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POSC > SEC Filings for POSC > Form 10-Q on 17-May-2013All Recent SEC Filings

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Form 10-Q for POSITRON CORP


17-May-2013

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") a nuclear medicine healthcare company specializing in the field of cardiac Positron Emission Tomography (PET) imaging - the gold standard diagnostic test in nuclear cardiology.

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.

Our Products and Key Components

The Company offers a range of products and services for nuclear imaging community that 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 has negotiated a strategic alliance with Jubilant DraxImage Inc. (JDI), an Sr-82/Rb-82 generator manufacturer, whose generator and related infusion cart are in the final stages of the FDA's approval process. Upon FDA approval, JDI and Positron will market and distribute the first and only alternative to Bracco's Cardiogen-82 generator, which had multiple recalls during the last two years. Positron will supply JDI with Sr-82 for the generator production. Positron intends to couple the generator with the 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.

In our pursuit of securing isotopes for North American consumption and increasing the global radioisotope supply, 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 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 Sr-82, that is currently in short supply in the world and is produced in the U.S. only by the Department of Energy ("DOE") National Laboratories. It is the policy of the DOE to not compete with private industry, and therefore the DOE may be compelled via petition to withdraw from the market when the materials are reasonably available commercially.

The cost of the project, including equipment, building, land, working capital and contingencies, is approximately $60 million. Positron executed an agreement with IBA Molecular, of Belgium, to manufacture a 70 MeV cyclotron. The facility will be located in the city of Gary, Indiana. The facility will take approximately 3.5 years to build. The Company expects to begin operations in 2017. Positron has received an offer of $30 Million in economic incentives from the City of Gary, Indiana towards the development of Positron's 70 MeV cyclotron 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. There can be no assurance that the Company will be able to raise the funds required to complete the cyclotron project or that if it does so, that such funds will be raised on terms that are favorable to the Company.

Major developments and milestones achieved by Positron Corporation during 2012 include:

· Acquisition of Manhattan Isotope Technology (MIT), 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.

· Jubilant DraxImage and Positron have negotiated a strategic collaboration on the sourcing and supply of strontium-82 and rubidium-82 generators, which will be the only alternative to Bracco Diagnostics' rubudium-82 generators in the U.S. after the FDA approval.

· Positron registered a Drug Master File (DMF) for its strontium-82 Drug Substance with the United States Food & Drug Administration (FDA).

· Positron began processing Sr-82 from third party irradiators and has been approved for supplying API grade Sr-82 for Jubilant DraxImage's rubidium-82 generators.

· Positron is securing supply agreements with all available foreign and domestic strontium-82 suppliers.

· Positron accepts offer of $30 Million in economic incentives from the City of Gary, Indiana towards the development of Positron's 70 MeV cyclotron project.

· The University of Texas Health Science Center at Houston has received FDA approval for their Coronary Flow Reserve (CFR) quantification software, to be used with Positron's Attrius PET scanner. Positron has been granted a license to distribute and support this software.

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, through the acquisition of Manhattan Isotope Technology (MIT) in 2012, 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 2010, 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, through its wholly owned subsidiary, Positron Isotopes Corporation, 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. Positron intends to couple the cyclotron with facilities for material processing, isotope target manufacturing, radiopharmaceutical manufacturing and equipment manufacturing operations; this facility, located in Gary, Indiana, will also host Positron's corporate headquarters.

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.

The cost of the project, including equipment, building, land, working capital and contingencies, is approximately $65 million with itemized costs detailed in the business plan. The facility will be located in the city of Gary, Indiana, concurrent with the relocation of Positron's corporate headquarters and manufacturing facilities. Positron has accepted a proposal from Gary, Indiana for $30 million in economic incentives through the issuance of long-term Economic Development Tax Increment Revenue Bonds ("TIF Bonds") and New Market Tax Credits ("NMTC").

Total amount of funding Positron seeks is $65 million; $30 million in corporate debt financing, $15 million in TIF bonds financing, $10 million in NMTC equity investment (approximate net proceeds) and $10 million in equity financing. The availability of Industrial Revenue Bonds exists, if necessary.

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

Comparison of the Results of Operations for the Three Months ended March 31, 2013 and 2012

The Company experienced a net loss of $1,201,000 for the three months ended March 31, 2013 compared to a net loss of $2,962,000 for the three months ended March 31, 2012. The decrease in the loss in the current three month period as compared to the same period last year is attributed primarily to a decrease in general and administrative expenses due to stock-based compensation and derivative gains/losses.

Revenues - Revenues for the three months ended March 31, 2013 were $371,000 as compared to $829,000 for the three months ended March 31, 2012. Systems sold during the three months ended March 31, 2013 were $0 while system sales for the same period in 2012 were $353,000. Service and parts revenue was $371,000 and $451,000 for the three months ended March 31, 2013 and 2012, respectively. Sales of PET systems during the three months ended March 31, 2013 have been negatively impacted by shortage of Sr-82/Rb-82 generators supplied to cardiac imaging facilities by Bracco Diagnostics due to cyclotron maintenance and limited production capacity of the isotope Sr-82.

Gross Margin - Gross margin for the three months ended March 31, 2013 and 2012 was $125,000 and $359,000, respectively. Costs were lower during the three months ended March 31, 2013 due to the majority of revenues being service income.

Operating Expenses - Operating expenses for the three months ended March 31, 2013 were $894,000 compared to $2,161,000 for the three months ended March 31, 2012.

The Company recorded $228,000 in research and development costs during the three months ended March 31, 2013, compared to $313,000 for the three months ended March 31, 2012. Research and development costs for the three months ended March 31, 2013 included mostly payroll, contract labor and consulting fees for Attrius® software and the PosiRx™ development. In addition, the Company has research and development costs related to the radiopharmaceutical facility to prepare it 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 March 31, 2013 and 2012 were $99,000 and $83,000, respectively and were lower in 2012 due to the Company's efforts to limit expenditures. Sales and marketing expenses for the three months ended March 31, 2013 and 2012 are mostly comprised of salaries and consulting fees.

General and administrative expenses during the three months ended March 31, 2013 were $567,000 as compared to $1,765,000 for the three months ended March 31, 2012. During the three months ended March 31, 2012, the Company recorded $1,066,000 in stock based compensation, compared to $88,000 in 2013.

Other Income (Expenses) - Interest expense was $493,000 for the three months ended March 31, 2013 and includes the $450,000 for the accretion of the convertible debentures discount and $43,000 for interest payable on the debt. Interest expense was $287,000 for the three months ended March 31, 2012 and includes the $241,000 for the accretion of the convertible debentures discount and $46,000 for interest payable on the debt.

During the three months ended March 31, 2013 and 2012, the Company also recorded derivate gains of $61,000 and losses of $876,000, respectively, in connection with the embedded conversion derivative liabilities related to convertible debt.

Liquidity and Capital Resources

At March 31, 2013, the Company had current assets of $1,008,000 and current liabilities of $9,104,000compared to December 31, 2012 when the Company had current assets of $1,104,000 and current liabilities of $8,110,000. Total assets at March 31, 2013 were $2,543,000 compared to $2,685,000 at December 31, 2012. Total liabilities were $9,846,000 and $8,875,000 at March 31, 2013 and December 31, 2012, respectively.

Cash and cash equivalents at March 31, 2013 were $40,000 compared to $243,000 at December 31, 2012. Accounts receivable was $292,000 at March 31, 2013 compared to $273,000 at December 31, 2012.

Current liabilities include accounts payable and accrued expenses of $1,682,000 at March 31, 2013.

Net cash used in operating activities was $740,000 and $342,000 for the three months ended March 31, 2013 and 2012, respectively

Net cash used in investing activities were $1,000 and $22,000 for the three months ended March 31, 2013 and 2012, respectively.

Net cash provided by financing activities was $538,000 and $366,000 for the three months ended March 31, 2013 and 2012, respectively.

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 . . .

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