET systems.
Operating Expenses
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The Company’s operating expenses were approximately $3,762,000 for the year ended December 31, 2013 compared to $5,551,000
for the year ended December 31, 2012.
General and administrative expenses during
the year ended December 31, 2013 were $2,779,000 as compared to $4,326,000 for the year ended December 31, 2012. The company recorded
$1,494,000 in stock based compensation in 2012, compared to $656,000 in 2013.
Research and development costs for the
year ended December 31, 2013 were approximately $564,000 compared to $940,000 for the year ended December 31, 2012. Research and
development costs included mostly payroll, contract labor and consulting fees for Attrius® software and the PosiRx® development.
In addition, the Company has incurred research and development costs related to its planned radiopharmaceutical facility in preparation
for regulatory approvals and production. The Company intends to continue to support research and development in software, radiopharmaceutical
products and automated devices.Sales and marketing expense for the years ended December 31, 2013 and 2012 were $419,000 and $285,000,
respectively and were lower in 2012 due to the Company’s efforts to limit expenditures during the recall period of the Bracco
Diagnostics rubidium generator.
Other Expenses
–
During the years ended December 31, 2013 and 2012, the Company recorded other expenses of approximately $3,766,000 and $3,233,000,
respectively. Other expenses include interest expense, derivative expenses, debt modification expense and other gains and losses.
Interest expense was $2,137,000 and $1,753,000
for the years ended December 31, 2013 and 2012, respectively. $1,910,000 and $1,380,000 of the total interest expense for the years
ended December 31, 2013 and 2012, respectively, was related to the accretion of debt discount associated with convertible debt.
Company recorded derivate loss of $665,000
and $726,000, for the years ended December 31, 2013 and 2012, respectively, in connection with the embedded conversion derivative
liabilities related to convertible debt and warrant extensions.
During the years ended December 31, 2013
and 2012, the Company recognized expense of $821,000 and $432,000, respectively, on the modification of the terms of the convertible
debentures.
During the year ended December 31, 2012,
the Company also recorded $18,000 loss on the disposal of property and equipment, $282,000 loss on settlement and other expenses
of $22,000. The Company recorded other expenses of $143,000 in 2013 related to foreign exchange adjustments.
Net Loss
- For the
year ended December 31, 2013, the Company had a net loss approximately of $7,104,000, or $0.00 per share, compared to a net loss
of $7,955,000, or $0.01 per share, for the year ended December 31, 2012.
Liquidity and Capital Resources
Since inception, the Company has expended
substantial resources on research and development. The Company has sustained substantial losses due to the limited number of systems
sold or placed into service each year. Revenues have also fluctuated significantly from year to year. The Company had an accumulated
deficit of approximately $123,432,000 at December 31, 2013. The Company will need to increase sales of systems, services, radiopharmaceuticals
and radioisotopes and apply the research and development advancements to achieve profitability in the future. Prior to the voluntary
recall of Sr-82/Rb-82 generators by Bracco Diagnostics, the Company had experienced an increase in sales with the launch of Attrius®
PET system and expected additional increase in revenue through sales of automated radiopharmaceutical systems and recurring revenue
from the sale of radiopharmaceuticals and radioisotopes. With an increase in sales, all systems material cost of goods and labor
costs will be significantly lower. The Company expects that these developments will have a positive impact on the sales & service
volumes and increased net margins. However, there is no assurance that the Company will be successful in selling new systems.
The Company's ability to achieve its objectives
is dependent on its ability to sustain and enhance its revenue stream and to continue to raise capital until such time as the Company
achieves profitability. To date, management has been successful in raising capital as needed for the continued operations of the
Company. There is no guarantee that management will be able to continue to raise needed capital in this fashion.
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 registered public
accountants, which accompanied the financial statements for the year ended December 31, 2013, is 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.
At December 31, 2013, the Company had current
assets of $2,573,000 and total assets of $3,882,000 compared to December 31, 2012, when current assets were $1,104,000 and total
assets were $2,685,000. The Increase in current assets is attributable primarily to the sales of convertible securities of approximately
$2,520,000 during December 2013.
Current liabilities at December 31, 2013
were $14,657,000 compared to $8,110,000 at December 31, 2012. At December 31, 2013 and 2012, current liabilities was largely comprised
of accounts payable and accrued liabilities, customer deposits, unearned revenue, current portion of notes payable, convertible
debt and embedded conversion derivative liabilities. The increase in current liabilities as of December 31, 2013 is largely due
to the $2,987,000 increase in the embedded derivative liability associated with the convertible debentures, and increase in the
current portion of notes payable of $1,159,000.
Net cash used in operating activities during
the year ended December 31, 2013 was $3,046,000 compared to $2,240,000 used in operating activities during the year ended December
31, 2012. The increase is primarily due to an increase in prepaid expenses and other assets caused by a $200,000 deposit to Neusoft
to construct Attrius Systems placed during 2013, as well as increased non-cash changes which decreased net loss in 2013.
Net cash used in investing activities was
$16,000 for the year ended December 31, 2013 compared to $72,000 for the year ended December 31, 2012, was related primarily to
purchases of property and equipment.
Net cash provided by financing
activities was $4,563,000 and $2,554,000 for the years ended December 31, 2013 and 2012, respectively. During the year ended
December 31, 2013, cash from financing activities was comprised of $2,520,000 proceeds from the issuance of convertible debt,
$2,245,000 proceeds from non-interest bearing advances, which were partially offset by repayments of notes payable of
$100,000, repayments of convertible debt of $100,000 and repayment of capital lease borrowings of $2,000. During
the year ended December 31, 2012, cash from financing activities was comprised of $2,210,000 proceeds from the issuance of
convertible securities, $305,000 proceeds from borrowing under notes payable, $65,000 proceeds from non-interest bearing
advances, $383,000 proceeds from issuance of common stock, which got partially offset by repayments of notes payable of
$324,000 and repayments of non-interest bearing advances of $85,000.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any transactions
with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other
contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligations under a variable
interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.
Recently Issued Accounting Standards
Pronouncements issued by the FASB or other
authoritative accounting standards group with future effective dates are either not applicable or not significant to the consolidated
financial statements of the Company.
Critical Accounting Policies
The discussion and analysis of our financial
condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance
with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amount of assets and liabilities and related disclosure of contingent assets and liabilities
at the date of our financial statements and the reported amounts of revenues and expenses during the applicable period. Actual
results may differ from these estimates under different assumptions or conditions.
We define critical accounting policies
as those that are reflective of significant judgments and uncertainties and which may potentially result in materially different
results under different assumptions and conditions. In applying these critical accounting policies, our management uses its judgment
to determine the appropriate assumptions to be used in making certain estimates. These estimates are subject to an inherent degree
of uncertainty. Our critical accounting policies include the following:
Revenue Recognition
The Company’s revenues are currently
derived from the sale of medical equipment products, maintenance contracts, service revenues and radioisotope sales. 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 and radioisotope 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® PET systems.
For 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.
Stock Compensation
We have granted stock options to employees,
directors and consultants, as well as warrants to other third parties. The value of each option
award is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model takes into account
volatility in the price of our stock, the risk-free interest rate, the estimated life of the option, the closing market price of
our stock and the exercise price. We base our estimates of our stock price volatility on the historical volatility of our common
stock and our assessment of future volatility; however, these estimates are neither predictive nor indicative of the future performance
of our stock. For purposes of the calculation, we assumed that no dividends would be paid during the life of the options and warrants.
The estimates utilized in the Black-Scholes calculation involve inherent uncertainties and the application of management judgment.
In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those equity awards expected
to vest. As a result, if other assumptions had been used, our recorded stock-based compensation expense could have been materially
different from that reported.
Embedded conversion derivative liabilities
Embedded conversion derivative liabilities
are recorded as liabilities at their estimated fair value at the date of issuance, with subsequent changes in estimated fair value
recorded in other income (expense) in the Company’s statement of operations in each subsequent period. The embedded conversion
derivative liabilities are measured at estimated fair value using the Black Scholes model. Inherent in this model are assumptions
related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield. We estimate volatility at
the date of issuance, and at each subsequent reporting period, based on historical volatility that matches the expected remaining
life of the embedded conversion derivative liabilities. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield
curve. The expected life of the embedded conversion derivative liabilities is assumed to be equivalent to their remaining contractual
term. The dividend rate is based on our historical rate, which we anticipate to remain at zero. The assumptions used in calculating
the estimated fair value of the embedded conversion derivative liabilities represent our best estimates, however these estimates
involve inherent uncertainties and the application of management judgment. As a result, if factors change and different assumptions
are used, the embedded conversion derivative liabilities and the change in estimated fair value could be materially different.
Allowance for doubtful accounts
Our allowance for doubtful accounts reflects
reserves for customer and other receivables to reduce receivables to amounts expected to be collected. Management uses significant
judgment in estimating uncollectible amounts. In estimating uncollectible accounts, management considers factors such as current
overall economic conditions, industry-specific economic conditions, historical customer performance and anticipated customer performance.
While we believe these processes effectively address our exposure for doubtful accounts and credit losses have historically been
within expectations, changes in the economy, industry, or specific customer conditions may require adjustments to the allowance
for doubtful accounts. As of December 31, 2013 and 2012, the allowance for doubtful accounts was $140,800 and $50,000, respectively.
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.
Management assesses the recoverability
of the various inventory components on a quarterly basis and is based on the estimated net realizable values of respective finished
and in process inventories.
Information Regarding and Factors Affecting
Forward Looking Statements
The Company is including the following
cautionary statement in this Annual Report on Form 10-K to make applicable and take advantage of the safe harbor provision of the
Private Securities Litigation Reform Act of 1995 for 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,
management’s examination of historical operating trends, data contained in the Company’s records and other data available
from third parties, but there can be no assurance that management’s expectations, beliefs or projections will result or be
achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors
that, in the view of the Company, could cause actual results to differ materially from those discussed in the forward looking statements:
the ability of the Company to attain widespread market acceptance of its systems; the ability of the Company to obtain acceptable
forms and amounts of financing to fund future operations; demand for the Company’s services; and competitive factors. The
Company disclaims any obligation to update any forward looking statements to reflect events or circumstances after the date hereof.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.
Item
8. Financial Statements
The required Financial Statements and the
notes thereto are contained in a separate section of this report beginning with the page following the signature page.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item
9A. Controls and Procedures
|
(a)
|
Evaluation of Disclosure Controls and Procedures
|
Our principal executive officer and principal
financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of December 31, 2013, have concluded that, based on such evaluation, our disclosure controls and procedures
were effective 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 SEC’s rules and forms, and
is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Notwithstanding the foregoing, we have
identified the following material weakness in our disclosure procedures:
Audit Committee and Financial Expert
- The Company does not have a formal audit committee with a financial expert, and thus the Company lacks the board oversight
role within the financial reporting process.
There can be no assurance that the Company’s
disclosure controls and procedures will detect or uncover all failures of persons within the Company to disclose material information
otherwise required to be set forth in the Company’s periodic reports. There are inherent limitations to the effectiveness
of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding
of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable, not
absolute, assurance of achieving their control objectives.
|
(b)
|
Management’s Report on Internal Control over Financial Reporting
|
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule
13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, our principal executive and
principal financial officers, management and other personnel, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles,
and includes those policies and procedures that:
|
·
|
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
|
|
·
|
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management; and
|
|
·
|
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
|
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
Our management assessed the effectiveness
of our internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria
set forth by the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, or the COSO criteria. Based on this assessment, management believes that, as of December 31, 2013, our internal control
over financial reporting was effective at a reasonable assurance level based on these criteria.
This annual report does not include an
attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's
report was not subject to attestation by the Company's independent registered public accounting firm pursuant to rules of the Securities
and Exchange Commission that permit the Company to provide only management's report in this annual report.
|
(c)
|
Changes in Internal Control over Financial Reporting
|
There have been no changes in the Company’s internal control over financial reporting during the most recent
fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
Item
9B. Other Information
None.
SELECTED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
1.
|
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Description of Business
Positron Corporation (the “Company”)
was incorporated on December 20, 1983 in the state of Texas and commenced commercial operations in 1986. Positron Corporation
is a nuclear medicine healthcare company. The Company offers positron emission tomography molecular imaging systems, clinical
and support services, automated radiopharmaceutical systems, radiopharmaceuticals and radioisotope processing and production.
The molecular imaging systems portion
of the business provides Positron Emission Tomography (PET) scanners. The automated radiopharmaceutical system portion of the
business offers the world’s first robotic system for the preparation and dispensing of radiopharmaceuticals that provides
unit dose radiopharmaceutical agents used in molecular imaging. The radioisotope manufacturing portion of the business enables
the Company to process and produce radioisotope(s) that are critical components required in nuclear imaging.
The Company’s objective is to generate
revenue by offering inexpensive molecular imaging systems and support services, disease specific software, automated radiopharmaceutical
dose preparation and dispensing system, radiopharmaceutical(s) and radioisotope(s) for nuclear medicine primarily in the field
of cardiac nuclear medicine.
On January 17, 2012, the Company acquired
all of the issued and outstanding membership interest of Manhattan Isotope Technology LLC (“MIT”). See Note 3.
MIT possesses the unique and
specialized expertise in all stages of strontium-82 (Sr-82) production and spent generator lifecycle management. Currently,
MIT produces API grade strontium-82 from target material received from its foreign collaborators.
Positron Isotopes Corporation (PIC)
was formed to investigate the possibility of building a cyclotron.
Principles of Consolidation
For the years ended December 31,
2013 and 2012, the financial statements include the transactions of Positron Corporation and its wholly-owned subsidiaries,
MIT, Positron Pharmaceuticals Company and PIC. All intercompany transactions have been eliminated.
Basis of Presentation and Use of Estimates
These financial statements have been prepared
in conformity with accounting principles generally accepted in the United States of America (GAAP). Such principles require 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 and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Affiliated Entities
Affiliated entities and their affiliation,
as defined by FASB Codification Topic 850 are as follows:
Solaris Opportunity Fund owns or controls
common and preferred shares of the Company and its managing member is the CEO of the Company.
The Company has a 1% ownership interest
in the joint venture Neusoft Positron Medical Systems ("Neusoft"). Both the Company and the joint venture's other partner,
Neusoft Medical Systems purchase PET systems at a wholesale transfer price from Neusoft. The Company maintains one of five board
seats on Neusoft's board. The Company currently accounts for its investment in Neusoft on the cost method and has no recorded
value as of December 31, 2013 and 2012 based on prior losses of Neusoft.
Concentrations of Credit Risk
The Company maintains its cash in institutions
insured by the Federal Deposit Insurance Corporation (FDIC) and at times, balances may exceed government insured limits. The Company
has never experienced any losses related to these balances.
During the twelve months ended December
31, 2013, no one customer accounted for more than 10% of sales and a separate customer accounted for 80% of accounts receivable.
During the twelve months ended December 31, 2012, one customer accounted for 26% of sales and a separate customer accounted for
70% of accounts receivable.
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.
Accounts Receivable
Accounts receivable consist of amounts
due from customers. The Company records a provision for doubtful accounts to allow for any amounts which may be unrecoverable,
which is based upon an analysis of the Company’s prior collection experience, customer creditworthiness and current economic
trends.
Goodwill and Other Intangible Assets
Accounting Standard Codification (“ASC”)
350 “Goodwill and Other Intangible Assets” requires that assets with indefinite lives no longer be amortized, but
instead be subject to annual impairment tests. The Company follows this guidance.
The Company tests goodwill that is
not subject to amortization for impairment annually or more frequently if events or circumstances indicate that impairment is
possible. Goodwill was tested as of December 31, 2013 at which time the Company determined that the carrying value of
goodwill was impaired. Impairment loss of $346,000 was recognized during the year ended December 31, 2013.
The impairment tests performed
at December 31, 2013 and 2012 were based on a discounted cash flow model using management’s business plan projection for
expected cash flows. As noted above, it was determined goodwill was fully impaired at December 31, 2013. As of December 31,
2012, no impairment was indicated. Goodwill as of December 31, 2013 and 2012 was $0 and $346,000, respectively.
Definite lived intangible assets are being
amortized over their useful lives.
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. Management assesses the
recoverability and establishes reserves of the various inventory components on a quarterly basis and is based on the estimated
net realizable values of respective finished, in process and raw material inventories.
Property and Equipment
Property and equipment are recorded at
cost and depreciated for financial statement purposes using the straight-line over estimated useful lives below:
|
|
Estimated life,
years
|
Buildings
|
|
39
|
Furniture and fixtures
|
|
5-7
|
Leasehold improvements
|
|
1-3
|
Computer equipment
|
|
3-5
|
Research equipment
|
|
7
|
Machinery and equipment
|
|
3-5
|
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 long-lived assets, by comparing the anticipated future net cash flows associated with those assets to the
related net book value. If impairment is indicated as a result of such reviews, the Company would record the impairment based
on the fair market value of the assets, using techniques such as projected future discounted cash flows or third party valuations.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities 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.
|
·
|
Level
1 — Quoted prices in active markets for identical assets or liabilities. These
are typically obtained from real-time quotes for transactions in active exchange markets
involving identical assets.
|
|
·
|
Level
2 — Quoted prices for similar assets and liabilities in active markets; quoted
prices included for identical or similar assets and liabilities that are not active;
and model-derived valuations in which all significant inputs and significant value drivers
are observable in active markets. These are typically obtained from readily-available
pricing sources for comparable instruments.
|
|
·
|
Level
3 — Unobservable inputs, where there is little or no market activity for the asset
or liability. These inputs reflect the reporting entity’s own beliefs about the
assumptions that market participants would use in pricing the asset or liability, based
on the best information available in the circumstances.
|
The following table presents the embedded
conversion derivative liabilities, the Company’s only financial liabilities 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 December 31, 2013 and 2013
and 2012 (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion derivative liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,981
|
|
The following table reconciles, for the year ended December
31, 2013 and 2012, the beginning and ending balances for financial instruments that are recognized at fair value in the consolidated
financial statements (in thousands):
Balance of embedded conversion derivative liability as of December 31, 2011
|
|
$
|
1,238
|
|
Fair value of embedded conversion derivative liabilities at issuance
|
|
|
2,129
|
|
Reductions in fair value due to conversion of Convertible Debentures into common stock
|
|
|
(544
|
)
|
Debt modification expense
|
|
|
432
|
|
Loss on fair value adjustments to embedded conversion derivative liabilities
|
|
|
726
|
|
Balance of embedded conversion derivative liability as of December 31, 2012
|
|
$
|
3,981
|
|
Fair value of embedded conversion derivative liabilities at issuance
|
|
|
1,501
|
|
Debt modification expense
|
|
|
821
|
|
Loss on fair value adjustments to embedded conversion derivative liabilities
|
|
|
665
|
|
Balance of embedded conversion derivative liabilities at December 31,
2013
|
|
$
|
6,968
|
|
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
statement 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:
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Market value of stock on measurement date
|
|
$
|
0.0048
|
|
|
$
|
0.0085
|
|
Risk-free interest rate
|
|
|
0.11
|
%
|
|
|
0.15
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility factor
|
|
|
200
|
%
|
|
|
141
|
%
|
Term
|
|
|
1 year
|
|
|
|
1 year
|
|
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. When the debt is repaid, the related debt
discount is recorded as additional interest expenses and the related derivative liability is relieved into additional paid in
capital.
The Company valued the embedded derivative
conversion using Black-Scholes method. The debt discount attributable to the warrants issued with convertible debentures during
the years December 31, 2013 and 2012 was $0 and $331,000, respectively. The debt discount attributable to the embedded conversion
derivative liability at issuance during the years ended December 31, 2013 and 2012 was $1,500,000 and $2,129,000, respectively.
At December 31, 2013,
convertible notes totaled $5,780,000 of which $1,328,000 was attributable to the discount on debt. These notes originally
were set to mature on December 31, 2013 but were extended under existing terms through December 31, 2014 or were presented
for conversion subsequent to year end.
Income Taxes
Income taxes are accounted for under the
liability method. Deferred income taxes are provided for temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and amounts used for income tax purposes. Deferred taxes are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion or the entire deferred tax asset will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the
enactment. We recognize tax benefits when we believe the benefit is more likely than not to be sustained upon review from the
relevant authorities. We recognize penalties and interest expense related to unrecognized tax benefits in income tax expense.
The Company’s federal and
state tax forms for the years ending December 31, 2010, 2011 and 2012 are subject to examination by the IRS or other taxing
authorities, generally for three years after they are filed.
Accumulated Other Comprehensive Income
Accumulated other comprehensive
income relates to foreign currency translation adjustments associated with transactions denominated in foreign currency. The
balance of accumulated other comprehensive income as of December 31, 2012 was $143,000. During the year ended December 31,
2013 the entire balance was reclassified to net income.
Revenue Recognition
The Company’s revenues are currently
derived from the sale of medical equipment products, maintenance contracts, service revenues and radioisotope sales. 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 and radioisotope 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® PET systems.
For 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.
The Company typically provides
a one-year parts and labor warranty to purchasers of equipment. A portion of revenue recorded upon the sale of a new machine
is allocated to the warranty provided. At the time of sale, the Company records deferred revenue in the amount of revenue
allocated to the warranty which is amortized over a one-year period.
Research and Development Expenses
All costs related to research and development
costs are charged to expense as incurred and include salaries and benefits, supplies and consulting expenses.
Stock Based Compensation
We recognize compensation expense for
share-based awards using the fair value of the option at the time of the grant and amortizing the fair value over the estimated
service period on the straight-line attribute method.
Loss Per Common Share
Basic loss per common share
is calculated by dividing net loss by the weighted average common shares outstanding during the period. Stock options, warrants and other dilutive securities 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 periods presented in the Statement of Operations and
Comprehensive Income, as the effect would be antidilutive.
Recent Accounting Pronouncements
The Company has implemented all new accounting
pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new
accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
Since inception, the Company has expended
substantial resources on research and development. Consequently, we have sustained substantial losses. Due to the limited number
of products sold each year, revenues have fluctuated significantly from year to year and has not sold quantities that are sufficient
to be operationally profitable. The Company had an accumulated deficit of $123,432,000 and a stockholders’ deficit of $11,241,000
at December 31, 2013. The Company will need to resume and increase sales of PET and radiopharmaceutical systems, services, radiopharmaceuticals
and radioisotope sales and apply the research and development advancements to achieve profitability in the future. There can be
no assurance that the Company will continue to be successful in selling products.
The Company utilized $2,520,000 proceeds
from issuance of convertible debt, $2,285,000 proceeds from non-interest bearing advances, and proceeds from borrowings under
capital lease to fund operating activities during the year ended December 31, 2013. The Company had cash and cash equivalents
of $1,744,000 at December 31, 2013, accounts payable and accrued liabilities of $1,401,000 and a negative working
capital of $12,084,000. 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 $12,000 in 2012.
The following table summarizes the consideration
transferred to acquire MIT at the acquisition date:
Fair Value of Consideration Transferred:
Common stock of Company
|
|
$
|
50,000
|
|
Contingent consideration
|
|
|
205,297
|
|
Total
|
|
$
|
255,297
|
|
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.
Cash
|
|
$
|
829
|
|
Equipment and leasehold improvements
|
|
|
653,567
|
|
Patent
|
|
|
14,000
|
|
Trade and other payables
|
|
|
(59,282
|
)
|
Note payable
|
|
|
(700,000
|
)
|
Net liabilities assumed
|
|
$
|
(90,886
|
)
|
|
|
|
|
|
Goodwill
|
|
$
|
346,183
|
|
The Company identified intangible assets
associated with patents and assigned the fair value of $14,000. The useful life associated with 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.
At December 31, 2013, the Company evaluated
the cashflow projections included in the contingent consideration and determined that there was a decrease in the fair value of
the contingent consideration and impairment of goodwill. The net effect of the adjustment is a decrease in general and administrative
expenses of $141,000.
Other assets at December 31, 2013, consisted
of $201,000 in deposits paid to our joint venture partner, Neusoft for Attrius® systems and $54,000 in operating lease deposits.
Other assets at December 31, 2012, consisted of $53,000 in operating lease deposits.
Inventories at December 31, 2013 and 2012
consisted of the following (in thousands):
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Finished systems
|
|
$
|
24
|
|
|
$
|
310
|
|
Raw materials and service parts
|
|
|
927
|
|
|
|
698
|
|
Work in progress
|
|
|
40
|
|
|
|
-
|
|
|
|
|
991
|
|
|
|
1,008
|
|
Less: Reserve for obsolete inventory
|
|
|
(444
|
)
|
|
|
(457
|
)
|
|
|
$
|
547
|
|
|
$
|
551
|
|
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 December 31, 2013 and December 31, 2012.
|
6.
|
PROPERTY AND EQUIPMENT
|
Property and equipment at December 31,
2013 and 2012 consisted of the following (in thousands):
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Buildings
|
|
$
|
500
|
|
|
$
|
500
|
|
Furniture and fixtures
|
|
|
88
|
|
|
|
75
|
|
Leasehold improvements
|
|
|
72
|
|
|
|
72
|
|
Computer equipment
|
|
|
62
|
|
|
|
60
|
|
Research equipment
|
|
|
667
|
|
|
|
667
|
|
Machinery and equipment
|
|
|
158
|
|
|
|
142
|
|
|
|
|
1,547
|
|
|
|
1,516
|
|
Less: Accumulated depreciation
|
|
|
(503
|
)
|
|
|
(346
|
)
|
|
|
$
|
1,044
|
|
|
$
|
1,170
|
|
|
7.
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
Accounts payable and accrued liabilities at December 31, 2013
and, 2012 consisted of the following (in thousands):
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Trade accounts payable
|
|
$
|
849
|
|
|
$
|
1,127
|
|
Accrued royalties
|
|
|
87
|
|
|
|
87
|
|
Accrued interest
|
|
|
278
|
|
|
|
154
|
|
Sales taxes payable
|
|
|
89
|
|
|
|
78
|
|
Accrued compensation
|
|
|
70
|
|
|
|
80
|
|
Other accrued expenses
|
|
|
28
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,401
|
|
|
$
|
1,634
|
|
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. Customer deposits at December 31, 2013 and 2012, were $658,000
and $746,000, respectively. Included in customer deposits at December 31, 2013 and 2012 were deposits of approximately $658,000
and $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 at
December 31, 2012 are $77,000 deposits on two Attrius® systems.
Our customer sales contracts require our customers to pay the
Company 30% upon signing the contract, 60% upon notification to ship, and the remaining 10% after customer acceptance.
|
9.
|
CONVERTIBLE DEBENTURES
|
Convertible Debentures 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
(see Note 17). 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 bears 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 period ended December 31, 2012, the Company has converted $100,000 of the
principal amount of the debt into 18,181,818 shares of common stock and recorded loss on debt settlement of $44,661.
During the twelve months ended December
31, 2012, the Company issued additional of $2,210,000 of convertible debt with maturity date December 31, 2013, of which $460,000
bears 8% interest and $1,750,000 is non-interest bearing. $510,000 of the convertible debt was issued to unrelated parties, and
$1,700,000 to related parties. In connection with the issuances the Company issued warrants (“Warrants”) to purchase
68,500,000 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.
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 $2,460,000. The discount 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 debt issuance
|
|
$
|
2,460
|
|
|
|
|
|
|
Allocation of debt to warrants
|
|
|
(331
|
)
|
|
|
|
|
|
Allocation of debt to embedded conversion derivative liability
|
|
|
(2,129
|
)
|
Convertible Debentures 2013
In December 2013, the Company issued
$2,520,000 of convertible debentures “(Convertible Debentures”) to certain investors (“Investors”).
The Convertible Debentures do not accrue interest. The debentures mature on December 31, 2014. The Investors are 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. On
December 9, 2013, one of the Investors agreed to convert $1,000,000 of his outstanding debt, pending authorization and/or
issuance of additional shares of common stock. As of December 9, 2013, there were not enough shares available to convert.
Initial Accounting
Under the initial accounting, the
Company separated the Convertible Debentures instrument into debt and the embedded conversion derivative liability. The
Company allocated the proceeds to the embedded conversion derivative liability. The fair value of the embedded
conversion derivative liability exceeded the proceeds from the Convertible Debentures, which resulted in a debt discount of
$1,500,000. The debt is accreted to interest expense over the life of the Convertible Debentures.
The following is a summary of the proceeds from the issuance
of the Convertible Debentures and the initial accounting of the issuance (in thousands):
Proceeds from convertible debt issuance
|
|
$
|
2,520
|
|
|
|
|
|
|
Allocation of proceeds to embedded conversion derivative liability
|
|
|
(1,500
|
)
|
Convertible debentures as of December
31, 2013
As of December 31, 2013, the
holders of the convertible debentures issued in 2012 agreed to extend those issuances through December 31, 2014. The related
Warrants were also extended through December 31, 2014. Approximately $821,000 in expense was recorded for the year ended
December 31, 2013 related to modification of the Warrants.
As of December 31, 2013,
convertible debt totaled $5,780,000, of which $1,328,000 was attributable to the discount on debt. These notes originally
were set to mature on December 31, 2013 but were extended under existing terms through December 31, 2014 or were presented
for conversion subsequent to year end.
During the years ended December 31, 2013
and 2012, the Company recognized interest expense related to Convertible Debentures of $1,970,000 and $1,628,000, respectively.
As of December 31, 2013 and December 31, 2012, accrued interest on Convertible Debentures was $277,542 and $148,741 respectively.
Convertible Debentures outstanding as of December 31, 2013 and 2012 were as follows (in thousands):
December 31, 2013
|
|
Unrelated
parties
|
|
|
Related parties
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debentures- face value
|
|
$
|
4,030
|
|
|
$
|
1,750
|
|
|
$
|
5,780
|
|
Debt discount
|
|
|
(1,328
|
)
|
|
|
0
|
|
|
|
(1,328
|
)
|
Total convertible debentures
|
|
|
2702
|
|
|
|
1,750
|
|
|
$
|
4,452
|
|
Less current portion
|
|
|
(2702
|
)
|
|
|
(1,750
|
)
|
|
|
(4,452
|
)
|
Long term portion
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
December 31, 2012
|
|
Unrelated
parties
|
|
|
Related parties
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debentures- face value
|
|
$
|
1,510
|
|
|
$
|
1,850
|
|
|
$
|
3,360
|
|
Debt discount
|
|
|
(350
|
)
|
|
|
(1,448
|
)
|
|
|
(1,798
|
)
|
Total current convertible debentures
|
|
$
|
1,160
|
|
|
$
|
402
|
|
|
$
|
1,562
|
|
Subsequent to year end, various holders of debt issued
in 2012 and 2013 agreed to convert their convertible debt pending authorization of additional common stock at a specific
price based on the weighted average close price of the three days prior to the conversion. A total of $2,220,000 have been
presented for conversion effective January 2014. Of the $2,220,000, $1,120,000 was debt held by unrelated parties and
$1,100,000 was debt held by related parties.
|
10.
|
NOTES PAYABLE AND ADVANCES FROM RELATED PARTIES
|
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, with an extended maturity of April 2015. The note renews annually. The monthly payment to LANB on the promissory
note is $10,000, with the interest rate of 5.5% at December 31, 2013 and 2012. The promissory note is guaranteed by the
Company and secured by all assets of the Company. Total interest expense related to the promissory note recorded during the
years ended December 31, 2013 and 2012 was $35,000. The outstanding principal amount and accrued interest as of December 31, 2013, was
approximately, $550,000 and $3,000, respectively. The outstanding principal and accrued interest as of December 31, 2012 was
approximately $649,000 and $3,000, respectively.
During the twelve months ended December 31, 2013, the Company
received $2,285,000 in short term notes from their CEO and CFO to help fund operations. The notes are unsecured and non-interest
bearing. As of December 31, 2013, $1,250,000 of the notes/advances were converted to preferred shares (see note 17). The total
outstanding notes/advances at December 31, 2013 were $1,035,000.
From time to time, the company receives
advances from unrelated parties. These advances are unsecured, bear interest at 8% and there are no specific repayment terms.
During the twelve months ended December 31, 2012, the Company received advances and made repayments of these advances in the amounts
of $305,000 and $265,000, respectively. During the year ended December 31, 2012, the Company recorded interest expense related
to the advances of $1,600. As of December 31, 2013, and 2012 the amounts due to
the unrelated parties were $0 and $40,000, respectively.
Future maturities of the advances and notes payable are
as follows:
Debt maturities as of
|
|
|
December 31,
|
|
2014
|
|
$
|
1,130,000
|
|
|
|
|
|
|
2015
|
|
|
455,000
|
|
|
11.
|
NOTES PAYABLE – CAPITAL LEASE
|
The Company has entered into a capital
leases for equipment at interest rates of 7.25%, payable through 2018. The assets and liabilities under the capital leases are
recorded at the present value of the minimum lease payments and are depreciated over their estimated useful lives. The gross amount
of assets held under capital leases for the nine months December 31, 2013 and December 31, 2012 was $16,300 and $0, respectively,
with accumulated depreciation of $1,165 and $0, respectively. Depreciation expense for this equipment for the years ended December
31, 2013 and December 31, 2012 was $1,165 and $0, respectively.
Future minimum lease payments and the
present value of the payments are as follows:
Debt maturities as of
|
|
|
December 31,
|
|
2014
|
|
$
|
4,000
|
|
2015
|
|
|
4,000
|
|
2016
|
|
|
4,000
|
|
2017
|
|
|
4,000
|
|
2018 and thereafter
|
|
|
1,000
|
|
|
|
|
17,000
|
|
Less: amounts representing interest
|
|
|
(3,000
|
)
|
Present value
|
|
|
14,000
|
|
Less: current portion
|
|
|
(3,000
|
)
|
Note payable Capital Lease – noncurrent portion
|
|
$
|
11,000
|
|
2013
On April 12, 2013, the Company issued
621,000 shares of common stock for consulting services. On the date of the issuance, the common stock had a fair market value
of $0.008 per share. The Company recorded consulting fee expense of $5,000 for the issuance of the shares.
On April 11, 2013, the
Company accepted subscriptions from Patrick Rooney, its Chairman and Chief Executive Officer, and Corey Conn, its
Chief Financial Officer and converted certain advances (see note 17) in the amounts of $500,000 and $250,000 respectively for
an aggregate investment of $750,000. In consideration of these subscriptions, the Company issued 7,500,000 shares of its
newly created Series H Junior Convertible Preferred Stock, par value $0.01 per share (the “Series H Preferred
Stock”). In November 2013, the Company accepted a subscription from Patrick G Rooney, Chairman and CEO to convert
additional advances in the amount of $500,000 for 5,000,000 shares of Series H Preferred Stock. The Series H Preferred Stock
ranks junior to dividends and distributions of the Company’s assets upon liquidation to all previously-issued shares of
the Company’s capital stock and is not entitled to receive interest or dividends. The Series H Preferred Stock is
convertible into shares of the Company’s Common Stock at a rate equal to the number of shares of Series H Preferred
Stock being converted multiplied by the Original Issuance Price of $0.10 and divided by seventy percent (70%) of the daily
weighted volume average price for the three trading days prior to conversion. The Series H Preferred Stock shall be entitled
to two hundred (200) votes per share of Series H Preferred Stock on all matters which holders of Common Stock are entitled
to vote.
In May 2013 the Board of Directors,
subject to the approval of the shareholders of the Company, authorized an amendment to the Company's Certificate of
Incorporation in order to effect a reverse split of the Company's common stock in a ratio of 1 for 100 (the "Reverse
Split"), reduce the number of shares of capital stock from 3,020,000,000 to 520,000,000 of which 500,000,000 shares will
be common stock and 20,000,000 shares will be preferred stock, each par value $0.0001 per share. The shareholders also
approved the conversion of the Company to a Delaware corporation. These actions are not effective.
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 were classified as common stock par value $0.01 per share (“Common
Stock”) and 20,000,000 shares were classified as 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.
On January 4, 2012, the Company issued
400,000 shares to a vendor for services rendered valued at $4,000.
On January 9, 2012, the Company issued
1,400,000 shares to a vendor for services rendered valued at $14,000.
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 and 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.
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 and issued 3,000,000 shares of Common
Stock to a vendor for services rendered valued at $51,000.
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 valued at $20,000, and 600,000 shares of Common Stock to a vendor
for services rendered valued at $10,000.
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 settlement of accounts payable. The Company recorded $26,456 loss on the settlement.
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 valued at $2,000.
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
settlement of accounts payable.
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. Both were valued at $10,000.
On August 21, 2012 the Company issued 1,000,000
shares of Common Stock to a vendor for services rendered valued at $10,000.
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 $35,605 into 10,000,000 shares of Common Stock. Of these shares, 6,666,667 shares were payable as of September
30, 2012 and were issued in October 2012. In connection with this issuance the Company recorded a loss on settlement of $54,395.
In November 2012, the Company issued warrants
to purchase a total of 10,500,000 shares of the Company’s Common Stock, at an exercise price of $0.01 per share expiring
on December 31, 2013, to its Chief Financial Officer. The warrants were issued in connection with the issuance of two non-interest
bearing convertible debentures totaling $380,000 to the CFO.
In November 2012, the Company issued warrants
to purchase a total of 37,500,000 shares of the Company’s Common Stock, at an exercise price of $0.01 per share to its Chief
Executive Officer. The warrants expire on December 31, 2013. The warrants were issued in connection with the issuance of two non-interest
bearing convertible debentures totaling $1,320,000 to the CEO.
In December 2012, the Company issued a convertible debenture in the amount of $50,000 to a third party.
In connection with the debt, the Company also issued to the third party warrants to purchase 1,500,000 shares of the Company’s
Common Stock, at an exercise price of $0.01 per share expiring on December 31, 2013.
Options
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.
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.
In January 2010 the Company granted certain employees options
to purchase 2,500,000 shares of Series B Preferred stock at an exercise price of $1.00 per share (the “Preferred Options”.)
The options vest immediately and have a term of three years. Accordingly, in January 2010 the Company recorded compensation expense
of $2,500,000 for the Preferred Option grants. At December 31, 2013, 430,000 of these options expired and 2,070,000 were extended
for one year. The Company recorded compensation expense of $567,567 for the extended Preferred Option grants. Fair market value
using the Black-Scholes option-pricing model was determined using the following assumptions:
Expected life (years)
|
|
|
1
|
|
Risk free rate of return
|
|
|
11
|
%
|
Dividend yield
|
|
|
0
|
|
Expected volatility
|
|
|
200
|
%
|
A summary of Series B Preferred stock option activity is as
follows:
|
|
Shares Issuable
Under
Outstanding
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
2,500,000
|
|
|
$
|
1.00
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
Expired/forfeited
|
|
|
(430,000
|
)
|
|
|
1.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Balance at December 31, 2013
|
|
|
2,070,000
|
|
|
$
|
1.00
|
|
Exercisable, December 31, 2013
|
|
|
2,070,000
|
|
|
$
|
1.00
|
|
On January 17, 2012, Positron's Board
of Directors (the “Board”) adopted the 2012 Equity Incentive Plan ("2012 Plan"), authorizing issuance of
200,000,000 stock options to purchase shares of the Company’s common stock.
On January 17, 2012, the Company
granted certain employees options to purchase 177,600,000 shares of common stock under the plan at an exercise price of $0.01
per share (“January Issuance”). Fifty (50) percent of the options vested immediately on the grant date with the
remaining fifty (50) percent vesting on January 17, 2013. The Company recorded a total expense of approximately $1,735,000
related to these options during the year ended December 31, 2012 and recorded an additional $39,000 for these stock
options in the first quarter of 2013. During the year ended December 31, 2012, options to purchase 7,000,000 shares of stock
were forfeited and a total of 170,600,000 options from the January issuance were outstanding as of December 31, 2012. At
December 31, 2012, the remaining weighted average contractual term of these options was 2.05 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:
Expected life (years)
|
|
|
1.75
|
|
Risk free rate of return
|
|
|
0.75
|
%
|
Dividend yield
|
|
|
0
|
|
Expected volatility
|
|
|
218
|
%
|
In November 2012, the Company granted
additional options to purchase 20,000,000 shares of common stock under the 2012 Plan to a new employee at an exercise price of
$0.01 per share. Fifty (50) percent of the options vested immediately on the grant date with the remaining fifty (50) percent
vesting on January 17, 2013 The Company recognized an expense of approximately $49,000 related to these options during the year
ended December 31, 2012 and will recognize an additional expense of $49,000 during the first quarter of 2013. At December 31,
2012, the remaining weighted average contractual term of these options was 2.05 years. The intrinsic value of the options on the
grant date was $0, as the closing stock price on the grant date was $0.008. Fair market value using the Black-Scholes option-pricing
model was determined using the following assumptions:
Expected life (years)
|
|
|
2.25
|
|
Risk free rate of return
|
|
|
0.27
|
%
|
Dividend yield
|
|
|
0
|
|
Expected volatility
|
|
|
125
|
%
|
As of December 31, 2012, the Company had
a total of 190,600,000 options outstanding with 9,400,000 options available for issuance under the 2012 Plan. Fifty (50) percent
of the outstanding options were fully and the remaining fifty (50) percent vest on January 17, 2013. All the options issued under
the 2012 Plan expire on January 17, 2015.
A summary of common stock option activity is as follows:
|
|
Shares Issuable
Under
Outstanding
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Issued in 2012
|
|
|
197,600,000
|
|
|
$
|
0.01
|
|
Forfeited
|
|
|
(7,000,000
|
)
|
|
|
0.01
|
|
Balance at December 31, 2012
|
|
|
190,600,000
|
|
|
$
|
0.01
|
|
Forfeited
|
|
|
(2,500,000
|
)
|
|
$
|
0.01
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Balance at December 31, 2013
|
|
|
188,100,000
|
|
|
$
|
0.01
|
|
Exercisable, December 31, 2013
|
|
|
188,100,000
|
|
|
$
|
0.01
|
|
Warrants
A summary of warrant activity based on common stock equivalents
is as follows:
|
|
Number of Shares
|
|
|
Exercise
Price
|
|
|
Weighted
Average
Exercise
Price
|
|
Balance at December 31, 2011
|
|
|
183,583,338
|
|
|
$
|
0.01-0.15
|
|
|
$
|
0.05
|
|
Warrants exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants expired
|
|
|
(134,583,338
|
)
|
|
$
|
0.01-0.03
|
|
|
$
|
0.03
|
|
Warrants issued with common and Series B Preferred
stock in private placement
|
|
|
114,850,000
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Warrants issued with convertible
debentures and notes payable
|
|
|
103,500,000
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Balance at December 31, 2012
|
|
|
267,350,000
|
|
|
$
|
0.01-0.15
|
|
|
$
|
0.03
|
|
Warrants exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants expired
|
|
|
(144,850,000
|
)
|
|
$
|
0.01-0.15
|
|
|
$
|
0.02
|
|
Warrants issued with convertible
debentures and notes payable
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Balance at December 31, 2013
|
|
|
122,500,000
|
|
|
$
|
0.01-0.02
|
|
|
$
|
0.01
|
|
All outstanding warrants are currently exercisable. A
summary of outstanding common stock warrants at December 31, 2013 follows:
Number of
Common Stock
Equivalents
|
|
|
Expiration Date
|
|
Remaining
Contractual Life
(Years)
|
|
|
Exercise
Price
|
|
|
4,000,000
|
|
|
(a)
|
|
|
-
|
|
|
$
|
0.02
|
|
|
118,500,000
|
|
|
(b)
|
|
|
1.00
|
|
|
$
|
0.01
|
|
(a) Warrants expire six months after the date on
which a registration statement is filed and accepted by the Securities Exchange Commission permitting a sale of the shares issuable
upon exercise of the warrant.
(b) Warrants were originally set to expire on December 31,
2013, but were extended by the Company through December 31, 2014.
The Company’s Certificate of Formation,
as amended, authorizes the issuance of 20,000,000 shares of preferred stock from time to time in one or more series. The Board
of Directors is authorized to determine, prior to issuing any such series of preferred stock and without any vote or action by
the shareholders, the rights, preferences, privileges and restrictions of the shares of such series, including dividend rights,
voting rights, terms of redemption, the provisions of any purchase, retirement or sinking fund to be provided for the shares of
any series, conversion and exchange rights, the preferences upon any distribution of the assets of the Company, including in the
event of voluntary or involuntary liquidation, dissolution or winding up of the Company, and the preferences and relative rights
among each series of preferred stock. The Board of Directors has designated the following series of preferred stock
Series A Preferred Stock
The Company had 7,900,000 shares of Series
A Preferred Stock authorized for issuance. 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.
As of December 31, 2013 and 2012, there
were 447,652 shares of Series A Preferred Stock outstanding, respectively.
Series B Preferred Stock
As of December 31, 2012, the Company has
9,000,000 shares of Series B Preferred Stock authorized for issuance. 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 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 December 31, 2013 and 2012, 3,056,487
shares of Series B Preferred Stock were outstanding, respectively.
Series G Preferred Stock
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. 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.
As of December 31, 2013 and 2012, there
are no shares of Series G Preferred Stock outstanding.
Series S Preferred Stock
As of December 31, 2012, the Company has
10,000 shares of Series S Preferred Stock authorized for issuance. Each share of Series S Convertible Preferred Stock, $1.00 par
value per share, is convertible into 10,000 shares of the Company’s Common Stock, subject to adjustment The Series S Preferred
Stock is senior to the Company’s Common Stock and junior in priority to the Company’s A, B and G Preferred Stock in
liquidation. Holders of the Series S Preferred Stock are entitled to 10,000 votes per share on all matters requiring shareholder
vote. While Series S Preferred Stock is outstanding no Common Stock dividends may be paid or declared by the Company.
As of December 31, 2013 and 2012, 100,000
shares of Series S Convertible Preferred Stock were outstanding.
Series H Preferred Stock
As of December 31, 2013, the Company
has 15,000,000 shares of Series H Preferred Stock authorized for issuance at par value of $0.01 per share. The Series H
Preferred Stock rank junior to dividends and distributions of the Company’s assets upon liquidation to
all previously-issued shares of capital stock of the Company and is not entitled to receive interest or dividends. The
Series H Preferred Stock is convertible into shares of the Company’s Common Stock at a rate equal to the number of
shares of Series H Preferred Stock being converted multiplied by the Original Issuance Price of $0.10 and divided by seventy
percent (70%) of the daily weighted volume average price for the three trading days prior to conversion. The Series H
Preferred Stock is entitled to two hundred (200) votes per share of Series H Preferred Stock on all matters which
holders of Common Stock are entitled to vote.
As of December 31, 2013 and 2012, 12,500,000 and 0 shares of
Series H Preferred Stock were outstanding, respectively.
During the years ended December 31, 2013
and 2012, the Company recorded other expenses of approximately $3,766,000 and $3,233,000, respectively. Other expenses include
interest expense, derivative expenses and other gains and losses.
Interest expense was $2,137,000 and $1,753,000
for the years ended December 31, 2013 and 2012, respectively. $1,910,000 and $1,628,000 of the total interest expense for the
years ended December 31, 2013 and 2012, respectively, was related to the accretion of debt discount associated with convertible
debt.
For the years ended December 31,
2013 and 2012, the Company recorded losses of approximately $665,000 and $726,000, respectively, on fair value
adjustments to embedded conversion derivative liability associated with the convertible debt. Debt modification expense was
$821,000 and $432,000 for the years ended December 31, 2013 and 2012, respectively.
During the year ended December 31,
2012, the Company also recorded $18,000 loss on the disposal of property and equipment, $282,000 loss on settlement and other
expenses of $22,000. During the year ended December 31, 2013 the Company recorded other expenses of $143,000, which is made
up of foreign currency translation losses reclassified out of accumulated other comprehensive income.
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 twelve months ended December 31, 2013 and 2012, 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):
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Numerator
|
|
|
|
|
|
|
|
|
Basic and diluted loss
|
|
$
|
(7,104
|
)
|
|
$
|
(7,955
|
)
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share - weighted average shares outstanding
|
|
|
1,452,364
|
|
|
|
1,265,270
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
Anti-dilutive
securities (based on conversions to common shares) not included in net loss per share calculation (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Convertible Series A preferred stock
|
|
|
448
|
|
|
|
448
|
|
Convertible Series B preferred stock
|
|
|
305,648
|
|
|
|
305,648
|
|
Convertible Series G preferred stock
|
|
|
-
|
|
|
|
100
|
|
Convertible Series S preferred stock
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Convertible Series H preferred stock
|
|
|
482,625
|
|
|
|
-
|
|
Stock warrants
|
|
|
122,500
|
|
|
|
267,350
|
|
Convertible debt
|
|
|
2,693,553
|
|
|
|
722,910
|
|
Common stock options
|
|
|
188,100
|
|
|
|
190,600
|
|
Series B preferred stock options
|
|
|
207,000
|
|
|
|
250,000
|
|
The Company has incurred losses
since its inception and, therefore, has not been subject to federal income taxes. As of December 31, 2013, the Company had
domestic net operating loss (“NOL”) carryforwards for income tax purposes of approximately $55,340,000 which
expire in 2013 through 2033. Under the provisions of Section 382 of the Internal Revenue Code greater than 50% ownership
changes that occurred in the Company may significantly limit the Company’s ability to utilize its NOL carry forwards to
reduce future taxable income and related tax liabilities.
Section 382 allows an owner shift any
time there is a transfer of stock by a person who directly, or indirectly, owns more than 5% of the corporation and the percentage
of stock of the corporation owned by one or more five percent shareholders has increased, in the aggregate, by more than 50 percentage
points over the lowest percentage of stock owned by such shareholders at any time during the "testing period." The "testing
period" is generally a three-year period ending on the date of any owner or equity structure shift.
The amount of post-change income that
may be offset by pre-change losses is limited each year by the "Section 382 Limitation." Generally, the Section 382
Limitation is an amount equal to the value of the old loss corporation multiplied by a long-term interest rate established monthly
by the Internal Revenue Service. The Company has not yet determined the qualifying events and resulting limitation that may impact
utilization of net operating losses against future periods.
The composition of deferred tax assets
and the related tax effects at December 31, 2013 and 2012 are as follows (in thousands):
|
|
2013
|
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic net operating losses
|
|
$
|
18,816
|
|
|
$
|
19,529
|
|
Stock option compensation
|
|
|
223
|
|
|
|
606
|
|
Book/tax differences in fixed assets
|
|
|
27
|
|
|
|
32
|
|
Accrued liabilities and reserves
|
|
|
327
|
|
|
|
272
|
|
|
|
|
19,393
|
|
|
|
20,439
|
|
Valuation allowance
|
|
|
(19,393
|
)
|
|
|
(20,439
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The difference between the income tax benefit in the accompanying
statement of operations and the amount that would result if the U.S. Federal statutory rate of 34% were applied to pre-tax loss
is as follows (amounts in thousands):
|
|
2013
|
|
|
2012
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Benefit for income taxes at federal statutory rate
|
|
$
|
2,415
|
|
|
|
34
|
%
|
|
$
|
2,704
|
|
|
|
34
|
%
|
Derivative losses
|
|
|
(226
|
)
|
|
|
(3
|
)
|
|
|
(596
|
)
|
|
|
(7
|
)
|
Discount amortization and other
|
|
|
(949
|
)
|
|
|
(13
|
)
|
|
|
(565
|
)
|
|
|
(7
|
)
|
Change in rates and other
|
|
|
(2,286
|
)
|
|
|
(32
|
)
|
|
|
21
|
|
|
|
-
|
|
Change in valuation allowance
|
|
|
1,046
|
|
|
|
14
|
|
|
|
(1,564
|
)
|
|
|
(20
|
)
|
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
The Positron Corporation 401(k) Plan and
Trust (the “Plan”) covers all of the Company’s employees who are United States citizens, at least 21 years of
age and have completed at least one quarter of service with the Company. Pursuant to the Plan, employees may elect to reduce their
current compensation by up to the statutorily prescribed annual limit and have the amount of such reduction contributed to the
Plan. The Plan allows for the Company to make discretionary contributions in an amount equal to 25 percent of the participant’s
deferral contributions, up to 6 percent of the employee’s compensation, as defined in the Plan agreement. The Company made
no contributions in 2013 and 2012. The Board of Directors of the Company may authorize additional discretionary contributions;
however, no such contributions were made by the Company in 2013 or 2012.
|
18.
|
RELATED PARTY TRANSACTIONS
|
2013
On January 31, 2013 the Company accepted
a non-interest bearing $250,000 advance from its CEO. At the time, the Company issued no shares or warrants in connection
with this transaction.
On February 27, 2013 the Company accepted
a non-interest bearing $250,000 advance from its CFO. At the time, the Company issued no shares or warrants in connection
with this transaction.
On March 25, 2013 the Company accepted
a non-interest bearing $100,000 advance from its CEO. At the time, the Company issued no shares or warrants in connection
with this transaction.
During June 2013 the Company accepted
a non-interest bearing $185,000 advance from its CEO. At the time, the Company issued no shares or warrants in connection
with this transaction.
On April 4, 2013 the Company accepted
a non-interest bearing $150,000 advance from its CFO. At the time, the Company issued no shares or warrants in connection
with this transaction.
On April 11, 2013, the Company converted certain advances from
its CEO and CFO in the amounts of $ 500,000 and $ 250,000, respectively, into Series H preferred shares (see note 15).
On May 22, 2013 the Company accepted a
non-interest bearing $150,000 advance from its CFO. At the time, the Company issued no shares or warrants in connection
with this transaction.
On June 21, 2013 the Company accepted
a non-interest bearing $100,000 advance from its CFO. At the time, the Company issued no shares or warrants in connection
with this transaction.
On August 16, 2013 the Company accepted
a non-interest bearing $250,000 advance from its CFO. At the time, the Company issued no shares or warrants in connection
with this transaction.
On August 26, 2013 the Company accepted
a non-interest bearing $250,000 advance from its CEO. At the time, the Company issued no shares or warrants in connection
with this transaction.
On November 2, 2013 the Company accepted
a non-interest bearing $100,000 advance from its CEO. At the time, the Company issued no shares or warrants in connection
with this transaction.
On November 7, 2013, the Company converted certain advances
from its CEO in the amount of $500,000, into Series H preferred shares (see note 15).
During 2013, the Company paid $201,000 in deposits to the joint
venture partner, Neusoft, for Attrius
®
Systems.
On January 3, 2014 the related party debt holders agreed
to convert certain convertible debt issued in 2012. The CEO and CFO agreed to convert a portion of their
outstanding debt in the amount of $1,000,000 and $300,000, respectively, pending reverse split authorization
and/or approval of additional authorized shares. Remaining convertible debt originally due December 31, 2013 due to the CEO and
CFO in the amount of $400,000 and $50,000, respectively, was extended through December 31, 2014. Warrants associated with
this debt issued in 2012 were also extended through December 31, 2014.
2012
On January 12, 2012, the
Company acquired a building in Westmont, Illinois, which the Company previously leased from its Chief Executive Officer
(Lender or Related Party) for corporate and administrative offices since 2010. The Company issued the Chief Executive Officer
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 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. During the twelve months ended December 31, 2012, the Company issued 18,181,818 shares of Common
Stock for repayment of $100,000 of these Convertible Debentures. During the year ended December 31, 2012, the Company
expensed $77,000 of deferred rent.
During the year ended December 31, 2012,
the Company recognized cost of revenues of approximately $623,000 related to the purchase of Attrius
®
PET Systems
from Neusoft, the joint venture partner.
During the year ended December 31, 2012
the Company issued additional convertible debt to its Chief Executive Officer (“Lender”) in the amount of $1,320,000.
The debt is non-interest bearing and matures on December 31, 2013. In connection with the this debt, the Company issued warrants
(“Warrants”) to purchase 37,500,000 shares of the Company’s Common Stock, at an exercise price of $0.01 per
share 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.
During September and December 2012, the
Company issued two non-interest bearing convertible debentures totaling $380,000 to it Chief Financial Officer (“Lender”
or “CFO”). In connection with this debt, the Company issued to the CFO warrants to purchase 10,500,000 shares of the
Company’s Common Stock, at an exercise price of $0.01 per share 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. These debentures
are noninterest bearing. As of December 31, 2012, the Company all of the $380,000 debt was outstanding.
In September of 2012, the Company received
an unsecured advance of $25,000 from a related party, which accrues interest at 8% per annum. This note was fully repaid as of
December 31, 2012.
|
19.
|
COMMITMENTS AND CONTINGENCIES
|
Lease Agreements
On April 19, 2010, the Company entered into an operating lease
agreement with a third party for warehousing and office space in Niagara, New York. The lease expires in May 2014, with an option
to renew for an additional three years. Monthly rent is $1,800. The Company is currently negotiating an extension.
On July 7, 2011, the Company entered into
an operating lease with a third party for space for medical device assembly and warehousing at a building in Fishers, Indiana.
The Company is required to make payments of $5,083 each month from December 1, 2011 through November 13, 2013, and $5,287 from
December 1, 2013 through November 30, 2016. The amount of leased space at this location is approximately 9,761 square feet.
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 month to month.
Total rent expense for the years
ended December 31, 2013 and 2012 was $84,011 and $69,512, respectively.
Future minimum rental commitments under
non-cancellable facilities operating leases as of December 31, 2013 are as follows:
Year Ending December 31,
|
|
|
|
2014
|
|
$
|
72,444
|
|
2015
|
|
|
63,444
|
|
2016
|
|
|
58,157
|
|
Litigation
On June 8, 2012, the owner of the radiopharmaceutical
manufacturing facility the Company formerly leased in Crown Point, Indiana commenced an action to recover the use of the premises
and the remaining rent due under the lease. On November 14, 2012, the owner was awarded a judgment against the Company in the amount
of $85,525.98 plus interest at the rate of 8%. The Company and the owner agreed to monthly payments in the minimum amount of $5,000
until the judgment is paid in its entirety.
In May, 2013, the Company was
served with a First Amended Complaint in an action commenced against related its CEO and principal shareholder. The plaintiff
in the action is seeking to enforce a judgment against the CEO and principal shareholder and is seeking to have the
Company’s Westmont, Illinois offices, which it purchased from the CEO, reconveyed. The CEO and the principal
shareholder have disputed the basis of the judgment and the Company has denied the allegations in the Complaint and is
defending the action. The action is currently in the discovery stage.
|
20.
|
SELECTED QUARTERLY FINANCIAL
DATA (UNAUDITED) (in thousands)
|
|
|
Quarter ended
|
|
|
|
March 31,
2013
|
|
|
June 30,
2013
|
|
|
September 30,
2013
|
|
|
December 31,
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
371
|
|
|
$
|
432
|
|
|
$
|
351
|
|
|
$
|
476
|
|
Gross profit (loss)
|
|
|
125
|
|
|
|
14
|
|
|
|
121
|
|
|
|
164
|
|
Net loss
|
|
|
(1,201
|
)
|
|
|
(1,088
|
)
|
|
|
(1,390
|
)
|
|
|
(3,425
|
)
|
Net (loss) per share - basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
Weighted average basic and diluted shares
|
|
|
1,451,927
|
|
|
|
1,452,425
|
|
|
|
1,452,548
|
|
|
|
1,452,548
|
|
|
|
Quarter ended
|
|
|
|
March 31,
2012
|
|
|
June 30,
2012
|
|
|
September 30,
2012
|
|
|
December 31,
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
829
|
|
|
$
|
1,224
|
|
|
$
|
370
|
|
|
$
|
378
|
|
Gross profit (loss)
|
|
|
359
|
|
|
|
331
|
|
|
|
106
|
|
|
|
33
|
|
Net loss
|
|
|
(2,962
|
)
|
|
|
(1,235
|
)
|
|
|
(1,568
|
)
|
|
|
(2,190
|
)
|
Net (loss) per share - basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
Weighted average basic and diluted shares
|
|
|
970,887
|
|
|
|
1,256,915
|
|
|
|
1,360,107
|
|
|
|
1,451,140
|
|
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 and regulatory approval 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 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):
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Total Sales:
|
|
|
|
|
|
|
|
|
Medical equipment
|
|
$
|
1,630
|
|
|
$
|
2,789
|
|
Radiopharmaceuticals
|
|
|
-
|
|
|
|
12
|
|
Total sales
|
|
$
|
1,630
|
|
|
$
|
2,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss:
|
|
|
|
|
|
|
|
|
Medical equipment
|
|
$
|
(2,486
|
)
|
|
$
|
(3,690
|
)
|
Radiopharmaceuticals
|
|
|
(862
|
)
|
|
|
(1,026
|
)
|
Unallocated
|
|
|
-
|
|
|
|
(6
|
)
|
Total operating loss
|
|
$
|
(3,338
|
)
|
|
$
|
(4,722
|
)
|
|
|
|
|
|
|
|
|
|
Total Assets:
|
|
|
|
|
|
|
|
|
Medical equipment
|
|
$
|
3,373
|
|
|
$
|
1,739
|
|
Radiopharmaceuticals
|
|
|
509
|
|
|
|
945
|
|
Unallocated
|
|
|
-
|
|
|
|
1
|
|
Total assets
|
|
$
|
3,882
|
|
|
$
|
2,685
|
|
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. The management of the Company has determined the following:
The Company issued an aggregate
of $320,000 of convertible notes to unrelated parties in February and March 2014. As with the Company’s other,
recent sales of convertible notes, the notes are convertible into shares of the Company’s Common Stock at a rate equal
to the daily volume weighted average price of the three trading days prior to a conversion, mulitiplied by 0.55.