DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2012

Accounting Policies [Abstract]

Accounting Policies

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Positron Corporation (the “Company”) was incorporated on December 20, 1983 in the state of Texas and commenced commercial operations in 1986.  Positron Corporation is a nuclear medicine healthcare company. The Company offers positron emission tomography molecular imaging systems, clinical and support services, automated radiopharmaceutical systems, radiopharmaceuticals and radioisotope processing and production.

The molecular imaging systems portion of the business provides Positron Emission Tomography (PET) scanners.  The automated radiopharmaceutical system portion of the business offers the world’s first robotic system for the preparation and dispensing of radiopharmaceuticals that provides unit dose radiopharmaceutical agents used in molecular imaging.  The radioisotope manufacturing portion of the business enables the Company to process and produce radioisotope(s) that are critical components required in nuclear imaging.

The Company’s objective is to generate revenue by offering inexpensive molecular imaging systems and support services, disease specific software, automated radiopharmaceutical dose preparation and dispensing system, radiopharmaceutical(s) and radioisotope(s) for nuclear medicine primarily in the field of cardiac nuclear medicine.

On January 17, 2012, the Company acquired all of the issued and outstanding membership interest of Manhattan Isotope Technology LLC (“MIT”). See Note 3.

MIT possesses the unique and specialized expertise in all stages of strontium-82 (Sr-82) production and spent generator lifecycle management. Currently, MIT produces API grade strontium-82 from target material received from its foreign collaborators.

Principles of Consolidation

For the years ended December 31, 2012 and 2011, the financial statements include the transactions of Positron Corporation and its wholly-owned subsidiaries, IPT and MIT, Positron Pharmaceuticals Company and Positron Isotope Corporation.  All intercompany transactions have been eliminated.

Basis of Presentation and Use of Estimates

These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Such principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Affiliated Entities

Affiliated entities and their affiliation, as defined by FASB Codification Topic 850 are as follows:

Solaris Opportunity Fund owns or controls common and preferred shares of the Company and its managing member is the CEO of the Company.

The Company has a 1% ownership interest in the joint venture Neusoft Positron Medical Systems ("Neusoft"). Both the Company and the joint venture's other partner, Neusoft Medical Systems purchase PET systems at a wholesale transfer price from Neusoft. The Company maintains one of five board seats on Neusoft's board. The Company currently accounts for its investment in Neusoft on the cost method and has no recorded value as of December 31, 2012 or 2011 based on prior losses of Neusoft.

Concentrations of Credit Risk

The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation (FDIC) and at times, balances may exceed government insured limits. The Company has never experienced any losses related to these balances. All of the Company’s non-interest bearing cash balances were fully insured at December 31, 2012 and 2011 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning in 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and non-interest bearing cash balances may again exceed federally insured limits.

During the twelve months ended December 31, 2012, one customer accounted for 26% of sales and a separate customer accounted for 70% of accounts receivable.  During the twelve months ended December 31, 2011, seven customers accounted for greater than 10% of sales with 11%, 12%, 11%, 13%, 10%, 10% and 11% , respectively. Two of those customers accounted for 40% and 46% of accounts receivable.

Cash Equivalents and Short-term Investments

For the purposes of reporting cash flows, the Company considers highly liquid, temporary cash investments with an original maturity period of three months or less to be cash equivalents.

Accounts Receivable

Accounts receivable consist of amounts due from customers. The Company records a provision for doubtful accounts to allow for any amounts which may be unrecoverable, which is based upon an analysis of the Company’s prior collection experience, customer creditworthiness and current economic trends.

Goodwill and Other Intangible Assets

Accounting Standard Codification (“ASC”) 350 “Goodwill and Other Intangible Assets” requires that assets with indefinite lives no longer be amortized, but instead be subject to annual impairment tests. The Company follows this guidance.

The Company tests goodwill that is not subject to amortization for impairment annually or more frequently if events or circumstances indicate that impairment is possible. Goodwill was tested at the end of the fourth quarter, December 31, 2012 and it was found that the carrying value of goodwill was not impaired.

The impairment test performed December 31, 2012 was based on a discounted cash flow model using management’s business plan projected for expected cash flows. Based on the computation it was determined that no impairment existed. Goodwill as of December 31, 2012 was $346,000. There was no goodwill as of December 31, 2011.

Definite lived intangible assets are being amortized over their useful lives.

Inventory

Inventories are stated at the lower of cost or market.  Cost is determined  using the first-in, first-out (FIFO) method of inventory valuation. Management assesses the recoverability and establishes reserves of the various inventory components on a quarterly basis and is based on the estimated net realizable values of respective finished, in process and raw material inventories.  

Property and Equipment

Property and equipment are recorded at cost and depreciated for financial statement purposes using the straight-line over estimated useful lives below:

	Estimated life, years
Building	39
Furniture and fixtures	5-7
Leasehold Improvements	1-3
Computer equipment	3-5
Research equipment	7
Machinery and equipment	3-5

Gains or losses on dispositions are included in the statement of operations in the period incurred.  Maintenance and repairs are charged to expense as incurred.

Impairment of Long-Lived Assets

Periodically, the Company evaluates the carrying value of its long-lived assets, by comparing the anticipated future net cash flows associated with those assets to the related net book value.  If impairment is indicated as a result of such reviews, the Company would record the impairment based on the fair market value of the assets, using techniques such as projected future discounted cash flows or third party valuations.

Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and unearned revenue, approximate their fair values because of the short-term nature of these instruments. Management believes the Company is not exposed to significant interest or credit risks arising from these financial instruments.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.

• Level 1 — Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets.

• Level 2 — Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These are typically obtained from readily-available pricing sources for comparable instruments.

• Level 3 — Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own beliefs about the assumptions that market participants would use in pricing the asset or liability, based on the best information available in the circumstances.

The following table presents the embedded conversion derivative liabilities, the Company’s only financial liabilities measured and recorded at fair value on the Company’s consolidated balance sheets on a recurring basis and their level within the fair value hierarchy as of December 31, 2012 (in thousands):

	December 31, 2012		Level 1		Level 2		Level 3
Embedded conversion derivative liability	$	3,981	$	-	$	-	$	3,981
		December 31, 2011
Embedded conversion liability	$	1,238	$	-	$	-	$	1,238

The following table reconciles, for the year ended December 31, 2012 and 2011, the beginning and ending balances for financial instruments that are recognized at fair value in the consolidated financial statements (in thousands):

Balance of embedded conversion derivative liability as of December 31, 2010	$	-
Fair value of embedded conversion derivative liabilities at issuance		1,731
Reductions in fair value due to conversion of Convertible Debentures into common stock		(1,037	)
Loss on fair value adjustments to embedded conversion derivative liabilities		544
Balance of embedded conversion derivative liability as of December 31, 2011	$	1,238
Fair value of embedded conversion derivative liabilities at issuance		2,129
Reductions in fair value due to conversion of Convertible Debentures into common stock		(544	)
Debt modification expense		432
Loss on fair value adjustments to embedded conversion derivative liabilities		726
Balance of embedded conversion derivative liabilities at December 31, 2012	$	3,981

The fair value of the conversion features are calculated at the time of issuance and the Company records a derivative liability for the calculated value using a Black-Scholes option-pricing model. Changes in the fair value of the derivative liability are recorded in other income (expense) in the consolidated statement of operations. Upon conversion of the convertible debt to stock, the Company reclassifies the related embedded conversion derivative liability to paid-in capital. Since the fair value of the embedded conversion derivative liability exceeded the carrying value of the convertible debentures on the issuance date, the convertible debentures were recorded at a full discount. The Company recognizes expense for accretion of the convertible debentures discount over the term of the notes. The Company has considered the provisions of ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in each debenture could result in the note principal being converted to a variable number of the Company’s common shares.

The derivatives were valued using the Black-Scholes option pricing model with the following assumptions:

	December 31, 2012			December 31, 2011
Market value of stock on measurement date	$	0.0085		$	0.0089
Risk-free interest rate		0.15	%		0.12	%
Dividend yield		0	%		0	%
Volatility factor		141	%		192	%
Term		1 year			1 year

Debt discount

Costs incurred with parties who are providing long-term financing, which generally include the value of warrants or the fair value of an embedded derivative conversion feature, are reflected as a debt discount and are amortized over the life of the related debt. When the debt is repaid, the related debt discount is recorded as additional interest expenses and the related derivative liability is relieved into additional paid in capital.

The Company valued the embedded derivative conversion using Black-Scholes method. The debt discount attributable to the warrants issued with convertible debentures during the years December 31, 2012 and 2011 was $331,000 and $369,000, respectively. The debt discount attributable to the embedded conversion derivative liability during the years ended December 31, 2012 and 2011 was $2,129,000 and $1,731,000, respectively.

Income Taxes

Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Deferred taxes are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or the entire deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the enactment. We recognize tax benefits when we believe the benefit is more likely than not to be sustained upon review from the relevant authorities. We recognize penalties and interest expense related to unrecognized tax benefits in income tax expense.

Revenue Recognition

The Company’s revenues are currently derived from the sale of medical equipment products, maintenance contracts, service revenues and radioisotope sales.  Revenues from maintenance contracts are recognized over the term of the contract.  Service revenues are recognized upon performance of the services. The Company recognizes revenues from the sale of medical equipment and radioisotope products when earned.  Specifically, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred (or services have been rendered), the price is fixed or determinable, and collectability is reasonably assured. The Company obtains a signed customer acceptance after installation is complete for the sale of its Attrius® PET systems.

For multiple-element arrangements, revenue is allocated to each element based on their relative selling prices. Relative selling prices are based first on vendor specific objective evidence (VSOE), then on third-party evidence of selling price (TPE) when VSOE does not exist, and then on estimated selling price (ESP) when VSOE and TPE do not exist.

Because the Company has neither VSOE nor TPE for its products, the allocation of revenue has been based on the Company’s ESPs. The objective of ESP is to determine the price at which the Company would transact a sale if the product was sold on a stand-alone basis. The Company determines ESP by considering the facts and circumstances of the product being sold.

Research and Development Expenses

All costs related to research and development costs are charged to expense as incurred and include salaries and benefits, supplies and consulting expenses.

Stock Based Compensation

We recognize compensation expense for share-based awards using the fair value of the option at the time of the grant and amortizing the fair value over the estimated service period on the straight-line attribute method.

Loss Per Common Share

Basic loss per common share is calculated by dividing net income by the weighted average common shares outstanding during the period.  Stock options and warrants are not included in the computation of the weighted average number of shares outstanding for dilutive net loss per common share during each of the periods presented in the Statement of Operations and Comprehensive Income, as the effect would be antidilutive.

Recent Accounting Pronouncements

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

In June of 2011, Accounting Standards Codification Topic 220, Comprehensive Income was amended to increase the prominence of items reported in other comprehensive income. Accordingly, a company can present all non-owner changes in stockholders’ equity either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this guidance as of January 1, 2012 on a retrospective basis and this adoption did not have a material effect on the Company’s financial statements.

In May of 2011, Accounting Standards Codification Topic 820, Fair Value Measurement was amended to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles and International Financial Reporting Standards. The Company adopted this guidance as of January 1, 2012 on a retrospective basis and this adoption did not have a material effect on the Company’s financial statements.