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-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.
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.
Positron Corporation (the "Company") was
incorporated in 1983 and commenced commercial
operations during 1986. The Company designs,
markets and services its POSICAMTM system
advanced medical imaging devices, utilizing
positron emission tomography ("PET") technology,
and through its wholly-owned subsidiary IPT
markets the IS2 PulseCDCTM compact digital
cardiac camera. Since the commencement of
commercial operations and prior to the
acquisition of IPT in 2006, revenues have been
generated primarily from the sale and service
contract revenues derived from the Company's
POSICAM™ system, 11 of which are currently in
operation in certain medical facilities in the
United States and 6 are operating in
international medical institutions. The Company
has never been able to sell its POSICAM™ systems
in sufficient quantities to achieve operating
profitability. For this reason, in 2005 the
Company entered into a joint venture with
Neusoft Medical Systems Co., Inc. of Shenyang,
Lianoning Province, People's Republic of China.
Through the joint venture the Company believes
it can modernize and upgrade its technology and
lower production costs of its systems.
Neusoft Positron Corporation Co. Ltd.
The Company's joint venture with Neusoft
Medical Systems Co., Inc. of Shenyang, Lianoning
Province, People's Republic of China ("Neusoft"),
named Neusoft Positron Corporation Co., Ltd.
("NPMS"), is active in the development and
manufacture of Positron Emission Tomography
systems (PET), and an integrated X-ray Computed
Tomography system (CT) and PET system (PET/CT).
These systems utilize the Company's patented and
proprietary technology, an imaging technique
which assesses the biochemistry, cellular
metabolism and physiology of organs and tissues,
as well as producing anatomical and structural
images. Targeted markets include medical
facilities and diagnostic centers located
throughout the world. POSICAMTM systems are used
by physicians as diagnostic and treatment
evaluation tools in the areas of cardiology,
neurology and oncology. The Company faces
competition principally from three other
companies which specialize in advanced medical
imaging equipment. To date NPMS has not produced
a PET or CT system for sale. NPMS will be
required to make a submission to the United
States Food and Drug Administration for approval
of its system modernization to the POSICAMTM
systems. The Company anticipates that the
submission will be made late in 2007 or early in
2008. FDA review time for similar submissions is
typically four months.
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FORM 10-QSB JUNE 30, 2007
Imaging Pet Technologies - Business
Acquisition
On January 26, 2007, the Company executed and
consummated a Securities Purchase Agreement (the
"Agreement") with Imagin Diagnostic Centres,
Inc. ("IMAGIN"), to acquire 11,523,000 shares of
common stock of Imaging Pet Technologies, Inc.
("IPT"). The Shares represented approximately a
50.1% of IPT's issued and outstanding common
stock. As a result of the acquisition of the
Shares, the Company owns 100% of the common
stock of IPT. As consideration for the shares,
the Company and IMAGIN agreed to cancel a
promissory note in the principal amount of
$2,400,000 made by IMAGIN subsidiary, QMP and
later assigned to IMAGIN. As of the date of the
Agreement, the Company had been advised by
IMAGIN that it had acquired all of QMP's
interest in IPT as well as QMP's other holdings
of the Company's related securities.
Results of Operations
The consolidated results of operations for
the three and six month periods ended June 30,
2007 included the results of Positron
Corporation and its wholly-owned subsidiary
Imaging Pet Technologies ("IPT") and IPT's
wholly-owned subsidiary Quantum Molecular
Technologies ("QMT"). Results of operations for
the three and six month periods ended June 30,
2006 include results of only Positron
Corporation. The Company acquired a 49.9%
interest in IPT in May 2006 and the remaining
50.1% in January 2007. For the three and six
month periods ended June 30, 2006, the Company
accounted for its investment in IPT under the
equity method of accounting and thus did not
consolidate IPT's results of operations for
those periods.
Comparison of the Results of Operations for
the Three Months ended June 30, 2007 and 2006
The Company experienced a net loss of
$1,107,000 for the three months ended June 30,
2007 compared to a loss of $3,115,000 for the
same quarter in 2006. Contributing to the
significantly greater loss for the three month
period in 2006 was a loss from derivative
liabilities of $1,887,000.
Revenues - Revenues from the sales of IPT's
gamma cameras were $454,000 for the three months
ended June 30, 2007. The Company did not have
any system sales for the same period in 2006.
Service revenue for the quarter was $415,000 as
compared to $266,000 for the same period in
2006. The increase of 56% is due in large part
to service revenue from IPT. Service revenue for
Positron Corporation alone decreased to $173,000
as two customers did not renew their service
contracts.
Gross profit for the three months ended June
30, 2007 and 2006, was $246,000 and 86,000,
respectively. Cost of sales related to the IPT
systems was $413,000. Costs of service and
component sales for the three months ended June
30, 2007 increased by $30,000 to $210,000 as
compared to $180,000 for the same period in
2006. The increase is attributed to additional
service contracts from the IPT business.
Operating Expenses - Operating expenses
increased $402,000 to $1,338,000 for the three
months ended June 30, 2007 from $936,000 for the
same period in 2006. Operating expenses for IPT
alone during the current quarter were $807,000.
Research and development costs for the three
months ended June 30, 2007 were $451,000
compared to $116,000 for the three months ended
June 30, 2006. For the three months ended June
30, 2007, IPT incurred $106,000 in research
costs related to improvements and developments
of gamma cameras while QMT had research expense
of $210,000. QMT is developing certain next
generation technologies including PET-enabled
surgical tools and solid-state photo detector
technology, which may have implications in both
molecular imaging and PET and which could have
further application in the military and
aerospace segments. Positron's research and
development costs of $135,000 were mostly costs
associated with the NPMS joint venture and
related costs of manufacturing modernization at
the Company's Houston facility.
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FORM 10-QSB JUNE 30, 2007
Sales and marketing expense for the three
months ended June 30, 2007 decreased to $317,000
from $375,000 for the same period in 2006. The
decrease occurred despite the addition of IPT's
costs. The Company has significantly reduced
sales and marketing costs since no further
manufacturing of PET systems is being done at
the Houston facility. Manufacturing and plant
modernization efforts are currently taking place
in conjunction with the NPMS joint venture.
On a consolidated basis, general and
administrative expenses remained virtually
unchanged during the three months ended June 30,
2007 as compared to the same period in 2006,
$467,000 and $470,000, respectively. However,
expenses at Positron Corporation in Houston
decreased by $291,000 to $179,000 for the
quarter ended June 30, 2007 compared to $470,000
for the quarter ended June 30, 2006. In large
part, the decrease is due to management's
overall cost reduction efforts. Also, during the
second quarter of 2006, the Company incurred
higher consulting and professional fees related
to a private placement and the acquisition of
IPT. General and administrative expenses at IPT
were $288,000.
Stock based compensation for the three months
ended June 30, 2007 was $103,000. For the three
months ended June 30, 2006, the application of
variable accounting rules resulted in a $25,000
reversal of previously recorded stock based
compensation.
Other Income (Expenses) -.Interest expense of
$41,000 for the three months ended June 30, 2007
was a decrease from $301,000 in interest expense
during the same period in 2006, which was
primarily interest on convertible debentures to
affiliated entities. The debentures were all
converted to shares of the Company's Series B
Preferred Stock in September 2006. The Company
also recorded derivative gains of $22,000 during
the second quarter of 2007 as compared to a
derivative loss of $1,887,000 for the same
period in 2006, when the related debentures were
issued. For the three months ended June 30,
2006, the Company recorded equity in the losses
of NPMS $77,000. No loss was recorded during the
three months ended June 30, 2007 as the
investment had been written down to zero under
the equity method of accounting during the first
quarter of 2007.
Comparison of the Results of Operations for
the Six Months ended June 30, 2007 and 2006
For the six months ended June 30, 2007, the
Company had a net loss of $2,226,000 compared to
a net loss of $4,271,000 for the same quarter in
2006. Contributing to the significantly greater
loss for the six month period in 2006 was a loss
from derivative liabilities of $1,887,000,
higher interest expense and equity in losses of
joint ventures.
Revenues - Revenues from the sales of IPT's
gamma cameras were $1,429,000 for the six months
ended June 30, 2007. The Company did not
consolidate IPT's accounts for the same period
in 2006. Service revenues for the current six
month period were $641,000 as compared to
$464,000 for the same period in 2006. The
increase of 38% is due in large part to service
revenue from IPT. Service revenue for Positron
Corporation alone decreased to $367,000 as two
customers did not renew their service contracts.
Gross profit for the six months ended June
30, 2007 and 2006, was $625,000 and 136,000,
respectively. The increase in gross profits
results from the sales and service from IPT
gamma cameras. Gross margins were consistent at
30% and 29% for the six months ended June 30,
2007 and 2006, respectively.
Operating Expenses - Operating expenses
increased $940,000 to $2,772,000 for the six
months ended June 30, 2007 from $1,832,000 for
the same period in 2006. Operating expenses for
IPT alone during the six month period in 2007
were $1,644,000.
Research and development costs for the six
months ended June 30, 2007 were $804,000
compared to $260,000 for the six months ended
June 30, 2006. IPT incurred $211,000 in research
costs related to improvements and developments
of gamma cameras while QMT had research expense
of $333,000. Positron's research and development
costs of $260,000 were mostly costs associated
with the NPMS joint venture and related costs of
manufacturing modernization at the Company's
Houston facility.
Table of Contents
FORM 10-QSB JUNE 30, 2007
Sales and marketing expense for the six
months ended June 30, 2007 increased to $586,000
from $445,000 for the same period in 2006. The
increase in sales and marketing expenses results
from the addition of IPT's expenses of $397,000
during the period. Positron Corporation in
Houston, significantly reduced sales and
marketing costs since manufacturing of PET
systems is being done at that facility. For the
six months ended June 30, 2007 Positron
Corporation incurred $123,000 in sales and
marketing expenses.
General and administrative expenses increased
$270,000 to $1,176,000 for the six months ended
June 30, 2007 from $906,000 for the six months
ended June 30, 2006. However, expenses at
Positron Corporation in Houston decreased by
$368,000 to $538,000 for the six months ended
June 30, 2007. The reduction in the Houston
facility comes as a result of an overall plan by
management to reduce costs. During the six
months ended June 30, 2006 significant
professional and consulting fees were incurred
in conjunction with the issuance of convertible
debentures, a private placement and the
acquisition of IPT.
Stock based compensation for the six months
ended June 30, 2007 and 2006 was $206,000 and
$221,000, respectively.
Other Income (Expenses) - Interest expense of
$73,000 for the six months ended June 30, 2007
was a decrease from $570,000 in interest expense
during the same period in 2006, which was
primarily interest on convertible debentures to
affiliated entities. The debentures were all
converted to shares of the Company's Series B
Preferred Stock in September 2006. The Company
also recorded derivative losses of $12,000
during the second quarter of 2007 as compared to
derivative losses of $1,887,000 for the same
period in 2006, when the related convertible
debentures issued. For the six months ended June
30, 2007 and 2006 the Company recorded equity in
the losses of NPMS of $23,000 and $118,000,
respectively. The current period charge of
$23,000 reduces the book value of the Company's
investment in NPMS to zero.
Financial Condition
The Company had cash and cash equivalents of
$173,000 on June 30, 2007. On the same date,
accounts payable and accrued liabilities
outstanding totaled $2,568,000. The Company sold
$1,429,000 of gamma cameras through IPT but did
not sell any PET imaging systems during the six
month period ended June 30, 2007. Increased
camera sales, sales of imaging systems and/or
additional debt or equity financings will
eventually be necessary to resolve the Company's
liquidity issues and allow it to continue to
operate as a going concern. However, there is no
assurance that the Company will be successful in
selling new systems or securing additional debt
or equity financing.
Since inception, the Company has expended
substantial resources on research and
development. Consequently, we have sustained
substantial losses. Due to the limited number of
systems sold or placed into service each year,
revenues have fluctuated significantly from year
to year. The Company had an accumulated deficit
of $71,051,000 at June 30, 2007. The Company
will need to increase system sales and apply the
research and development advancements to achieve
profitability in the future. Through the
Company's joint venture with Neusoft Medical
Systems PET system cost of goods and labor will
be significantly lower. In addition, the Company
expects increased revenue from its IPT SPECT
camera subsidiary to come from new sales
campaigns and service division. The Company
expects that these developments will have a
positive impact on the PET, PET/CT and SPECT
device products, sales & service volumes and
increased net margins.
The Company's current financial condition
raises doubt as to its ability to continue as a
going concern. The report of the Company's
independent public accountants, which
accompanied the financial statements for the
year ended December 31, 2006, was qualified with
respect to that risk. If the Company is unable
to obtain debt or equity financing to meet its
cash needs it may have to severely limit or
cease business activities or may seek protection
from creditors under the bankruptcy laws.
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FORM 10-QSB JUNE 30, 2007
