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POSC > SEC Filings for POSC > Form 10-Q on 15-Nov-2012All Recent SEC Filings

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Form 10-Q for POSITRON CORP


15-Nov-2012

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company is including the following cautionary statement in this Quarterly Report on Form 10-Q to make applicable and utilize the safe harbor provision of the Private Securities Litigation Reform Act of 1995 regarding any forward-looking statements made by, or on behalf of, the Company. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts. Certain statements contained herein are forward-looking statements and, accordingly, involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.

The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitations, examination of historical operating trends, data contained in records and other data available from third parties, but there can be no assurance that the Company's expectations, beliefs or projections will result, or be achieved, or be accomplished.

Overview

Positron Corporation (the "Company" or "Positron") is a leading molecular imaging company providing innovative nuclear medicine technologies and services that are reshaping the field of nuclear cardiology. Through proprietary PET imaging systems and radiopharmaceutical solutions, Positron enables healthcare providers to more accurately diagnose disease and improve patient outcomes while practicing cost effective medicine. Positron has gained significant traction in a diverse industry and continues its strong commitment to excellence and advancing cardiac imaging solutions.

General

The Company offers a range of products and services for the nuclear imaging community that are discussed below.

Attrius®

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 achieved significant advancements with the Company's new state-of-the-art coronary flow reserve (CFR) software, developed in collaboration with the University of Texas. The software received FDA approval in July 2012. Positron expects to offer this software in conjunction with the Attrius® starting Q3 2012. The CFR software, a clear differentiator and advantage for Positron, was developed by a leading cardiologist and industry luminary Dr. K. Lance Gould and is considered to be a key driver in the upcoming growth in cardiac PET.

PosiStar™

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.

PosiRx™

Tc-99m accounts for 82 percent of all diagnostic radiopharmaceutical injections each year (Arlington Medical Resources, Inc., The Imaging Market Guides - United States Edition, 2008). A current distribution model of Tc-99m is based on centralized radio pharmacies which provides scheduled deliveries of unit doses of radiopharmaceuticals to their clients located in a 70-75 miles range.

PosiRx™ is a system that automates the elution, preparation, and dispensing processes for radiopharmaceutical agents used in SPECT molecular imaging with Tc-99m. It eliminates the need for scheduled deliveries of unit doses from centralized radiopharmacies. A nuclear cardiology facility equipped with the PosiRx™ has 24/7 unit dose accessibility and reliability of an on-site supply. A self-contained device, the PosiRx™ is compliant with all regulations that involve compounding and dispensing sterile injectables. Positron's proprietary automated quality control module for the PosiRx system includes a patent pending method of testing Tc-99m compounds for radiochemical purity. PosiRx™ is targeted for cardiac clinics and hospitals with a high volume flow of imaging patients. Positron's PosiRx has completed validation testing at the University of New Mexico and is being marketed to leading nuclear cardiology luminaries and nuclear pharmacies. To best serve market demand, Positron intends to offer different revenue models: 1) rent/sell and service PosiRx systems to practices/hospitals handling their own radiopharmaceutical consumables, and 2) sell radiopharmaceutical consumables directly to practices/hospitals through installed PosiRx systems.

Radiopharmaceutical Manufacturing

The Company plans to focus on small batch, radioactive PET products. Consolidating radiopharmaceutical manufacturing, Positron has moved production of any and all radiopharmaceuticals from the facility in Crown Point, Indiana, to its wholly-owned subsidiary Manhattan Isotopes Technology (MIT) in Texas. Positron has initial customers for radiochemical grade Indium. Positron is entering into the Indium market as it projects increased demand in an underserved market and as a precursor for its PET radiopharmaceuticals initiatives.

The Company continues development of a proprietary Rb-82 generator and its associated infusion cart with prototypes. This product is a key element of Positron's strategy to vertically integrate the production and delivery of a complete cardiac imaging solution: isotope (Sr82), generator (Rb82), and imaging system (Attrius®).

Isotopes production - 70MeV Cyclotron

Positron Corporation plans to build and operate a high energy/high current cyclotron facility to be used primarily for production of medical isotopes for PET diagnostic imaging and radiotherapy. The proposed facility will be equipped with a 70MeV cyclotron and 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 intends to couple the cyclotron with a material processing facility, isotope target manufacturing, drug manufacturing and Positron's expanding equipment-manufacturing operations.

The primary isotope to be produced is Sr82 that is currently in short supply in the world and is produced in the U.S. only by the DOE National Laboratories. As a competitive advantage of private sector, is the policy of the DOE to not compete with private industry, and therefore as Positron enters certain markets that are deemed competitive, the DOE may be compelled via petition to withdraw from the market when the materials are reasonably available commercially.

Sr82 is used as a parent isotope for production of Rb82 in Sr82/Rb82 generators for PET myocardial perfusion imaging. Positron is currently developing its own generator and intends to buy all Sr82 produced by the facility to supply its cardiac PET client base. The production of Rb82 would allow Positron to have a complete integrated value chain that includes radioisotope production, generator distribution, unit dose delivery of the radiopharmaceutical and sale of the PET imaging equipment.

The cost of the project, including equipment, building, land, working capital and contingencies, is approximately $65 million. Positron executed an agreement with IBA Molecular, of Belgium, to manufacture a 70 MeV cyclotron. The facility will take approximately 3.5 years to build, and will include Positron's corporate headquarters and radiopharmaceutical manufacturing. The facility expects to begin operations in 2016. Positron has amended its previous location of the facility in Noblesville, Indiana, to Gary, Indiana, as a result of substantial economic incentives offered by the city of Gary.

The Redevelopment Commission of the City of Gary approved a Pledge Resolution for $15 Million in Tax Increment Financing (TIF) Bonds 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.

The Company plans to execute the project through its wholly owned subsidiary, Positron Isotopes Corporation, and will be funded with proceeds from debt and equity which the Company intends to raise.

Manhattan Isotope Technology LLC

In January 2012, Positron acquired Manhattan Isotope Technology LLC ("MIT"). Founded in 2009 by former Los Alamos National Laboratories (LANL) scientists, MIT personnel were at the core of the DOE team that provided the majority of the world's Sr-82 supply over the past 15 years and also developed the patented technology for recycling Sr82 from expired Sr82/Rb82 generators. This patented recycle production method was exclusively licensed to MIT from the DOE via Los Alamos National Laboratory in 2010.

MIT is the only commercial resource in the United States with practical knowledge and experience in all stages of strontium-82 production. Its current facility in Lubbock, Texas, has the capacity to provide critical services necessary for the refurbishment of spent strontium-82/rubidium-82 generators and the recycling of strontium-82 using patented methods. Over the past five years the explosive growth of PET imaging has driven a significant increase in the Sr82/Rb82 generator demand, creating an environment whereby the Sr82 demand has begun to outpace supply. MIT intends to focus on increasing the Active Pharmaceutical Ingredient (API) Sr82 supply through the recycling of Sr82 from spent generators and production of Sr82 from foreign suppliers.

MIT, with the support of Positron, has executed a Memorandum of Understanding with the ARRONAX Cyclotron Facility in Nantes, France. ARRONAX is one of only a small number of global accelerator facilities which possess the requisite proton beam characteristics for strontium-82 production. MIT and ARRONAX will collaborate on production of strontium-82 and other medical radionuclides, such as germanium-68. The collaboration of ARRONAX and MIT will expand the global supply of Sr-82, a supply that is very limited and in great demand by the medical community.

In June 2012, Sr82 samples from ARRONAX have been successfully validated at the Lubbock, Texas processing facility. The internal analysis of the product demonstrates it meets the Sr-82 purity specifications required for the formulation of Sr-82/Rb-82 generators. MIT has now generated the necessary data required for its Drug Master File (DMF) and will be submitting its DMF to the FDA in July 2012. Currently, the only supplier of API grade strontium-82 in the United States is the US Department of Energy.

Results of Operations

Comparison of the Results of Operations for the Three Months ended September 30, 2012 and 2011

The Company experienced a net loss of $1,568,000 for the three months ended September 30, 2012 compared to a net loss of $1,453,000 for the three months ended September 30, 2011. The increase in the current three month period as compared to the same period last year is attributed primarily to the decrease in cost of sales, due to the mix of sales, the decrease in research and development costs, offset by the increase in other expense due to an increase in interest expense, loss on settlement of accounts payable, and other expense for the three months ended September 30, 2012 as compared to the same period in 2011.

Revenues - Revenues for the three months ended September 30, 2012 were $370,000 as compared to $482,000 for the three months ended September 30, 2011. Systems and related equipment sold during the three months ended September 30, 2012 and 2011 were $-0-. Service and warranty revenue was $370,000 and $482,000 for the three months ended September 30, 2012 and 2011, respectively. Sales of PET systems during the three months ended September 30, 2012 have been negatively impacted by shortage of Sr-82/Rb-82 generators supplied to cardiac imaging facilities by Bracco Diagnostics due to the rubidium recall as well as cyclotron maintenance and limited production capacity of the isotope Sr-82.

Gross Margin - Gross margin for the three months ended September 30, 2012 and 2011 was $106,000 and $(19,000), respectively. Costs were lower during the three months ended September 30, 2012 due to the mix of revenues, which consisted solely of service revenues for the three months ended September 30, 2012, which have a higher gross margin.

Operating Expenses - Operating expenses for the three months ended September 30, 2012 were $909,000 compared to $1,081,000 for the three months ended September 30, 2011.

The Company recorded $186,000 in research and development costs during the three months ended September 30, 2012, compared to $401,000 for the three months ended September 30, 2011. Costs were lower in 2012 due to the Company's efforts to limit expenditures. Research and development costs for the three months ended September 30, 2012 included mostly payroll, contract labor and consulting fees for Attrius® software and the PosiRx™ development. In addition, the Company incurs 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 three months ended September 30, 2012 and 2011 were $59,000 and $221,000, respectively and were lower in 2012 due to the Company's efforts to limit expenditures. Sales and marketing expenses for the three months ended September 30, 2012 are primarily comprised of salaries and benefits of $36,000 and travel and trade show expenses of $17,000. Sales and marketing expenses for the three months ended September 30, 2011 include salaries and commissions of approximately $133,000, advertising expense of $17,000 and trade show expenses of $41,000.

General and administrative expenses during the three months ended September 30, 2012 were $664,000 as compared to $459,000 for the three months ended September 30, 2011. The increase over the prior year was primarily due to stock-based compensation of $223,000 and general and administrative expenses of $212,000 related to MIT, the Company's wholly-owned subsidiary acquired in January 2012. The Company did not have these types of expenses during the three months ended September 30, 2011. In addition, other general and administrative expenses decreased by approximately $165,000 as compared to the same period of 2011.

Other Income (Expenses) - Interest expense was $323,000 for the three months ended September 30, 2012 and consists primarily of $286,000 for the accretion of the convertible debentures discount and $37,000 for interest payable on the debt. Interest expense was $123,000 for the three months ended September 30, 2011 and included $108,000 for the accretion of the convertible debentures discount, and $15,000 for interest payable on the convertible debentures.

During the three months ended September 30, 2012, the Company also recorded derivate losses of $279,000 in connection with the embedded conversion derivative liabilities related to convertible debt. The Company recognized derivative losses of $230,000 on the embedded conversion derivative liability during the three months ended September 30, 2011.

Net loss - For the three months ended September 30, 2012, the Company had a net loss of $1,568,000, or $0.00 per share, compared to a net loss of $1,453,000, or $0.00 per share, for the three months ended September 30, 2011.

Comparison of the Results of Operations for the Nine months ended September 30, 2012 and 2011

The Company experienced a net loss of $5,765,000 for the nine months ended September 30, 2012 compared to a net loss of $5,023,000 for the nine months ended September 30, 2011. The increase in the current nine month period as compared to the same period last year is attributed primarily to the increase in stock compensation expense of $1,494,000, and partially offset by the decreases in research and development of $307,000.

Revenues - Revenues for the nine months ended September 30, 2012 were $2,423,000 as compared to $6,374,000 for the nine months ended September 30, 2011. Systems and related equipment sold during the nine months ended September 30, 2012 were $1,177,000 while system sales for the same period in 2011 were $5,486,000. Service and warranty revenue was $1,246,000 and $888,000 for the nine months ended September 30, 2012 and 2011, respectively. Sales of PET systems during the nine months ended September 30, 2012 have been negatively impacted by shortage of Sr-82/Rb-82 generators supplied to cardiac imaging facilities by Bracco Diagnostics due to the rubidium recall as well as cyclotron maintenance and limited production capacity of the isotope Sr-82. The increase in service revenue was due to the expiration of warranties of systems sold in prior years which now have service contracts with Company.

Gross Margin - Gross margin for the nine months ended September 30, 2012 and 2011 was $796,000 and $341,000, respectively. Costs were lower during the nine months ended September 30, 2012 due to the mix of revenues, which included a higher proportion of service revenues for the nine months ended September 30, 2012, which have a higher gross margin.

Operating Expenses - Operating expenses for the nine months ended September 30, 2012 were $4,542,000 compared to $3,741,000 for the nine months ended September 30, 2011.

The Company recorded $755,000 in research and development costs during the nine months ended September 30, 2012, compared to $1,062,000 for the nine months ended September 30, 2011. Costs were lower in 2012 due to the Company's efforts to limit expenditures. Research and development costs for the nine months ended September 30, 2012 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 nine months ended September 30, 2012 and 2011 were $202,000 and $888,000, 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. Sales and marketing expenses for the nine months ended September 30, 2012 are primarily comprised of salaries and benefits of $142,000, and travel and trade show expenses of $36,000. Sales and marketing expenses for the nine months ended September 30, 2011 include salaries and commissions of approximately $446,000, advertising expense of $110,000 and trade show expenses of $127,000.

General and administrative expenses during the nine months ended September 30, 2012 were $3,585,000 as compared to $1,791,000 for the nine months ended September 30, 2011. The increase over the prior year was primarily due to stock-based compensation of $1,494,000, bad debts of $250,000 and general and administrative expenses of $624,000 related to MIT, the Company's wholly-owned subsidiary acquired in January 2012. The Company did not have these types of expenses during the nine months ended September 30, 2011. In addition, consulting expense decreased from $678,000 for the nine months ended September 30, 2011 compared to $120,000 for the nine months ended September 30, 2012 and other general and administrative expenses increased by $413,000.

Other Income (Expenses) - Interest expense was $1,116,000 for the nine months ended September 30, 2012 and consists primarily of $775,000 for the accretion of the convertible debentures discount, $248,000 for the accretion of convertible debentures upon conversion to common stock, and $92,000 for interest payable on the debt. Interest expense was $900,000 for the nine months ended September 30, 2011 and includes the $700,000 for the accretion of convertible debentures upon conversion to Series B Preferred stock as well as $173,000 for the accretion of the convertible debentures discount, and $27,000 for interest payable on the convertible debentures.

During the nine months ended September 30, 2012, the Company also recorded derivative losses of $779,000 in connection with the embedded conversion derivative liabilities related to convertible debt. The Company recognized derivative losses of $723,000 on the embedded conversion derivative liability during the nine months ended September 30, 2011.

Net loss - For the nine months ended September 30, 2012, the Company had a net loss of $5,765,000, or $0.00 per share, compared to a net loss of $5,023,000, or $0.01 per share, for the nine months ended September 30, 2011.

Liquidity and Capital Resources

At September 30, 2012, the Company had current assets of $1,867,000 and current liabilities of $4,542,000 compared to December 31, 2011 when the Company had current assets and current liabilities of $1,951,000 and $5,176,000, respectively. Total assets at September 30, 2012 were $3,518,000 compared to $2,308,000 at December 31, 2011. Total liabilities were $8,109,000 and $5,176,000 at September 30, 2012 and December 31, 2011, respectively.

Cash and cash equivalents at September 30, 2012 were $1,058,000 compared to $1,000 at December 31, 2011. Accounts receivable was $200,000 at September 30, 2012 compared to $612,000 at December 31, 2011.

Current liabilities include accounts payable and accrued expenses of $1,796,000. Customer deposits of $746,000 include $77,000 of deposits for two used machines and $669,000 from a customer that had placed an order for five Nuclear Pharm-Assist™ systems.

Net cash used in operating activities was $1,725,000 and $3,484,000 for the nine months ended September 30, 2012 and 2011, respectively. The decrease over the prior year was primarily due to stock-based compensation, change in receivables, other assets, and customer deposits during the nine months ended September 30, 2012.

Net cash used in investing activities were $70,000 and $8,000 for the nine months ended September 30, 2012 and 2011, respectively. The increase over the prior year was primarily due to higher purchases of property and equipment.

Net cash provided by financing activities was $2,852,000 and $2,545,000 for the nine months ended September 30, 2012 and 2011, respectively. During the nine months ended September 30, 2012, the Company received advances on notes payable and convertible debt of $3,118,000 and repayments of $840,000, compared to advances of $1,700,000 for the nine months ended September 30, 2011. During the nine months ended September 30, 2012, the Company recorded $534,000 related to common stock issuance, compared to $845,000 recorded last year for proceeds from exercise of warrants.

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 funds through loans, credit and the private placement of restricted securities until such time as the Company achieves profitability. To date, management has been successful in raising cash on an as-needed basis for the continued operations of the Company. There is no guarantee that management will be able to continue to raise needed cash in this fashion.

The report of the Company's independent public accountants, which accompanied the financial statements for the year ended December 31, 2011, was qualified with respect to the ability of the Company to continue as a going concern. Although the Company's financial conditions have improved significantly, the Company is not yet profitable or cash-positive. If the Company is unable to obtain debt or equity financing to meet its ongoing cash needs, it may have to limit or disregard portions of its business plans.

The Company has no material commitments for capital expenditures within its current operations at this time. The Company has no "off balance sheet" source of liquidity arrangements.

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