FORM 10-QSB JUNE 30, 2002
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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
Commission file number: 0-24092
[GRAPHIC OMITED] POSITRON
A Texas Corporation
I.D. No. 76-0083622
1304 Langham Creek Drive, Suite 300, Houston, Texas 77084
(281) 492-7100
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, 2002, there were 62,173,303 shares of the Registrant's Common
Stock, $ .01 par value outstanding.
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FORM 10-QSB JUNE 30, 2002
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POSITRON CORPORATION
TABLE OF CONTENTS
FORM 10-QSB FOR THE QUARTER ENDED JUNE 30, 2002
PART I - FINANCIAL INFORMATION PAGE
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of June 30, 2002 and December 31, 2001 3
Condensed Statements of Operations for the three and six months ended
June 30, 2002 and 2001 4
Condensed Statements of Cash Flows for the six months ended
June 30, 2002 and 2001 5
Selected Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation 8
PART II - OTHER INFORMATION 9
Signature Page 10
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FORM 10-QSB JUNE 30, 2002
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POSITRON CORPORATION
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, December
2002 31, 2001
ASSETS (Unaudited) (Note)
------ ------------ ----------
Current assets:
Cash and cash equivalents $ 208 $ 635
Accounts receivable, net 490 184
Inventories 3,045 4,887
Prepaid expenses 64 54
Loan costs -- 100
Other current assets 85 118
------------ ----------
Total current assets 3,892 5,978
Property and equipment, net 336 375
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Total assets $ 4,228 $ 6,353
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Note payable to stockholder $ 2,000 $ 2,000
Accounts payable, trade and accrued liabilities 1,927 2,496
Unearned revenue 152 318
Current portion of capital lease obligation 42 40
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Total current liabilities 4,121 4,854
Capital lease obligation 11 33
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Total liabilities 4,132 4,887
Stockholders' equity:
Series A Preferred Stock: $1.00 par value; 8% cumulative,
convertible, redeemable; 5,450,000 shares authorized;
510,219 shares issued and outstanding at June 30, 2002
and December 31, 2001. 510 510
Common Stock: $0.01 par value; 100,000,000 shares authorized;
62,233,459 shares issued and 62,173,303 shares outstanding
at June 30, 2002 and December 31, 2001. 622 622
Additional paid-in capital 55,079 55,079
Subscription receivable (30) (30)
Accumulated deficit (56,070) (54,700)
Treasury Stock: 60,156 shares at cost (15) (15)
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Total stockholders' equity 96 1,466
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Total liabilities and stockholders' equity $ 4,228 $ 6,353
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Note: The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. See accompanying notes.
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FORM 10-QSB JUNE 30, 2002
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POSITRON CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenues:
System sales $ 2,169 $ -- $ 3,319 $ --
Upgrades -- 56 -- 183
Service and component 315 393 661 759
---------- ---------- ---------- ----------
Total revenues 2,484 449 3,980 942
Costs of sales and services:
System sales 2,174 -- 3,272 --
Upgrades -- 57 -- 140
Service, warranty and component 161 222 301 375
---------- ---------- ---------- ----------
Total costs of revenues 2,335 279 3,573 515
---------- ---------- ---------- ----------
Gross profit 149 170 407 427
Operating expenses:
Research and development 267 307 532 577
Selling and marketing 146 166 242 419
General and administrative 595 303 948 728
---------- ---------- ---------- ----------
Total operating expenses 1,008 776 1,722 1,724
---------- ---------- ---------- ----------
Loss from operations (859) (606) (1,315) (1,297)
Other income (expense)
Interest income 1 6 2 38
Interest expense (51) (3) (107) (6)
Deposit forfeiture 50 -- 50 --
---------- ---------- ---------- ----------
Total other income (expense) -- 3 (55) 32
---------- ---------- ---------- ----------
Net loss $ (859) $ (603) $ (1,370) $ (1,265)
========== ========== ========== ==========
Basic and diluted loss per common share $ (0.01) $ (0.01) $ (0.02) $ (0.02)
Weighted average number of basic and
diluted common shares outstanding
62,173 62,047 62,173 62,047
See accompanying notes
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FORM 10-QSB JUNE 30, 2002
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POSITRON CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
----------------------
June 30, June 30,
2002 2001
---------- ----------
Cash flows from operating activities:
Net loss $ (1,370) $ (1,265)
Adjustment to reconcile net loss to net cash
used in operating activities
Depreciation 46 60
Amortization 100 --
Loss on retirement of property and equipment -- 13
Changes in operating assets and liabilities:
Accounts receivable (306) 480
Inventory 1,842 (1,950)
Prepaid expenses (10) 57
Other current assets 33 224
Accounts payable and accrued liabilities (569) 348
Unearned revenue (166) (90)
Other liabilities -- (11)
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Net cash used in operating activities (400) (2,134)
Cash flows from investing activities:
Decrease in short-term investments -- 2,087
Capital expenditures (7) (126)
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Net cash provided by (used in) investing activities (7) 1,961
Cash flows from financing activities:
Proceeds from note payable to stockholder -- 1,000
Repayment of capital lease obligation (20) (18)
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Net cash provided by (used in) financing activities (20) 982
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Net increase (decrease) in cash and cash equivalents (427) 809
Cash and cash equivalents, beginning of period 635 114
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Cash and cash equivalents, end of period $ 208 $ 923
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See accompanying notes
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FORM 10-QSB JUNE 30, 2002
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POSITRON CORPORATION
SELECTED NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
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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 Form 10-KSB for Positron Corporation (the
"Company") for the year ended December 31, 2001. 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, 2001, as reported in the Form 10-KSB, have been
omitted.
2. COMPREHENSIVE INCOME
---------------------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income."
Comprehensive income includes such items as unrealized gains or losses on
certain investment securities and certain foreign currency translation
adjustments. The Company's financial statements include none of the
additional elements that affect comprehensive income. Accordingly,
comprehensive income and net income are identical.
3. 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, 2002 and 2001 since it would
have resulted in an antidilutive effect.
4. INCOME TAX
-----------
The difference between the Federal statutory income tax rate and the
Company's effective income tax rate is primarily attributable to increases
in valuation allowances for deferred tax assets relating to net operating
losses.
5. LITIGATION
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PROFUTURES CAPITAL BRIDGE FUND, L.P.
On September 26, 2000, ProFutures Capital Bridge Fund, L.P. ("ProFutures")
filed a complaint against the Company in Colorado state court for
declaratory relief and breach of contract. ProFutures alleges in its
complaint that the Company breached four stock purchase warrants when, on
February 14, 2000, the Company registered only 1,500,000 shares of stock
underlying ProFutures warrants instead of the 4,867,571 that ProFutures
claims it is entitled to purchase. ProFutures claims that it is entitled to
purchase these additional shares of stock under the anti-dilution
provisions in its warrants and as the result of the Company sale of
additional shares of stock and issuance of additional warrants. Prior to
being sued by ProFutures, the Company notified ProFutures that its Board of
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FORM 10-QSB JUNE 30, 2002
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Directors had determined that as a result of the Imatron Transaction
ProFutures was entitled to purchase an additional 965,894 shares of common
stock under its warrants. ProFutures seeks in its complaint for a
declaration that it is entitled to purchase the additional shares of stock
under its warrants and for damages for breach of the warrants in an
unspecified amount. On February 28, 2002, ProFutures asserted in amended
court filings that it was seeking $4.6 million in damages plus interest
from the Company.
The Company believes that ProFutures' claim that it is entitled to purchase
additional shares and to damages is without merit. The Company has retained
counsel and intends to vigorously defend the ProFutures' lawsuit. The
matter is currently set for a court trial in District Court, City and
County of Denver, Colorado on October 21, 2002. The Company cannot,
however, provide assurance as to the outcome. If it is decided that
ProFutures is entitled under its warrants to purchase some or all of the
claimed additional shares of stock, upon the exercise of the warrants, the
Company's shareholders would suffer additional dilution and the price of
the Company's common stock could drop.
On January 5, 2002, ProFutures filed a second complaint against the
Company, also naming its directors S. Lewis Meyer and Gary H. Brooks and
its investor Imatron Inc. ("Imatron") as co-defendants, in Colorado Sate
Court for fraudulent transfer and injunctive relief based upon alleged
violations of various sections of the Texas Business and Commerce code. The
defendants removed the case to the United States District Court for the
District of Colorado and filed a motion to dismiss, which is pending as of
this date. ProFutures alleges in its complaint that the Company committed
fraud when they entered into a loan agreement with Imatron on June 29,
2001, wherein Imatron agreed to loan the Company $2,000,000. As security
for the loan, the Company granted Imatron a first priority security
interest in all of the Company assets. ProFutures alleges that the loan
transaction was an illegal transfer pursuant to Texas law on the basis that
the defendants knew the amount of monetary damages claimed by ProFutures in
the related September 26, 2000, Colorado state litigation at the time of
the June 29, 2001, loan transaction and that the loan transaction was an
effort to hinder, delay and defraud ProFutures with respect to that
pre-existing monetary damage claim. ProFutures seeks the following relief:
declarations from the court that the loan transfer is fraudulent and
therefore void; injunctions prohibiting the Company from making any further
payments to Imatron and prohibiting Imatron from enforcing its rights under
the agreement. The Company believes that ProFutures' claims are without
merit and has retained counsel to vigorously defend against the claims. The
matter does not currently have a trial date. The Company cannot, however,
provide assurance as to the outcome. If the court holds in favor of
ProFutures on this matter there could be a material adverse effect on the
business of the Company.
CHINA XINXING
In July 2001 and February 2002, the Company received demands from China
Xinxing, a company located in Shanghai, China, for payment of an
arbitration award in favor of China Xinxing and against the Company, in the
total amount of approximately $297,000. The award was rendered on or about
August 25, 2000 by arbitrators affiliated with the Shanghai Sub-commission
of the China International Economic and Trade Arbitration Commission
(CIETAC Case No. SM9872, Award No. (2000) HMZZ 1154). The award represents
the amount of a refund (together with arbitration costs) of an advance
payment made by China Xinxing under a contract with the Company dated
September 12, 1996. In its February 2002 demand, China Xinxing threatened
to file suit in the United States to obtain confirmation and enforcement of
the award. The amount of the arbitration award is included in accrued
liabilities at June 30, 2002.
10P10, L.P.
In December 2001, 10P10, L.P. the Company's landlord for its premises
located at 16350 Park Ten Place, Suite 150, Houston, Texas, filed a
complaint against the Company alleging breach of lease agreement. The
Company disputes the amount of lease commissions and construction costs
charged by 10P10, L.P. in conjunction with the subleasing of the premises.
The claim amount of approximately $130,000 is included in accrued
liabilities as of June 30, 2002.
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FORM 10-QSB JUNE 30, 2002
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, 2002
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AND 2001.
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We experienced a loss of $859,000 for the three months ended June 30, 2002
compared to a loss of $603,000 for the same period in 2001. A loss of $5,000
was realized on the sale of two systems in the quarter ended June 30, 2002, due
to the significant labor and overhead costs that were incurred in the
manufacturing process in 2001. The larger loss in the quarter ended June 30,
2002 was also attributable to increased legal expenses and amortization of loan
origination fees.
We generated revenues of $2,169,000 from the sale of two systems during the
three months ended June 30, 2002 versus no revenues from the sale of systems for
the same period in 2001. Service and component sales revenue decreased $78,000
to $315,000 during the three months ended June 30, 2002 from $393,000 for the
same quarter in the prior year.
Our gross profits for the three months ended June 30, 2002 decreased $21,000 to
$149,000 compared to $170,000 for the same three months in 2001. The loss of
$5,000 that was realized on the sale of the two systems reduced gross profit in
the quarter ended June 30, 2002.
Our operating expenses increased $232,000 to $1,008,000 for the three months
ended June 30, 2002 from $776,000 for the same period in 2001. The increase in
operating expenses in the quarter ended June 30, 2002 is primarily attributable
to legal fees related to the ProFutures litigation and amortization of loan
origination fees.
Interest expense increased $48,000 to $51,000 for the three months ended June
30, 2002 from $3,000 for the same period in 2001. The increase in interest
expense is primarily attributable to the note payable to a shareholder. The
forfeiture of a nonrefundable deposit by a potential customer resulted in
$50,000 of income during the three months ended June 30, 2002.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002
--------------------------------------------------------------------------------
AND 2001.
----------
We experienced a loss of $1,370,000 for the six months ended June 30, 2002
compared to a loss of $1,265,000 for the same period in 2001. Gross profit of
only $47,000 was realized on the sale of three systems in the six months ended
June 30, 2002, due to the significant labor and overhead costs that were
incurred in the manufacturing process in 2001. The greater loss in the six
months ended June 30, 2002 was also attributable to increased legal expenses and
amortization of loan origination fees.
We generated revenues of $3,319,000 from the sale of three systems during the
six months ended June 30, 2002 versus no revenues from the sale of systems for
the same period in 2001. We produced no revenues from equipment upgrades in the
first six months of 2002 compared to $183,000 in revenues from upgrades of
equipment for the same period in 2001. In addition, service and component sales
revenue decreased $98,000 to $661,000 during the six months ended June 30, 2002
from $759,000 for the same period in the prior year.
Our gross profits for the six months ended June 30, 2002 decreased $20,000 to
$407,000 compared to $427,000 for the same six months in 2001.
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FORM 10-QSB JUNE 30, 2002
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Our operating expenses decreased $2,000 to $1,722,000 for the six months ended
June 30, 2002 from $1,724,000 for the same period in 2001. The increased legal
expenses and amortization of loan origination fees in the six months in 2002 was
offset by a decrease in the rental obligation due to subleases.
We earned interest income of $2,000 during the six month period ended June 30,
2002 compared to $38,000 for the same period in 2001. The $36,000 decrease in
interest income was the result of having a significantly lower level of invested
funds in 2002. Interest expense increased $101,000 to $107,000 for the six
months ended June 30, 2002 from $6,000 for the same period in 2001. The
increase in interest expense is primarily attributable to the note payable to a
shareholder. The forfeiture of a nonrefundable deposit by a potential customer
resulted in $50,000 of income during the six months ended June 30, 2002.
FINANCIAL CONDITION
--------------------
We had cash and cash equivalents of $208,000 on June 30, 2002. On the same
date, we had accounts payable and accrued liabilities of $1,927,000, and were in
default on a $2,000,000 note payable to a stockholder. In the first six months
of 2002 we sold three imaging systems. In order to resolve the liquidity
problems, we must continue to sell imaging systems or seek alternative sources
of equity funding. However, there is no assurance that we will be successful in
selling new systems or securing additional 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, our revenues
have fluctuated significantly from year-to-year. We had an accumulated deficit
of $56,070,000 at June 30, 2002.
These events raise doubt as to our ability to continue as a going concern. The
report of our independent public accountants, which accompanied our consolidated
financial statements for the year ended December 31, 2001, was qualified with
respect to that risk.
PART II OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The information regarding legal proceedings set forth above under Part I -
Financial Information, Note 5 to the Condensed Financial Statements, is hereby
incorporated by reference into Part II, Item 1 - Legal Proceedings.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
The Company entered into a loan arrangement on June 29, 2001 with Imatron, Inc.,
a stockholder of the Company, for the purpose of borrowing up to $2,000,000 to
fund operating activities. The loan is collateralized by substantially all the
assets of the Company. As of June 30, 2002, principal of $2,000,000 has been
advanced on the loan. The loan bears interest on the outstanding principal
balance at an annual rate of 10% and is payable monthly. Principal on the loan
amounting to $1,000,000 and $500,000 shall be repaid within five (5) business
days of December 31, 2001 and March 31, 2002, respectively. The remaining
$500,000 of loan principal and all unpaid interest was due and payable no later
than June 30, 2002. The Company has not made the interest payments that are due
monthly on the loan, resulting in outstanding accrued interest of approximately
$177,000 at June 30, 2002. The portions of the loan principal due on December
31, 2001, March 31, 2002, and June 30, 2002 are currently in default.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description of the Exhibit
99.1 Certifiction pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on From 8-K
There were no reports filed on From 8-K for the quarterly period ended June
30, 2002.
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FORM 10-QSB JUNE 30, 2002
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SIGNATURES
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 13, 2002 /s/ Gary H. Brooks
---------------------------------
Gary H. Brooks
President & CEO
(Duly Authorized Officer and
Principal Accounting Officer)
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