|
FORM
10-QSB
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JUNE
30,
2005
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C.
20549
FORM
10-QSB
|
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30,
2005.
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|
¨
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TRANSITION
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE TRANSITION PERIOD FROM _____________ TO
______________.
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Commission
file
number: 0-24092
Positron
Corporation
(Exact
name of
small business issuer as specified in its charter)
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Texas
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76-0083622
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|||
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(State
of
incorporation)
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(IRS
Employer
Identification No.)
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1304
Langham Creek
Drive, Suite 300, Houston, Texas 77084
(Address
of
principal executive offices)
(281)
492-7100
(Issuer's
telephone
number)
(Former
name,
former address and former fiscal year, if changed since last
report)
Indicate
by check
mark whether the issuer (1) filed all reports required to be filed by Section
13
or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes
x No
¨
As
of June 30,
2005, there were 76,325,046 shares of the Registrant’s Common Stock, $.01 par
value outstanding.
Transitional
Small
Business Disclosure Format (check one). Yes ¨ No
x
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1
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FORM
10-QSB
|
JUNE
30,
2005
|
TABLE
OF
CONTENTS
Form
10-QSB
for the quarter ended June 30,
2005
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PART
I -
FINANCIAL INFORMATION
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Page
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Item
1.
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3
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4
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5
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6
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Item
2.
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10
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Item
3.
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12
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12
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Item
1.
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12
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Item
2.
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12
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Item
3.
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13
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Item
4.
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13
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Item
5.
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13
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Item
6.
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13
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14
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FORM
10-QSB
|
JUNE
30,
2005
|
PART
1 -
FINANCIAL INFORMATION
|
ITEM
1.
|
BALANCE
SHEET
June
30,
2005
(In
thousands,
except share data)
(Unaudited)
|
ASSETS
|
||||
|
Current
assets:
|
||||
|
Cash
and cash
equivalents
|
$
|
368
|
||
|
Inventories
|
684
|
|||
|
Prepaid
expenses
|
76
|
|||
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Other
current
assets
|
10
|
|||
|
Total
current
assets
|
1,138
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|||
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Property
and
equipment, net
|
126
|
|||
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Other
assets
|
270
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|||
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Total
assets
|
$
|
1,534
|
||
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||
|
Current
liabilities:
|
||||
|
Accounts
payable, trade and accrued liabilities
|
$
|
1,476
|
||
|
Customer
deposits
|
17
|
|||
|
Unearned
revenue
|
142
|
|||
|
Convertible
notes payable to affiliated entity, less discount of
$29
|
1,304
|
|||
|
Total
current
liabilities
|
2,939
|
|||
|
Convertible
notes payable to affiliated entity, less discount of
$1,254
|
146
|
|||
|
Stockholders’
equity (deficit):
|
||||
|
Series
A
Preferred Stock: $1.00 par value; 8% cumulative, convertible, redeemable;
5,450,000 shares authorized; 464,319 shares issued and
outstanding
|
464
|
|||
|
Common
Stock:
$0.01 par value; 100,000,000 shares authorized; 76,385,202 shares
issued
and 76,325,046 shares outstanding
|
764
|
|||
|
Additional
paid-in capital
|
57,285
|
|||
|
Subscription
receivable
|
(30
|
)
|
||
|
Accumulated
deficit
|
(60,019
|
)
|
||
|
Treasury
Stock: 60,156 shares at cost
|
(15
|
)
|
||
|
Total
stockholders’ equity (deficit)
|
(1,551
|
)
|
||
|
Total
liabilities and stockholders’ equity
|
$
|
1,534
|
||
See
accompanying
notes
|
|
|
|
FORM
10-QSB
|
JUNE
30,
2005
|
STATEMENTS
OF OPERATIONS
(In
thousands,
except per share data)
(Unaudited)
|
Three
Months
Ended
|
Six
Months
Ended
|
||||||||||||
|
June
30,
2005
|
June
30,
2004
|
June
30,
2005
|
June
30,
2004
|
||||||||||
|
Revenues:
|
|||||||||||||
|
System
sales
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
|||||
|
Upgrades
|
34
|
--
|
34
|
--
|
|||||||||
|
Service
and
component
|
171
|
236
|
350
|
479
|
|||||||||
|
Total
revenues
|
205
|
236
|
384
|
479
|
|||||||||
|
Costs
of
revenues:
|
|||||||||||||
|
System
sales
|
87
|
38
|
176
|
86
|
|||||||||
|
Upgrades
|
8
|
--
|
8
|
--
|
|||||||||
|
Service,
warranty and component
|
75
|
79
|
126
|
149
|
|||||||||
|
Total
costs
of revenues
|
170
|
117
|
310
|
235
|
|||||||||
|
Gross
profit
|
35
|
119
|
74
|
244
|
|||||||||
|
Operating
expenses:
|
|||||||||||||
|
Research
and
development
|
104
|
58
|
260
|
101
|
|||||||||
|
Selling
and
marketing
|
213
|
46
|
443
|
85
|
|||||||||
|
General
and
administrative
|
392
|
286
|
708
|
575
|
|||||||||
|
Stock
based
compensation
|
3
|
350
|
(102
|
)
|
350
|
||||||||
|
Total
operating expenses
|
712
|
740
|
1,309
|
1,111
|
|||||||||
|
Loss
from
operations
|
(677
|
)
|
(621
|
)
|
(1,235
|
)
|
(867
|
)
|
|||||
|
Other
income
(expense)
|
|||||||||||||
|
Interest
Income
|
1
|
--
|
1
|
--
|
|||||||||
|
Interest
expense
|
(273
|
)
|
(22
|
)
|
(353
|
)
|
(22
|
)
|
|||||
|
Total
other
income (expense)
|
(272
|
)
|
(22
|
)
|
(352
|
)
|
(22
|
)
|
|||||
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Net
loss
|
$
|
(949
|
)
|
$
|
(643
|
)
|
$
|
(1,587
|
)
|
$
|
(889
|
)
|
|
|
Basic
and
diluted loss per common share
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
|
|
Weighted
average number of basic and diluted common shares
outstanding
|
53,303
|
53,186
|
53,286
|
53,186
|
|||||||||
See
accompanying
notes
|
|
|
|
FORM
10-QSB
|
JUNE
30,
2005
|
STATEMENTS
OF CASH FLOWS
(In
thousands)
(Unaudited)
|
Six
Months
Ended
|
|||||||
|
June
30,
2005
|
June
30,
2004
|
||||||
|
Cash
flows
from operating activities:
|
|||||||
|
Net
loss
|
$
|
(1,587
|
)
|
$
|
(889
|
)
|
|
|
Adjustment
to
reconcile net loss to net cash used in operating
activities
|
|||||||
|
Depreciation
|
42
|
60
|
|||||
|
Amortization
of loan costs, debt discount and beneficial conversion
features
|
233
|
--
|
|||||
|
Compensation
related to re-pricing of warrants
|
(102
|
)
|
350
|
||||
|
Changes
in
operating assets and liabilities:
|
|||||||
|
Accounts
receivable
|
--
|
3
|
|||||
|
Inventory
|
(63
|
)
|
(630
|
)
|
|||
|
Prepaid
expenses
|
(14
|
)
|
96
|
||||
|
Other
current
assets
|
18
|
1
|
|||||
|
Field
service
parts and supplies
|
(3
|
)
|
3
|
||||
|
Accounts
payable and accrued liabilities
|
83
|
(92
|
)
|
||||
|
Customer
deposits
|
1
|
563
|
|||||
|
Unearned
revenue
|
(11
|
)
|
(27
|
)
|
|||
|
Net
cash used
in operating activities
|
(1,403
|
)
|
(562
|
)
|
|||
|
Cash
flows
from investing activities:
|
|||||||
|
Capital
expenditures
|
(12
|
)
|
--
|
||||
|
Net
cash used
in investing activities
|
(12
|
)
|
--
|
||||
|
Cash
flows
from financing activities:
|
|||||||
|
Proceeds
from
notes payable to an affiliated entity
|
1,650
|
700
|
|||||
|
Deferred
loan
costs
|
--
|
(100
|
)
|
||||
|
Repayment
of
capital lease obligation
|
--
|
(9
|
)
|
||||
|
Net
cash
provided by financing activities
|
1,650
|
591
|
|||||
|
Net
increase
in cash and cash equivalents
|
235
|
29
|
|||||
|
Cash
and cash
equivalents, beginning of period
|
133
|
5
|
|||||
|
Cash
and cash
equivalents, end of period
|
$
|
368
|
$
|
34
|
|||
See
accompanying
notes
|
|
|
|
FORM
10-QSB
|
JUNE
30,
2005
|
SELECTED
NOTES TO FINANCIAL STATEMENTS
|
1.
|
Basis
of Presentation
|
The
accompanying
unaudited interim financial statements have been prepared in accordance with
generally accepted accounting principles and the rules of the U.S. Securities
and Exchange Commission, and should be read in conjunction with the audited
financial statements and notes thereto contained in the Annual Report on Form
10-KSB for Positron Corporation (the “Company”) for the year ended December 31,
2004. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of financial position
and the results of operations for the interim periods presented have been
reflected herein. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. Notes
to
the financial statements which would substantially duplicate the disclosures
contained in the audited financial statements for the most recent fiscal year
ended December 31, 2004, as reported in the Form 10-KSB, have been
omitted.
|
2.
|
Accounting
Policies
|
Revenue
Recognition
Revenues
from
POSICAMTM
system
contracts
are recognized when all significant costs have been incurred and the system
has
been shipped to the customer. The Company also recognizes revenue on bill and
hold transactions when the product is completed and is ready to be shipped
and
the risk of loss is transferred to the customer. In certain cases, at the
customers’ request, the Company is storing the product for a brief period of
time. Revenues from maintenance contracts are recognized over the term of the
contract. Service revenues are recognized upon performance of the
services.
Reclassifications
Certain
prior year
amounts have been reclassified to conform with the presentation for the current
year. Such reclassifications had no impact on net income or stockholders’ equity
as previously reported.
|
3.
|
Inventories
|
Inventories
at June
30, 2005 consisted of the following (in thousands):
|
Raw
materials
|
$
|
717
|
||
|
Work
in
progress
|
17
|
|||
|
Subtotal
|
734
|
|||
|
Less
reserve
for obsolescence
|
(50
|
)
|
||
|
Total
|
$
|
684
|
|
4.
|
Other
Assets
|
Other
assets at
June 30, 2005 consisted of the following (in thousands):
|
Field
service
parts and supplies
|
$
|
218
|
||
|
Deferred
loan
costs
|
52
|
|||
|
Total
|
$
|
270
|
|
5.
|
Accounts
Payable and Accrued
Liabilities
|
|
|
|
|
FORM
10-QSB
|
JUNE
30,
2005
|
Accounts
payable
and accrued liabilities at June 30, 2005 consisted of the following (in
thousands):
|
Trade
accounts payable
|
$
|
343
|
||
|
Accrued
royalties
|
318
|
|||
|
Sales
taxes
payable
|
236
|
|||
|
Accrued
interest
|
185
|
|||
|
Accrued
compensation
|
118
|
|||
|
Accrued
property taxes
|
116
|
|||
|
Accrued
professional fees
|
80
|
|||
|
Insurance
premiums payable
|
40
|
|||
|
Accrued
warranty costs
|
40
|
|||
|
Total
|
$
|
1,476
|
|
6.
|
Convertible
Notes Payable to Affiliated
Entities
|
Notes
payable to
affiliated entities at June 30, 2005 consisted to the following (in
thousands):
|
IMAGIN
Diagnostic Centres, Inc., less discount of $29
|
$
|
1,304
|
||
|
Solaris
Opportunity Fund, L.P., less discount of $1,254
|
146
|
|||
|
Total
|
$
|
1,450
|
IMAGIN
Diagnostic Centres, Inc.
On
May 26, 2004 and
June 17, 2004, the Company sold two separate secured convertible promissory
notes under a Note Purchase Agreement dated May 21, 2004, to IMAGIN Diagnostic
Centres, Inc. (“IMAGIN”) in the principal amounts of $400,000 and $300,000,
respectively. Interest is charged on the outstanding principal at the rate
of
ten percent (10%) per annum and is payable annually to the extent of positive
cash flow on the anniversary dates of these notes. The principal and any unpaid
interest must be paid on the earlier to occur of May 21, 2006 or when declared
due and payable by IMAGIN upon occurrence of an event of default. The notes
are
initially convertible into new shares of Series C Preferred Stock that, in
turn
are convertible into an aggregate of 35,000,000 shares of the Company’s common
stock. These notes are collateralized by all of the assets of the Company.
As of
June 30, 2005, principal of $700,000 has been advanced and remains outstanding
related to these notes. Full convertibility of the shares of Series C Preferred
Stock into common stock will require an amendment to the Company’s Articles of
Incorporation which must be approved by the shareholders. The Company has agreed
to seek such approval.
In
a second stage
of the financing IMAGIN agreed to purchase additional secured convertible
promissory notes in the aggregate principal amount of $1,300,000. These notes
were to be purchased over a six and a half month period, commencing July 15,
2004. These notes are due and payable on May 21, 2006. These notes are initially
convertible into new shares of Series D Preferred Stock that, in turn is
convertible into an aggregate of 52,000,000 shares of the Company’s common
stock. As of June 30, 2005, principal of $1,208,500 has been advanced related
to
these notes. On June 30, 2005, IMAGIN converted $575,000 of these promissory
notes into shares of Series D Preferred Stock that, in turn were converted
into
23,000,000 shares of the Company’s common stock. This conversion reduced the
principal owed under these promissory notes from $1,208,500 to $633,500. Full
convertibility of the shares of Series D Preferred Stock into common stock
will
require an amendment to the Company’s Articles of Incorporation which must be
approved by the shareholders. The Company has agreed to seek such
approval.
The
agreements with
IMAGIN provided for a $200,000 transaction fee payable to IMAGIN upon completion
of the financing. Under terms of these agreements, this fee obligation was
to be
reduced by an amount equal to $0.02 multiplied by the number of warrants issued
to IMAGIN. The agreements with IMAGIN also provided for the issuance of new
warrants for the purchase of 4,575,000 shares of common stock, which resulted
in
a $91,500 decrease in this fee obligation to $108,500. This fee obligation
is
included in the principal of the notes payable to IMAGIN at June 30, 2005.
The
Company allocated the proceeds received from this convertible debt with
detachable warrants using the relative fair value of the individual elements
at
the time of issuance. The notes payable to IMAGIN contain an unamortized
discount balance of approximately $29,000 at June 30, 2005. The discount of
the
debt is to be amortized over the term of the notes payable.
|
|
|
|
FORM
10-QSB
|
JUNE
30,
2005
|
Patrick
G. Rooney,
Chairman of the Board of the Company is the son of Patrick Rooney, Director
of
Corporate Development of IMAGIN Diagnostic Centres, Inc. Patrick G. Rooney
and
John E. McConnaughy, Jr. were appointed to the Board of Directors of the Company
in connection with the financing with IMAGIN.
Solaris
Opportunity Fund, L.P.
Financing
Agreements dated February 28, 2005
On
February 28,
2005, the Company entered into a series of agreements with Solaris Opportunity
Fund, L.P. (“Solaris”) pursuant to which Solaris agreed to purchase an aggregate
of $1,000,000 face amount of the Company’s 10% secured convertible promissory
notes. As of June 30, 2005, Solaris has purchased $1,000,000 of these notes.
These notes are due and payable on March 6, 2007. The notes are initially
convertible into new shares of Series E Preferred Stock that, in turn are
convertible into an aggregate of 22,000,000 shares of the Company’s common
stock. As of June 30, 2005, full convertibility of the shares of Series E
Preferred Stock into common stock will require an amendment to the Company’s
Articles of Incorporation which must be approved by the shareholders. The
Company has agreed to seek such approval.
In
accordance with
generally accepted accounting principles in the event the conversion price
is
less than the Company’s stock price at the date of the agreement, the difference
is considered to be a beneficial conversion feature and is amortized over the
period from the date of issuance to the stated maturity date. On February 28,
2005, enough common shares were available to facilitate the conversion of
substantially all of the debt into common stock. The fair value of the related
Series E Preferred Stock at the commitment date of $2,200,000 less the
$1,000,000 in loan proceeds, results in an intrinsic value of $1,200,000 for
the
beneficial conversion feature. However, the beneficial conversion feature is
limited to the $1,000,000 proceeds of the debt.
Pursuant
to the
terms of the agreements, the Company granted to Solaris a security interest
in
all of its assets to secure payment of the convertible promissory notes. The
security interest is subordinate to the security interest previously granted
in
the same collateral to IMAGIN.
Financing
Agreements dated June 27, 2005
On
June 27, 2005,
the Company entered into a series of agreements with Solaris pursuant to which
Solaris agreed to purchase an aggregate of $400,000 face amount of the Company’s
10% secured convertible promissory notes. As of June 30, 2005, Solaris has
purchased $400,000 of these notes. These notes are due and payable on March
6,
2007. The notes are initially convertible into new shares of Series F Preferred
Stock that, in turn are convertible into an aggregate of 20,000,000 shares
of
the Company’s common stock. As of June 30, 2005, full convertibility of the
shares of Series F Preferred Stock into common stock will require an amendment
to the Company’s Articles of Incorporation, which must be approved by the
shareholders. The Company has agreed to seek such approval.
In
accordance with
generally accepted accounting principles in the event the conversion price
is
less than the Company’s stock price at the date of the agreement, the difference
is considered to be a beneficial conversion feature and is amortized over the
period from the date of issuance to the stated maturity date. On June 27, 2005,
enough common shares were available to facilitate the conversion of all of
the
debt into common stock. The fair value of the related Series F Preferred Stock
at the commitment date of $1,600,000 less the $400,000 in loan proceeds, results
in an intrinsic value of $1,200,000 for the beneficial conversion feature.
However, the beneficial conversion feature is limited to the $400,000 proceeds
of the debt.
|
|
|
|
FORM
10-QSB
|
JUNE
30,
2005
|
Pursuant
to the
terms of the agreements, the Company granted to Solaris a security interest
in
all of its assets to secure payment of the convertible promissory notes. The
security interest is subordinate to the security interest previously granted
in
the same collateral to IMAGIN and Solaris.
Patrick
G. Rooney,
Chairman of the Board of the Company, is the general partner of
Solaris.
|
7.
|
Stockholders’
Equity
|
Stockholders
converted 45,900 shares of Series A Preferred Stock into 199,243 shares of
common stock in the six month period ended June 30, 2005.
|
8.
|
Earnings
Per Share
|
Basic
earnings per
common share are based on the weighted average number of common shares
outstanding in each period and earnings adjusted for preferred stock dividend
requirements. Diluted earnings per common share assume that any dilutive
convertible preferred shares outstanding at the beginning of each period were
converted at those dates, with related interest, preferred stock dividend
requirements and outstanding common shares adjusted accordingly. It also assumes
that outstanding common shares were increased by shares issuable upon exercise
of those stock options and warrants for which market price exceeds exercise
price, less shares which could have been purchased by the Company with related
proceeds. The convertible preferred stock and outstanding stock options and
warrants were not included in the computation of diluted earnings per common
share for the three and six month periods ended June 30, 2004 and 2005 since
it
would have resulted in an antidilutive effect.
The
following table
sets forth the computation of basic and diluted earnings per share.
|
Three
Months
Ended
|
Six
Months
Ended
|
||||||||||||
|
June
30,
2005
|
June
30,
2004
|
June
30,
2005
|
June
30,
2004
|
||||||||||
|
(In
Thousands, except per share data)
|
|||||||||||||
|
Numerator
|
|||||||||||||
|
Basic
and
diluted loss
|
$
|
(949
|
)
|
$
|
(643
|
)
|
$
|
(1,587
|
)
|
$
|
(889
|
)
|
|
|
Denominator
|
|||||||||||||
|
Basic
and
diluted earnings per share - weighted average shares
outstanding
|
53,303
|
53,186
|
53,286
|
53,186
|
|||||||||
|
Basic
and
diluted loss per common share
|
$
|
(0.02
|
)
|
$
|
(
0.01
|
)
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
|
|
9.
|
Litigation
|
Please
refer to our
Quarterly Report on Form 10-QSB for the fiscal quarter ended March 31, 2005,
filed on May 16, 2005, which discloses claims which have been filed against
the
Company. There have been no material developments with respect to these claims
since the previously filed Quarterly Report.
|
10.
|
Stock
Based Compensation
|
In
connection with
the May 2004 transaction with IMAGIN, the Company re-priced various options
and
warrants to employees that are subject to the variable accounting rules. The
market price of the Company’s common stock decreased $0.03 from $0.12 at
December 31, 2004 to $0.09 at June 30, 2005. Due to the decline in price,
application of the variable accounting rules resulted in the reversal of stock
based compensation by $102,000 in the six months ended June 30,
2005.
|
|
|
|
FORM
10-QSB
|
JUNE
30,
2005
|
|
11.
|
Subsequent
Events
|
On
August 8, 2005,
the Company sold to IMAGIN Diagnostic Centres, Inc. 10% secured convertible
promissory notes under a Note Purchase Agreement, dated the same date, in the
aggregate principal amount of $400,000. These notes are convertible into an
aggregate of 20,000,000 shares of the Company’s common stock. Full
convertibility of the notes into shares of common stock will require an
amendment to the Company’s Articles of Incorporation which must be approved by
the shareholders. The Company has agreed to seek such approval.
We
are including
the following cautionary statement in this Quarterly Report on Form 10-QSB
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.
Our
expectations,
beliefs and projections are expressed in good faith and are believed by us
to
have a reasonable basis, including without limitations, our examination of
historical operating trends, data contained in our records and other data
available from third parties, but there can be no assurance that our
expectations, beliefs or projections will result, or be achieved, or be
accomplished.
Comparison
of the Results of Operations for the Three Months ended June 30, 2005 and
2004
We
experienced a
loss of $949,000 for the three months ended June 30, 2005 compared to a loss
of
$643,000 for the same quarter in 2004. The larger loss in 2005 resulted
primarily from increases in costs related to personnel and interest, offset
by
decreases in stock based compensation.
We
generated no
revenues from sales of systems in the three months ended June 30, 2005 and
2004.
We earned revenues of $34,000 from upgrades of systems in the second quarter
of
2005 compared to no revenues from system upgrades in the same period in 2004.
Our service revenues decreased $65,000 to $171,000 in the three months ended
June 30, 2005 from $236,000 in the same period in 2004. Service revenues in
the
three month period ended June 30, 2004 included the recognition of $50,000
in
revenue relating to support provided to GE Medical Systems in conjunction with
the sale of our Cardiac PET Software.
We
generated gross
profits of $35,000 during the three months ended June 30, 2005 compared to
profits of $119,000 for the same three months in 2004. Revenues of $50,000
relating to services provided to GE Medical Systems were included in gross
profits in the quarter ended June 30, 2004. Expense associated with
manufacturing labor and overhead increased $49,000 to $87,000 in the quarter
ended June 30, 2005 from $38,000 in the same period in 2004. This $49,000
increase resulted primarily from the capitalization of $61,000 of manufacturing
cost into inventory in 2004.
|
|
|
|
FORM
10-QSB
|
JUNE
30,
2005
|
Our
operating
expenses decreased $28,000 to $712,000 for the three months ended June 30,
2005
from $740,000 for the same period in 2004. Research and development expenses
increased $46,000 to $104,000 from $58,000 as a result of increased personnel
costs. Sales and marketing expenses also increased $167,000 to $213,000 from
$46,000 as a result of increased personnel costs. General and administrative
expenses increased $106,000 to $392,000 in the quarter ended June 30, 2005
from
$286,000 in the same period in 2004. This increase in general and administrative
expenses primarily resulted from increased legal fees expensed in 2005. We
recorded stock based compensation of $350,000 in the quarter ended June 30,
2004
relating to the application of the variable accounting rules to the re-pricing
of warrants and options.
We
recognized
interest expense of $273,000 in the second quarter of 2005 compared to $22,000
of interest expense in the same period in 2004. Interest expense in the second
quarter of 2005 relates to the notes payable to IMAGIN Diagnostic Centres,
Inc.
and Solaris Opportunity Fund, L.P. and includes $201,000 in amortization of
loan
costs, debt discounts and beneficial conversion features.
Comparison
of the Results of Operations for the Six Months ended June 30, 2005 and
2004
We
experienced a
loss of $1,587,000 for the six months ended June 30, 2005 compared to a loss
of
$889,000 for the same period in 2004. The larger loss in 2005 resulted primarily
from increases in costs related to personnel and interest, offset by decreases
in stock based compensation.
We
generated no
revenues from sales of systems in the six months ended June 30, 2005 and 2004.
We earned revenues of $34,000 from upgrades of systems in the first six months
of 2005 compared to no revenues from system upgrades in the same period in
2004.
Our service revenues decreased $129,000 to $350,000 in the six months ended
June
30, 2005 from $479,000 in the same period in 2004. Service revenues in the
six
month period ended June 30, 2004 included the recognition of $100,000 in revenue
relating to support provided to GE Medical Systems in conjunction with the
sale
of our Cardiac PET Software.
We
generated gross
profits of $74,000 during the six months ended June 30, 2005 compared to
$244,000 for the same period in 2004. Revenues of $100,000 relating to services
provided to GE Medical Systems were included in gross profits in the six months
ended June 30, 2004. Expense associated with manufacturing labor and overhead
increased $90,000 to $176,000 in the six month period ended June 30, 2005 from
$86,000 in the same period in 2004. This $90,000 increase resulted primarily
from the capitalization of $61,000 of manufacturing cost into inventory in
2004.
Our
operating
expenses increased $198,000 to $1,309,000 for the six months ended June 30,
2005
from $1,111,000 for the same period in 2004. Research and development expenses
increased $159,000 to $260,000 from $101,000 as a result of increased personnel
costs. Sales and marketing expenses also increased $358,000 to $443,000 from
$85,000 as a result of increased personnel costs. General and administrative
expenses increased $133,000 to $708,000 in the six month period ended June
30,
2005 from $575,000 in the same period in 2004. This increase in general and
administrative expenses primarily resulted from increased legal fees expensed
in
2005. We recorded stock based compensation of $350,000 in the six months ended
June 30, 2004 relating to the application of the variable accounting rules
to
the re-pricing of warrants and options. We reversed $102,000 of stock based
compensation in the first six months of 2005.
We
recognized
interest expense of $353,000 in the second first six months of 2005 compared
to
$22,000 of interest expense in the same period in 2004. Interest expense in
the
first six months of 2005 relates to the notes payable to IMAGIN Diagnostic
Centres, Inc. and Solaris Opportunity Fund, L.P. and includes $233,000 in
amortization of loan costs, debt discounts and beneficial conversion
features.
Financial
Condition
We
had cash and
cash equivalents of $368,000 on June 30, 2005. On the same date, we had accounts
payable and accrued liabilities outstanding of $1,476,000. We did not sell
any
imaging systems in the six-month period ended June 30, 2005. In order to resolve
our liquidity problems, we must sell imaging systems or seek alternative sources
of debt or equity funding. However, there is no assurance that we will be
successful in selling new systems or securing additional debt or equity
funds.
Since
inception, we
have been unable to sell our POSICAMTM
systems in
quantities sufficient to be operationally profitable. Consequently, we have
sustained substantial losses. Due to the sizable selling prices of our systems
and the limited number of systems sold or placed into service each year,
revenues have fluctuated significantly from year to year. We have an accumulated
deficit of $60,019,000 at June 30, 2005. The Company will need to increase
system sales to achieve profitability in the future.
|
|
|
|
FORM
10-QSB
|
JUNE
30,
2005
|
These
events raise
doubt as to our ability to continue as a going concern. The report of our
independent public accountants, which accompanied our financial statements
for
the year ended December 31, 2004, was qualified with respect to that risk.
If we
are unable to obtain debt or equity 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.
New
Accounting Pronouncements
Please
refer to the
Annual Report Form 10-KSB for the year ended December 31, 2004 for disclosures
regarding the Company’s treatment of new accounting pronouncements.
Critical
Accounting Policies
Revenue
Recognition
Revenues
from
POSICAMTM
system
contracts
are recognized when all significant costs have been incurred and the system
has
been shipped to the customer. The Company also recognizes revenue on bill and
hold transactions when the product is completed and is ready to be shipped
and
the risk of loss is transferred to the customer. In certain cases, at the
customers’ request, the Company is storing the product for a brief period of
time. Revenues from maintenance contracts are recognized over the term of the
contract. Service revenues are recognized upon performance of the
services.
As
of June 30,
2005, the Company carried out an evaluation, under the supervision and with
the
participation of the Company’s management, including the Company’s Chief
Financial Officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e) and Rule 15d-15(e)). Based upon that evaluation, the Company’s Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures are effective at a reasonable level. There has been no change in
the
Company’s internal control over financial reporting that occurred during the
Company’s most recent fiscal quarter that has materially affected or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
The
Company’s
management, including the Chief Financial Officer, do not expect that the
Company’s disclosure controls or internal control over financial reporting will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met due to numerous factors, ranging from
errors to conscious acts of an individual, or individuals acting together.
In
addition, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in a cost-effective control
system, misstatements due to error and/or fraud may occur and not be
detected.
Please
refer to our
Quarterly Report on Form 10-QSB for the fiscal quarter ended March 31, 2005,
filed on May 16, 2005, which discloses claims which have been filed against
the
Company. There have been no material developments with respect to these claims
since the previously filed Quarterly Report.
Series
F
Preferred Stock
|
|
|
|
FORM
10-QSB
|
JUNE
30,
2005
|
The
Board of
Directors created, out of the 10,000,000 shares of preferred stock authorized
in
Article Four of the Articles of Incorporation, a series of 600,000 shares of
preferred stock, par value $1.00 per share, designated as Series F Preferred
Stock. Each share of Series F Preferred Stock is convertible into shares of
common stock.
Recent
Sales of Unregistered Securities
On
June 27, 2005,
the Company sold to Solaris Opportunity Fund, L.P. a 10% secured convertible
promissory note under a Note Purchase Agreement dated June 27, 2005, in the
principal amount of $400,000. These notes are convertible into shares of Series
F Preferred Stock that, in turn, are convertible at the option of the holder
into an aggregate 20,000,000 shares of the Company’s common stock.
The
sales of
securities described above were exempt from the registration requirements of
the
Securities Act of 1933, as amended, pursuant to Section 4(2) of the Securities
Act of 1933, since the issuance constituted a sale not involving a public
offering.
None
None
None
|
Exhibit
|
Description
of the Exhibit
|
|
|
3.1
|
Articles
of
Incorporation of the Registrant (incorporated herein by reference
to
Exhibit 3.1 to the Company’s Registration Statement on Form SB-2 (File No.
33-68722)).
|
|
|
3.2
|
By-laws
of
the Registrant, as amended (incorporated herein by reference to Exhibit
3.2 to the Company’s Registration Statement on Form SB-2 (File No.
33-68722)).
|
|
|
4.1
|
Statement
of
Designation Establishing Series F Preferred Stock of Positron Corporation
(incorporated herein by reference to Exhibit 4.1 to the Company’s Current
Report on Form 8-K (File No. 000-24092)).
|
|
|
10.1
|
Note
Purchase
Agreement dated June 27, 2005 between Positron and Solaris Opportunity
Fund, L.P. (incorporated herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K (File No.
000-24092)).
|
|
|
10.2
|
Form
Secured
Convertible Promissory Note (incorporated herein by reference to
Exhibit
10.2 to the Company’s Current Report on Form 8-K (File No.
000-24092)).
|
|
|
10.3
|
Security
Agreement dated June 27, 2005 between Positron and Solaris Opportunity
Fund, L.P. (incorporated herein by reference to Exhibit 10.3 to the
Company’s Current Report on Form 8-K (File No.
000-24092)).
|
|
|
10.4
|
Registration
Rights Agreement dated June 27, 2005 between Positron and Solaris
Opportunity Fund, L.P. (incorporated herein by reference to Exhibit
10.4
to the Company’s Current Report on Form 8-K (File No.
000-24092)).
|
|
|
|
|
FORM
10-QSB
|
JUNE
30,
2005
|
|
Chief
Executive Officer and Chief Financial Officer Certification of Periodic
Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.*
|
||
|
Chief
Executive Officer and Chief Financial Officer Certification Pursuant
to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.#
|
*
Filed
herewith
#
Furnished
herewith
Pursuant
to the
requirements of the Securities Exchange Act of 1934, the Registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
POSITRON
CORPORATION
|
||
|
(Registrant)
|
||
|
Date:
August 12,
2005
|
/s/
Gary
H. Brooks
|
|
|
Gary
H.
Brooks
|
||
|
CEO
&
CFO
|
||
EXHIBIT
INDEX
|
Exhibit
|
Description
of the Exhibit
|
|
|
Chief
Executive Officer and Chief Financial Officer Certification of Periodic
Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.*
|
||
|
Chief
Executive Officer and Chief Financial Officer Certification Pursuant
to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.#
|
*
Filed
herewith
#
Furnished
herewith
|
|
|
14