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EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES ? OXLEY ACT OF 2002 - ADVANCED MEDICAL ISOTOPE Corpexhibit_31-2.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - ADVANCED MEDICAL ISOTOPE Corpexhibit_32-1.htm
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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES ? OXLEY ACT OF 2002 - ADVANCED MEDICAL ISOTOPE Corpexhibit_31-1.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-Q
 
(Mark One)
   
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED:  September 30, 2012
 
OR  
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM __________ TO __________
 
COMMISSION FILE NUMBER    000-53497
 
ADVANCED MEDICAL ISOTOPE CORPORATION

(Exact name of registrant as specified in its charter)
 
Delaware
80-0138937
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
6208 W. Okanogan Ave.,
Kennewick, WA 99336
 (Address of principal executive offices, Zip Code)

(509) 736-4000
(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer (Do not check if a smaller reporting company)
o
Smaller reporting company
x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
The number of shares of registrant’s common stock outstanding, as of November 13, 2012 was 79,099,019.


 
1

 




 
TABLE OF CONTENTS
 
     
Page
 
PART I - FINANCIAL INFORMATION
 
         
Item 1.
Financial Statements
 
3
 
 
Condensed Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011
 
3
 
 
Condensed Statements of Operations for the Three Months and the Nine Months ended September 30, 2012 (unaudited) and the Three Months and the Nine Months ended September 30, 2011 (unaudited)
 
4
 
 
Condensed Statement of Changes in Stockholders’ Equity (Deficit) for the period ended September 30, 2012 (unaudited)
 
5
 
 
Condensed Statements of Cash Flow for the Nine Months ended September 30, 2012 (unaudited) and the Nine Months ended September 30, 2011 (unaudited)
 
6
 
 
Notes to Condensed Financial Statements (unaudited)
 
7
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
19
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
37
 
Item 4.
Controls and Procedures
 
38
 
         
PART II - OTHER INFORMATION
         
Item 1A.
Risk Factors
 
39
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
39
 
Item 6.
Exhibits
 
40
 
         
SIGNATURES
 
40
 
 
 
 

 
 
 
 
 
 
 
 
 
 




 
2

 


PART I - FINANCIAL INFORMATION
 
Item 1.   Financial Statements.

Advanced Medical Isotope Corporation
Condensed Balance Sheets
             
   
September 30,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
ASSETS
           
             
Current Assets:
           
Cash
 
$
47,381
   
$
52,557
 
Accounts receivable - trade
   
23,849
     
13,699
 
Prepaid expenses
   
7,737
     
1,060
 
Prepaid expenses paid with stock, current portion
   
-
     
35,375
 
Inventory
   
3,625
     
9,675
 
Total current assets
   
82,592
     
112,366
 
                 
Fixed assets, net of accumulated depreciation
   
312,984
     
671,944
 
                 
Other assets:
               
License fees, net of amortization
   
19,186
     
9,722
 
Patents and intellectual property
   
399,152
     
317,224
 
Deposits
   
5,406
     
5,406
 
Total other assets
   
423,744
     
332,352
 
                 
Total assets
 
$
819,320
   
$
1,116,662
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
               
                 
Current liabilities:
               
Accounts payable and accrued expenses
 
$
1,198,402
   
$
929,496
 
Accrued interest payable
   
703,853
     
422,279
 
Payroll liabilities payable
   
62,704
     
62,421
 
Deferred income
   
535,320
     
945,765
 
Short term loan payable
   
60,000
     
116,000
 
Loans from stockholder
   
54,592
     
83,468
 
Related party convertible notes payable, net
   
3,172,569
     
2,361,231
 
Current portion of long-term debt
   
33,086
     
-
 
Current portion of capital lease obligations
   
366,768
     
430,000
 
Total current liabilities
   
6,187,294
     
5,350,660
 
                 
Long term liabilities:
               
Long-term debt, net of current portion
   
2,760
     
-
 
Capital lease obligations, net of current portion
   
375,000
     
601,813
 
Convertible notes payable, net
   
134,488
      -  
Total liabilities
   
6,699,542
     
5,952,473
 
                 
Stockholders’ Equity (Deficit):
               
Preferred Stock, $.001 par value, 20,000,000 shares authorized;
               
   zero issued and outstanding
   
-
     
-
 
Common stock, $.001 par value; 200,000,000 shares authorized;
               
   78,242,019 and 70,653,399 shares issued and outstanding,
               
   respectively
   
78,242
     
70,653
 
Paid in capital
   
22,740,009
     
19,174,984
 
Accumulated deficit
   
(28,698,473
)
   
(24,081,448
)
Total stockholders’ equity (deficit)
   
(5,880,222
)
   
(4,835,811
)
                 
Total liabilities and stockholders’ equity (deficit)
 
$
819,320
   
$
1,116,662
 

The accompanying notes are an integral part of these condensed financial statements.


 
3

 


Advanced Medical Isotope Corporation
Condensed Statements of Operations
(unaudited)
                   
   
Three months ended September 30,
   
 
 Nine months ended September 30,
   
2012
   
2011
   
2012
   
2011
 
                         
Revenues
 
$
65,250
   
$
55,560
   
$
181,268
   
$
346,043
 
                                 
Operating expenses
                               
   Cost of goods sold
   
22,292
     
17,120
     
57,444
     
53,658
 
   Sales and marketing expenses
   
8,800
     
508
     
17,459
     
59,097
 
   Depreciation and amortization
   
101,454
     
136,596
     
381,746
     
409,788
 
   Professional fees
   
902,654
     
95,093
     
1,696,882
     
595,659
 
   Stock options granted
   
640,000
     
50,000
     
1,052,980
     
50,000
 
   Payroll expenses
   
168,861
     
163,122
     
534,376
     
575,539
 
   General and administrative expenses
   
500,716
     
117,708
     
785,215
     
415,856
 
      Total operating expenses
   
2,344,777
     
580,147
     
4,526,102
     
2,159,597
 
                                 
Operating loss
   
(2,279,527
)
   
(524,587
)
   
(4,344,834
)
   
(1,813,554
)
                                 
Non-operating income (expense)
                               
   Interest expense
   
(325,481
)
   
(95,890
)
   
(682,086
)
   
(297,934
)
   Net loss on settlement
   
-
     
(25,000
)
   
(550
)
   
(25,000
)
   Recognized income from grants
   
242,162
     
47,453
     
410,445
     
153,673
 
      Non-operating income (expense), net
   
(83,319
)
   
(73,437
)
   
(272,191
)
   
(169,261
)
                                 
Loss before Income Taxes
   
(2,362,846
)
   
(598,024
)
   
(4,617,025
)
   
(1,982,815
)
                                 
Income Tax Provision
   
-
     
-
     
-
     
-
 
                                 
Net Loss
 
$
(2,362,846
)
 
$
(598,024
)
 
$
(4,617,025
)
 
$
(1,982,815
)
                                 
Loss per common share
 
$
(0.03
)
 
$
(0.01
)
 
$
(0.06
)
 
$
(0.03
)
                                 
Weighted average common shares outstanding
   
76,660,889
     
69,913,167
     
74,437,138
     
68,992,551
 

 







The accompanying notes are an integral part of these condensed financial statements.


 
4

 
 

Advanced Medical Isotope Corporation
Condensed Statement of Changes in Stockholders’ Equity (Deficit)
(Unaudited)
                         
   
Common Stock
   
Paid in
   
Accumulated
       
   
Shares
   
Amount
   
Capital
   
Deficit
   
Total
 
                               
Balances at December 31, 2011 (audited)
   
70,653,399
   
$
70,653
   
$
19,174,984
   
$
(24,081,448
)
 
$
(4,835,811
)
                                         
Common stock issued for:
                                       
Services
   
7,260,500
     
7,261
     
1,183,685
     
-
     
1,190,946
 
Debt
   
15,000
     
15
     
2,535
     
-
     
2,550
 
Loan fees on convertible debt
   
313,120
     
313
     
77,885
     
-
     
78,198
 
Options and warrants issued for services
   
-
     
-
     
1,140,920
     
-
     
1,140,920
 
Debt discount on convertible debt
   
-
     
-
     
1,160,000
     
-
     
1,160,000
 
Net loss
   
               -
     
        -
     
              -
     
(4,617,025
)
   
(4,617,025
)
Balances at September 30, 2012
   
78,242,019
   
$
78,242
   
$
22,740,009
   
$
(28,698,473
)
 
$
(5,880,222
)











The accompanying notes are an integral part of these condensed financial statements.



 
5

 


Advanced Medical Isotope Corporation
Condensed Statements of Cash Flow
(Unaudited)
   
Nine months ended
 
   
September 30,
 
   
2012
   
2011
 
CASH FLOW FROM OPERATING ACTIVITIES:
           
Net Loss
 
$
(4,617,025
)
 
$
(1,982,815
)
                 
Adjustments to reconcile net loss to net cash
               
used by operating activities:
               
Depreciation of fixed assets
   
373,710
     
404,790
 
Amortization of licenses and intangible assets
   
8,036
     
4,998
 
Amortization of convertible debt discount
   
241,224
     
37,861
 
Amortization of prepaid expenses paid with stock
   
35,375
     
79,574
 
Common stock issued for services
   
1,190,946
     
18,000
 
Stock options and warrants issued for services
   
1,140,920
     
50,000
 
Loss on settlement of receivables
   
-
     
25,000
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(10,150
)
   
(8,479
)
Accounts receivable - other
   
-
     
400,504
 
Inventory
   
6,050
     
(13,450
)
Prepaid expenses
   
(6,677
)
   
38,027
 
Accounts payable
   
318,181
     
362,625
 
Payroll liabilities
   
283
     
(39,116
)
Accrued interest
   
281,574
     
120,229
 
Deferred income
   
(410,445
)
   
(153,673
)
Net cash used by operating activities
   
(1,447,998
)
   
(577,693
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Cash used to acquire patents and intellectual property
   
(14,750
)
   
(77,094
)
Cash used to acquire equipment
   
(99,428
)
   
-
 
Net cash used by investing activities
   
(114,178
)
   
(77,094
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Payments on Washington Trust debt
   
(28,876
)
   
(33,064
)
Principal payments on capital lease
   
(290,045
)
   
(297,953
)
Proceeds from short term loan
   
105,000
     
-
 
Payments on short term loan
   
(161,000
)
   
-
 
Proceeds from convertible note
   
1,942,800
     
365,066
 
Payments on convertible note
   
-
     
(293,750
)
Principal payments on long-term debt
   
(10,879
)
   
-
 
Proceeds from exercise of options and warrants
   
-
     
343,750
 
Net cash provided by financing activities
   
1,557,000
     
84,049
 
                 
Net increase in cash
   
(5,176
)
   
(570,738
)
Cash, beginning of period
   
52,557
     
589,390
 
                 
CASH, END OF PERIOD
 
$
47,381
   
$
18,652
 
                 
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
 
$
199,639
   
$
122,708
 
Cash paid for income taxes
 
$
                -
   
$
                -
 
   

The accompanying notes are an integral part of these condensed financial statements.

 
6

 

 
Advanced Medical Isotope Corporation
Notes to Condensed Financial Statements
For the nine months ended September 30, 2012 (unaudited) and the year ended December 31, 2011


NOTE 1:                      BASIS OF PRESENTATION

Nature of Organization

The accompanying condensed financial statements of the Company have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures required by accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.  These condensed financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the results of operations of the Company for the period presented. The results of operations for the nine months ended September 30, 2012, are not necessarily indicative of the results that may be expected for any future period or the fiscal year ending December 31, 2012.
 
Reclassification
 
Certain prior period amounts in the condensed financial statements have been reclassified to conform to current period presentation.
 
NOTE 2:                      GOING CONCERN

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  As shown in the accompanying financial statements, the Company has suffered recurring losses and used significant cash in support of its operating activities and the Company’s cash position is not sufficient to support the Company’s operations. Historically, we have relied upon outside investor funds to maintain our operations and develop our business. We anticipate we will continue to require funding from investors for working capital as well as business expansion during this fiscal year and we can provide no assurance that additional investor funds will be available on terms acceptable to us. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable time. In addition, our ability to continue as a going concern must be considered in light of the problems, expenses and complications frequently encountered by entrance into established markets and the competitive environment in which we operate.

We anticipate a requirement of $1.5 million in funds over the next twelve months to maintain current operation activities. In addition we anticipate a requirement of approximately $15 million in funds over the next twelve months due to the anticipation of adding additional staff in the future assuming we are successful in selling our medical isotopes and/or the start of development by us on future manufacturing sites or other projects. As of September 30, 2012 we have $47,381 cash on hand which means there will be an anticipated shortfall of nearly the full $16.5 million requirement in additional funds over the next twelve months. There are currently commitments to vendors for products and services purchased, plus, the employment agreements of the CFO and other employees of the Company and our current lease commitments that will necessitate liquidation of the Company if we are unable to raise additional capital. The current level of cash is not enough to cover the fixed and variable obligations of the Company.
 
Assuming we are successful in our sales/development effort, we believe that we will be able to raise additional funds through the sale of our stock to either current or new stockholders. There is no guarantee that we will be able to raise additional funds or to do so at an advantageous price.

The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.  The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis and ultimately to attain profitability.  The Company plans to seek additional funding to maintain its operations through debt and equity financing and to improve operating performance through a focus on strategic products and increased efficiencies in business processes and improvements to the cost structure.  There is no assurance that the Company will be successful in its efforts to raise additional working capital or achieve profitable operations.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.







 
7

 


Advanced Medical Isotope Corporation
Notes to Condensed Financial Statements
For the nine months ended September 30, 2012 (unaudited) and the year ended December 31, 2011


NOTE 3:                      FIXED ASSETS
       
 
Fixed assets consist of the following at September 30, 2012 and December 31, 2011:
 
 
   
September 30, 2012
   
December 31, 2011
 
Production equipment
 
$
2,131,377
   
$
2,116,627
 
Building
   
446,772
     
446,772
 
Leasehold improvements
   
3,235
     
3,235
 
Office equipment
   
32,769
     
32,769
 
     
2,614,153
     
2,599,403
 
Less accumulated depreciation
   
(2,301,169
)
   
(1,927,459
)
   
$
312,984
   
$
671,944
 
 
Accumulated depreciation related to fixed assets is as follows:
     
 
   
September 30, 2012
   
December 31, 2011
 
Production equipment
 
$
1,826,998
   
$
1,521,519
 
Building
   
446,772
     
382,945
 
Leasehold improvements
   
3,235
     
2,801
 
Office equipment
   
24,164
     
20,194
 
   
$
2,301,169
   
$
1,927,459
 

Depreciation expense for the above fixed assets for the nine months ended September 30, 2012 and 2011, respectively, was $373,710 and $404,790.













 
8

 


Advanced Medical Isotope Corporation
Notes to Condensed Financial Statements
For the nine months ended September 30, 2012 (unaudited) and the year ended December 31, 2011


NOTE 4:                      INTANGIBLE ASSETS
     
       
Intangible assets consist of the following at September 30, 2012 and December 31, 2011:
 
   
September 30, 2012
   
December 31, 2011
 
License Fee
 
$
112,500
   
$
95,000
 
Less accumulated amortization
   
(93,314
)
   
(85,278
)
     
19,186
     
9,722
 
Patents and intellectual property
   
399,152
     
317,224
 
Intangible assets net of accumulated amortization
 
$
418,338
   
$
326,946
 

Amortization expense for the above intangible assets for the nine months ended September 30, 2012 and 2011, respectively, was $8,036 and $4,998.

NOTE 5:                      RELATED PARTY TRANSACTIONS

Indebtedness from Related Parties

The Company had a $200,000 revolving line of credit with Washington Trust Bank that was to expire in September 2009.  We had $199,908 in borrowings under the line of credit as of October 28, 2008 at which time the line of credit was paid off and replaced with a loan in the initial principal amount of $199,908 from James C. Katzaroff and Carlton M. Cadwell.  Mr. Katzaroff is our chief executive officer, and Mr. Katzaroff and Mr. Cadwell are directors and beneficial owners of more than 10% of our common stock.  The loan calls for $4,066 monthly payments, including 8% interest, beginning November 30, 2008, with a balloon payment for the balance at October 31, 2009, at which time the note was extended for another year to October 31, 2010, at which time the note was extended for another year to October 31, 2011, at which time the note was extended for another year to October 31, 2012 with monthly payments increasing to $4,090.  This note is currently under negotiation for another extension for another year to October 31, 2013. There is no security held as collateral for this loan.  As of September 30, 2012, the payment due September 30, 2012 was not paid. This September 30, 2012 payment was paid on October 11, 2012.  The Company paid $28,877 in principal and $3,843 in interest to the holders of this loan for the nine months ended September 30, 2012. As of September 30, 2012 and December 31, 2011, the outstanding balance on this loan was $54,592 and $83,468, respectively.

The Company issued various shares of common stock and convertible promissory notes during the nine months ended September 30, 2012 to a director and major stockholder. The details of these transactions are outlined in NOTE 11 STOCKHOLDERS’ EQUITY - Common Stock Issued for Convertible Debt.




















 
9

 

 
Advanced Medical Isotope Corporation
Notes to Condensed Financial Statements
For the nine months ended September 30, 2012 (unaudited) and the year ended December 31, 2011


NOTE 5:                      RELATED PARTY TRANSACTIONS - continued

Rent Expenses

On August 1, 2007 the Company began renting office and warehouse space, known as the Production Facility, located in Kennewick, Washington from a stockholder holding less that 5% of the total shares outstanding. The lease agreement calls for monthly rental payments starting at $3,500, increasing every August 1st until they become $4,762 as of August 1, 2011 and continue through the month ended July 31, 2012. Subsequent to July 31, 2012 the Company is renting this space on a month to month basis at $11,904 per month. During the nine months ended September 30, 2012 and 2011 the Company incurred rent expenses for this facility totaling $52,374 and $40,385, respectively. In addition, the lease agreement called for the issuance of $187,500 in common stock valued at $0.40 per share for a total of 416,667 shares. The Company recognized the issuance of all 416,667 shares in 2007 and will amortize the $187,500 value of that stock over the sixty month term of the lease. For the nine months ended September 30, 2012 and 2011 the Company amortized $21,875 and $28,125 of this stock issuance and recognized it as rent expense.

Additionally, in June 2008, the Company entered into two twelve month leases for its corporate offices with three four month options to renew but in no event will the lease extend beyond December 31, 2010. Subsequent to December 31, 2010 the Company is renting this space on a month to month basis. These lease agreements calls for monthly rental payments of $2,733 and $2,328 per month for two separate office areas. Effective November 1, 2009 the Company terminated the portion of the lease consisting of the $2,328 rental payment per month. Effective February 28, 2012 and retroactive back to December 1, 2011, the $2,328 rental payment per month was adjusted to $2,500 rental payment per month. The monthly rental was again adjusted to $2,675 for the months of March and April, 2012 and adjusted again to $2,850 effective for the months May through September, 2012. During the nine months ended September 30, 2012 and 2011 the Company incurred rent expenses for this facility totaling $24,367 and $24,567, respectively.

There are no future minimum rental payments as the Company’s current rental agreements either expired as of July 2012 or are on a month to month basis.
 
Rental expense for the nine months ended September 30, 2012 and 2011 consisted of the following:
 
   
 
Nine months ended September 30, 2012
   
 
Nine months ended September 30, 2011
 
Office and warehouse lease effective August 1, 2007
           
   Monthly rental payments
 
$
52,374
   
$
40,385
 
   Rental expense in the form of stock issuance
   
21,875
     
28,125
 
Corporate office
   
24,367
     
24,567
 
Total Rental Expense
 
$
98,617
   
$
93,077
 
















 
10

 

 
Advanced Medical Isotope Corporation
Notes to Condensed Financial Statements
For the nine months ended September 30, 2012 (unaudited) and the year ended December 31, 2011

 
NOTE 6:                      PREPAID EXPENSES PAID WITH STOCK

In period periods, the Company has issued stock to companies for a service agreement and has issued stock for prepaid rent. As of September 30, 2012 and December 31, 2011, the prepaid rent expenses paid with stock were $0 and $35,375, respectively.
 
NOTE 7:                       CAPITAL LEASE OBLIGATIONS
 
At the time of our December 31, 2011 audit we were in default on a covenant in the capital lease obligations due to failure to maintain the minimum debt service ratio required by the leases. Accordingly we recorded the entire value of the leases as a current obligation in our audited December 31, 2011 financial statements. During the nine months ended September 30, 2012 the Company was able to come into compliance with the minimum debt service coverage ratio stipulated in the loan covenants due to the additional convertible debt raised during the period.  Due to the Company coming into compliance we recognized current and long term portions of the lease on our balance sheet at September 30, 2012 and accordingly reclassified the December 31, 2011 capital lease obligations to current and long term portions as of that date.
 
NOTE 8:                      DEBT

The Company borrowed $55,000 May 2011, due November 2011, with interest at 8%. The holder of the note had the right, after the first one hundred eighty days of the note (November 8, 2011), to convert the note and accrued interest into common stock at a price per share equal to 61% (representing a discount rate of 39%) of the average closing price of the last five trading prices for the common stock ending one trading day prior to the date of conversion.

The Company had the right to prepay the note and accrued interest during the first ninety days following the date of the note. During that time the amount of any prepayment would equal 135% of the outstanding principal balance of the note plus accrued interest on the note. The Company prepaid the note in full on August 3, 2011 and therefore has accrued interest expense of $20,046 related to the prepayment cost in the financial statements for the twelve months ending December 31, 2011. If the Company had not paid off the note and related accrued interest by August 10, 2011, the Company could have paid off the note between the period ninety-one days to one hundred twenty days following the issue date and the prepayment would have equaled 140% of the outstanding principal balance of the note plus accrued interest on the note.  If the Company had not paid off the note and related accrued interest by November 8, 2011, the note would have become convertible and the Company would have had to accrue an additional $12,981 to interest expense to account for the beneficial conversion feature of the note.

The Company borrowed $53,000 October 2011, due July 2012, with interest at 8%. The holder of the note had the right, after the first one hundred eighty days of the note (April 15, 2012), to convert the note and accrued interest into common stock at a price per share equal to 61% (representing a discount rate of 39%) of the average of the lowest five trading prices for the Common Stock during the ten trading day period ending one trading day prior to the date of Conversion Notice.

The Company had the right to prepay the note and accrued interest during the first sixty days following the date of the note. During that time the amount of any prepayment would equal 130% of the outstanding principal balance of the note plus accrued interest on the note. The Company had the right to prepay the note and accrued interest during the next thirty days following the date of the note. During that time the amount of any prepayment would equal 135% of the outstanding principal balance of the note plus accrued interest on the note. The Company has the right to prepay the note and accrued interest during the third, fourth, and fifth thirty days periods following the date of the note. During that time the amount of any prepayment would equal 140%, 145%, and 150% of the outstanding principal balance of the note plus accrued interest on the note.

The Company has accrued interest expense of $871 related to the prepayment cost in the financial statements for the year ending December 31, 2011. The Company prepaid the note in full April 13, 2012 and therefore has recorded interest expense of $27,685 related to the prepayment cost in the accompanying financial statements for the nine months ending September 30, 2012.

The Company borrowed $63,000 November 2011, due May 2012, with interest at 8%. The holder of the note had the right, after the first one hundred eighty days of the note (May 15, 2012), to convert the note and accrued interest into common stock at a price per share equal to 61% (representing a discount rate of 39%) of the average of the lowest five trading prices for the Common Stock during the ten trading day period ending one trading day prior to the date of Conversion Notice.

The Company had the right to prepay the note and accrued interest during the first sixty days following the date of the note. During that time the amount of any prepayment would equal 130% of the outstanding principal balance of the note plus accrued interest on the note. The Company had the right to prepay the note and accrued interest during the next thirty days following the date of the note. During that time the amount of any prepayment would equal 135% of the outstanding principal balance of the note plus accrued interest on the note. The Company has the right to prepay the note and accrued interest during the third, fourth, and fifth thirty days periods following the date of the note. During that time the amount of any prepayment would equal 140%, 145%, and 150% of the outstanding principal balance of the note plus accrued interest on the note.


 
11

 


Advanced Medical Isotope Corporation
Notes to Condensed Financial Statements
For the nine months ended September 30, 2012 (unaudited) and the year ended December 31, 2011


NOTE 8:                      DEBT - continued

The Company has accrued interest expense of $621 related to the prepayment cost in the financial statements for the year ending December 31, 2011. The Company prepaid the note in full May 18, 2012 and therefore has recorded interest expense of $33,337 related to the prepayment cost in the accompanying financial statements for the nine months ending September 30, 2012.

The Company borrowed $45,000 February 27, 2012, due August 2012, with interest at 8%. The holder of the note had the right, after the first one hundred eighty days of the note (August 24, 2012), to convert the note and accrued interest into common stock at a price per share equal to 61% (representing a discount rate of 39%) of the average of the lowest five trading prices for the Common Stock during the ten trading day period ending one trading day prior to the date of Conversion Notice.

The Company has the right to prepay the note and accrued interest during the first sixty days following the date of the note. During that time the amount of any prepayment would equal 130% of the outstanding principal balance of the note plus accrued interest on the note. The Company has the right to prepay the note and accrued interest during the next thirty days following the date of the note. During that time the amount of any prepayment would equal 135% of the outstanding principal balance of the note plus accrued interest on the note. The Company has the right to prepay the note and accrued interest during the third, fourth, and fifth thirty-day periods following the date of the note. During that time the amount of any prepayment would equal 140%, 145%, and 150% of the outstanding principal balance of the note plus accrued interest on the note.

The Company prepaid the note in full July 17, 2012 and therefore has recorded interest expense of $20,366 related to the prepayment cost in the accompanying financial statements for the nine months ending September 30, 2012.

The Company borrowed $60,000 April 13, 2012, due October 2012, with interest at 8%. The holder of the note had the right, after the first one hundred eighty days of the note (October 19, 2012), to convert the note and accrued interest into common stock at a price per share equal to 61% (representing a discount rate of 39%) of the average of the lowest five trading prices for the Common Stock during the ten trading day period ending one trading day prior to the date of Conversion Notice.

The Company has the right to prepay the note and accrued interest during the first sixty days following the date of the note. During that time the amount of any prepayment would equal 130% of the outstanding principal balance of the note plus accrued interest on the note. The Company has the right to prepay the note and accrued interest during the next thirty days following the date of the note. During that time the amount of any prepayment would equal 135% of the outstanding principal balance of the note plus accrued interest on the note. The Company has the right to prepay the note and accrued interest during the third, fourth, and fifth thirty-day periods following the date of the note. During that time the amount of any prepayment would equal 140%, 145%, and 150% of the outstanding principal balance of the note plus accrued interest on the note.

The Company prepaid the note in full October 15, 2012 and therefore has accrued interest expense of $32,367 related to the prepayment cost in the accompanying financial statements for the nine months ending September 30, 2012.

The Company had credit card debt of $46,725 that was converted to a promissory note March 15, 2012 secured by personal guarantees of Mr. Katzaroff, CEO and Mr. Jolliff, CFO of the Company. The note calls for $2,500 up front payment and nineteen payments of $2,568 including interest of twelve percent. As of September 30, 2012 the payments for August and September, 2012 had not yet been paid. For the nine month period ending September 30, 2012 the Company paid $10,879 in principal and $1,894 in interest towards the debt. The balance of the debt was $35,846 at September 30, 2012 of which $33,086 was recorded as current and $2,760 was recorded as long term.

The Company had received $1,060,000 in cash as of September 30, 2012 in exchange for Convertible Debt instruments. These Convertible Debt instruments have an eighteen month term, accrued interest at an annual rate of 12% and a conversion price of $0.10.  In addition the Convertible Debt instruments have an equal amount of $0.15, five year common stock warrants and Additional Investment Rights to enter into an additional convertible note with a corresponding amount of warrants equal to forty percent of the convertible note principal. The Company has recorded a debt discount to account for the warrants and convertible nature of the note totaling $1,060,000. As of September 30, 2012, $134,766 has been recognized in interest expense for amortization of the debt discount.

The Company had received $100,000 in cash as of September 30, 2012 in exchange for Convertible Debt instruments. These Convertible Debt instruments have an eighteen month term, accrued interest at an annual rate of 12% and a conversion price of $0.12.  In addition the Convertible Debt instruments has an equal amount of $0.18, five year common stock warrants and Additional Investment Rights to enter into an additional convertible note with a corresponding amount of warrants equal to forty percent of the convertible note principal. The Company has recorded a debt discount to account for the warrants and convertible nature of the note totaling $100,000. As of September 30, 2012, $722 has been recognized in interest expense for amortization of the debt discount.

 
12

 

 
Advanced Medical Isotope Corporation
Notes to Condensed Financial Statements
For the nine months ended September 30, 2012 (unaudited) and the year ended December 31, 2011


NOTE 9:                      INCOME FROM GRANTS AND DEFERRED INCOME

The Company has chosen to recognize grant money received as income as it incurs costs associated with those grants, and until such time as it recognizes the grant as income those funds received will be classified as Deferred Income on the balance sheet.

For the twelve months ended December 31, 2011 the Company recognized $245,727 of a $1,215,000 Department of Energy grant as income with the remaining $945,765 recorded as deferred income as of December 31, 2011. The $245,727 recognized as of December 31, 2011 was for costs incurred for the twelve months ended December 31, 2011. For the nine months ended September 30, 2012 the Company recognized an additional $410,445 as income leaving a remaining balance of $535,320 recorded as deferred income as of September 30, 2012. The $410,445 was for costs incurred for the nine months ended September 30, 2012.

As of September 30, 2012 the grant money received and grant money recognized as income and deferred income can be summarized as follows:

   
$1,215,000 Brachytherapy Grant
 
Grant money received during 2010
 
$
1,215,000
 
Recognized income from grants in 2010
   
23,508
 
Deferred income at December 31, 2010
   
1,191,492
 
Recognized income from grants in 2011
   
245,727
 
Deferred income at December 31, 2011
   
945,765
 
Recognized income from grants for the nine months ended September 30, 2012
   
410,445
 
Deferred income at September 30, 2012
 
$
535,320
 

 NOTE 10:                    COMMON STOCK OPTIONS AND WARRANTS

The Company recognizes in the financial statements compensation related to all stock-based awards, including stock options and warrants, based on their estimated grant-date fair value. The Company has estimated expected forfeitures and is recognizing compensation expense only for those awards expected to vest. All compensation is recognized by the time the award vests.

The following schedule summarizes the changes in the Company’s stock options during the nine months ended September 30, 2012:
 
               
Weighted
         
Weighted
 
   
Options Outstanding
   
Average
         
Average
 
   
Number
   
Exercise
   
Remaining
   
Aggregate
   
Exercise
 
   
Of
   
Price
   
Contractual
   
Intrinsic
   
Price
 
   
Shares
   
Per Share
   
Life
   
Value
   
Per Share
 
                               
Balance at December 31, 2011
   
5,135,000
   
$
0.20-0.50
   
0.94 years
   
$
315,000
   
$
0.35
 
   Options granted
   
9,150,000
   
$
0.09-0.25
   
3.26 years
   
$
270,000
   
$
0.15
 
   Options exercised
   
-
   
$
-
     
-
   
$
-
   
$
-
 
   Options expired
   
(4,010,000
)
 
$
0.20-0.50
     
-
   
$
(315,000
)
 
$
0.37
 
Balance at September 30, 2012
   
10,275,000
   
$
0.09-0.30
   
3.05 years
   
$
270,000
   
$
0.17
 
                                         
Exercisable at December 31, 2011
   
5,135,000
   
$
0.20-0.50
   
0.94 years
   
$
315,000
   
$
0.35
 
                                         
Exercisable at September 30, 2012
   
10,275,000
   
$
0.09-0.30
   
3.05 years
   
$
270,000
   
$
0.17
 






 
13

 

 
Advanced Medical Isotope Corporation
Notes to Condensed Financial Statements
For the nine months ended September 30, 2012 (unaudited) and the year ended December 31, 2011


 NOTE 10:                    COMMON STOCK OPTIONS AND WARRANTS - continued

The following schedule summarizes the changes in the Company’s stock warrants during the nine months ended September 30, 2012:

               
Weighted
         
Weighted
 
   
Warrants Outstanding
   
Average
         
Average
 
   
Number
   
Exercise
   
Remaining
   
Aggregate
   
Exercise
 
   
Of
   
Price
   
Contractual
   
Intrinsic
   
Price
 
   
Shares
   
Per Share
   
Life
   
Value
   
Per Share
 
                               
Balance at December 31, 2011
   
-
     
-
   
-
     
-
     
-
 
   Warrants granted
   
11,600,000
   
$
0.15-0.18
   
4.82 years
     
1,209,000
   
$
0.15
 
   Warrants exercised
   
-
   
$
-
     
-
     
-
   
$
-
 
   Warrants expired
   
-
   
$
-
     
-
     
-
   
$
-
 
Balance at September 30, 2012
   
11,600,000
   
$
0.15-0.18
   
4.82 years
     
1,209,000
   
$
0.15
 
                                         
Exercisable at December 31, 2011
   
-
   
$
-
   
-
     
-
   
$
-
 
                                         
Exercisable at September 30, 2012
   
11,600,000
   
$
0.15-0.18
   
4.82 years
     
1,209,000
   
$
0.15
 

 
 
 
 
 
 
 
 
 

 

 

 

 

 

 

 
14

 

 
Advanced Medical Isotope Corporation
Notes to Condensed Financial Statements
For the nine months ended September 30, 2012 (unaudited) and the year ended December 31, 2011

 
NOTE 11:                    STOCKHOLDERS’ EQUITY

Common Stock Issued for Services and Other

In March 2012 the Company issued 15,000 shares of common stock with a total fair market value of $2,550. The fair market value of the shares issued was $0.17 per share. The shares were issued to extinguish $2,000 of a prior year liability.

In March 2012 the Company issued 3,990,500 shares of common stock with a total fair market value of $359,145. The fair market value of the shares issued was $0.09 per share. The shares were issued for $359,145 worth of current year services.

In April 2012 the Company issued 20,000 shares of common stock with a total fair market value of $1,800. The fair market value of the shares issued was $0.09 per share. The shares were issued for $1,800 worth of current year services.

In June 2012 the Company issued 250,000 shares of common stock with a total fair market value of $50,000. The fair market value of the shares issued was $0.20 per share. The shares were issued for $50,000 worth of current year services.

In August 2012 the Company issued 3,000,000 shares of common stock with a total fair market value of $780,000. The fair market value of the shares issued was $0.26 per share. The shares were issued for $780,000 worth of current year services.

Common Stock Issued for Convertible Debt

The Company issued 51,400 shares of its common stock and a convertible promissory note in the amount of $128,500 with interest payable at 10% per annum in January 2012 to our major stockholder, who is also a Director. The Note matures in January of 2013. The entire outstanding principal balance and any outstanding fees or interest is due and payable in full on the maturity date. At the option of the holder, the note and interest is convertible into the Company’s common stock at $0.15 per share. The value of the $128,500 debt plus the $0.15 fair market value of the 51,400 shares at the date of the agreement was prorated to arrive at the allocation of the original $128,500 debt and the value of the 51,400 shares and the beneficial conversion feature. The computation resulted in an allocation of $113,952 toward the debt and $7,274 to the shares and $7,274 to the beneficial conversion feature. The $7,274 value of the shares and the $7,274 value of the beneficial conversion feature are then amortized to interest over the twelve month life of the debt. Interest expense of $9,699 has been accrued and added to the note payable bringing the total debt balance related to this convertible promissory note to $123,651 as of September 30, 2012. Additionally, $8,568 worth of interest expense on the notes principal balance has been recognized in the accompanying financial statements for the nine months ending September 30, 2012.

The Company issued 48,600 shares of its common stock and a convertible promissory note in the amount of $121,500 with interest payable at 10% per annum in February 2012 to our major stockholder, who is also a Director. The Note matures in February of 2013. The entire outstanding principal balance and any outstanding fees or interest is due and payable in full on the maturity date. At the option of the holder, the note and interest is convertible into the Company’s common stock at $0.16 per share. The value of the $121,500 debt plus the $0.16 fair market value of the 48,600 shares at the date of the agreement was prorated to arrive at the allocation of the original $121,500 debt and the value of the 48,600 shares and the beneficial conversion feature. The computation resulted in an allocation of $106,884 toward the debt and $7,308 to the shares and $7,308 to the beneficial conversion feature. The $7,308 value of the shares and the $7,308 value of the beneficial conversion feature are then amortized to interest over the twelve month life of the debt. Interest expense of $8,830 has been accrued and added to the note payable bringing the total debt balance related to this convertible promissory note to $115,714 as of September 30, 2012. Additionally, $7,341 worth of interest expense on the notes principal balance has been recognized in the accompanying financial statements for the nine months ending September 30, 2012.

The Company issued 46,000 shares of its common stock and a convertible promissory note in the amount of $115,000 with interest payable at 10% per annum in March 2012 to our major stockholder, who is also a Director. The Note matures in March of 2013. The entire outstanding principal balance and any outstanding fees or interest is due and payable in full on the maturity date. At the option of the holder, the note and interest is convertible into the Company’s common stock at $0.14 per share. The value of the $115,000 debt plus the $0.14 fair market value of the 46,000 shares at the date of the agreement was prorated to arrive at the allocation of the original $115,000 debt and the value of the 46,000 shares and the beneficial conversion feature. The computation resulted in an allocation of $102,804 toward the debt and $6,098 to the shares and $6,098 to the beneficial conversion feature. The $6,098 value of the shares and the $6,098 value of the beneficial conversion feature are then amortized to interest over the twelve month life of the debt. Interest expense of $6,352 has been accrued and added to the note payable bringing the total debt balance related to this convertible promissory note to $109,156 as of September 30, 2012. Additionally, $5,990 worth of interest expense on the notes principal balance has been recognized in the accompanying financial statements for the nine months ending September 30, 2012.
 

 
15

 
 
 
Advanced Medical Isotope Corporation
Notes to Condensed Financial Statements
For the nine months ended September 30, 2012 (unaudited) and the year ended December 31, 2011
 
 
NOTE 11:                    STOCKHOLDERS’ EQUITY - continued

Common Stock Issued for Convertible Debt - continued

The Company issued 53,120 shares of its common stock and a convertible promissory note in the amount of $132,800 with interest payable at 10% per annum in April 2012 to our major stockholder, who is also a Director. The Note matures in April of 2013. The entire outstanding principal balance and any outstanding fees or interest is due and payable in full on the maturity date. At the option of the holder, the note and interest is convertible into the Company’s common stock at $0.09 per share. The value of the $132,800 debt plus the $0.09 fair market value of the 53,120 shares at the date of the agreement was prorated to arrive at the allocation of the original $132,800 debt and the value of the 53,120 shares and the beneficial conversion feature. The computation resulted in an allocation of $123,570 toward the debt and $4,615 to the shares and $4,615 to the beneficial conversion feature. The $4,615 value of the shares and the $4,615 value of the beneficial conversion feature are then amortized to interest over the twelve month life of the debt. Interest expense of $4,207 has been accrued and added to the note payable bringing the total debt balance related to this convertible promissory note to $127,777 as of September 30, 2012. Additionally, $6,020 worth of interest expense on the notes principal balance has been recognized in the accompanying financial statements for the nine months ending September 30, 2012.

The Company issued 40,000 shares of its common stock and a convertible promissory note in the amount of $100,000 with interest payable at 10% per annum in April 2012 to our major stockholder, who is also a Director. The Note matures in April of 2013. The entire outstanding principal balance and any outstanding fees or interest is due and payable in full on the maturity date. At the option of the holder, the note and interest is convertible into the Company’s common stock at $0.10 per share. The value of the $100,000 debt plus the $0.10 fair market value of the 40,000 shares at the date of the agreement was prorated to arrive at the allocation of the original $100,000 debt and the value of the 40,000 shares and the beneficial conversion feature. The computation resulted in an allocation of $92,308 toward the debt and $3,846 to the shares and $3,846 to the beneficial conversion feature. The $3,846 value of the shares and the $3,846 value of the beneficial conversion feature are then amortized to interest over the twelve month life of the debt. Interest expense of $3,203 has been accrued and added to the note payable bringing the total debt balance related to this convertible promissory note to $95,511 as of September 30, 2012. Additionally, $4,170 worth of interest expense on the notes principal balance has been recognized in the accompanying financial statements for the nine months ending September 30, 2012.

The Company issued 22,000 shares of its common stock and a convertible promissory note in the amount of $55,000 with interest payable at 10% per annum in May 2012 to our major stockholder, who is also a Director. The Note matures in May of 2013. The entire outstanding principal balance and any outstanding fees or interest is due and payable in full on the maturity date. At the option of the holder, the note and interest is convertible into the Company’s common stock at $0.09 per share. The value of the $55,000 debt plus the $0.09 fair market value of the 22,000 shares at the date of the agreement was prorated to arrive at the allocation of the original $55,000 debt and the value of the 22,000 shares and the beneficial conversion feature. The computation resulted in an allocation of $51,178 toward the debt and $1,911 to the shares and $1,911 to the beneficial conversion feature. The $1,911 value of the shares and the $1,911 value of the beneficial conversion feature are then amortized to interest over the twelve month life of the debt. Interest expense of $1,434 has been accrued and added to the note payable bringing the total debt balance related to this convertible promissory note to $52,612 as of September 30, 2012. Additionally, $2,063 worth of interest expense on the notes principal balance has been recognized in the accompanying financial statements for the nine months ending September 30, 2012.

The Company issued 28,000 shares of its common stock and a convertible promissory note in the amount of $70,000 with interest payable at 10% per annum in May 2012 to our major stockholder, who is also a Director. The Note matures in May of 2013. The entire outstanding principal balance and any outstanding fees or interest is due and payable in full on the maturity date. At the option of the holder, the note and interest is convertible into the Company’s common stock at $0.10 per share. The value of the $70,000 debt plus the $0.10 fair market value of the 28,000 shares at the date of the agreement was prorated to arrive at the allocation of the original $70,000 debt and the value of the 28,000 shares and the beneficial conversion feature. The computation resulted in an allocation of $64,616 toward the debt and $2,692 to the shares and $2,692 to the beneficial conversion feature. The $2,692 value of the shares and the $2,692 value of the beneficial conversion feature are then amortized to interest over the twelve month life of the debt. Interest expense of $1,796 has been accrued and added to the note payable bringing the total debt balance related to this convertible promissory note to $66,412 as of September 30, 2012. Additionally, $2,330 worth of interest expense on the notes principal balance has been recognized in the accompanying financial statements for the nine months ending September 30, 2012.








 
16

 


Advanced Medical Isotope Corporation
Notes to Condensed Financial Statements
For the nine months ended September 30, 2012 (unaudited) and the year ended December 31, 2011


NOTE 11:                    STOCKHOLDERS’ EQUITY - continued

Common Stock Issued for Convertible Debt - continued

The Company issued 24,000 shares of its common stock and a convertible promissory note in the amount of $60,000 with interest payable at 10% per annum in August 2012 to our major stockholder, who is also a Director. The Note matures in August of 2013. The entire outstanding principal balance and any outstanding fees or interest is due and payable in full on the maturity date. At the option of the holder, the note and interest is convertible into the Company’s common stock at $0.245 per share. The value of the $60,000 debt plus the $0.245 fair market value of the 24,000 shares at the date of the agreement was prorated to arrive at the allocation of the original $60,000 debt and the value of the 24,000 shares and the beneficial conversion feature. The computation resulted in an allocation of $49,290 toward the debt and $5,355 to the shares and $5,355 to the beneficial conversion feature. The $5,355 value of the shares and the $5,355 value of the beneficial conversion feature are then amortized to interest over the twelve month life of the debt. Interest expense of $890 has been accrued and added to the note payable bringing the total debt balance related to this convertible promissory note to $50,180 as of September 30, 2012. Additionally, $500 worth of interest expense on the notes principal balance has been recognized in the accompanying financial statements for the nine months ending September 30, 2012.

NOTE 12:                    SUPPLEMENTAL CASH FLOW INFORMATION

During the three months ended March 31, 2011, the Company issued 156,167 shares of common stock for an extinguishment of $46,850 worth of debt and issued 1,235,000 options for an extinguishment of $234,650 worth of debt.

During the three months ended September 30, 2011, the Company issued 1,235,000 options for an extinguishment of $234,650 worth of debt and 146,026 shares of common stock for loan fees on convertible debt of $62,155.
 
During the three months ended March 31, 2012, the Company issued 15,000 shares of common stock for an extinguishment of $2,550 worth of debt.
 
During the three months ended September 30, 2012, the Company issued 313,120 shares of common stock for loan fees on convertible debt of $78,198 and recorded a debt discount on convertible debt of $1,160,000.
 
NOTE 13:                    SUBSEQUENT EVENTS

The Company prepaid a $60,000 note on October 15, 2012 and paid an additional $32,367 for accrued interest expense related to the prepayment fee.

The Company received $15,000 in funds as non-secured Convertible Notes in October 2012. This Convertible Debt has an eighteen month term with interest accruing at an annual rate of 12%, and a conversion price of $0.12. The Convertible debt carries an equal amount of $0.18, five year common stock warrants and Additional Investment Rights to purchase additional common stock shares and corresponding amount of warrants equal to forty percent of the convertible note principal.
 
In October 2012 the Company received $145,000 from a related party in exchange for a convertible 10%, one year note. The note plus interest is convertible at the option of the note holder into common stock share at $0.15 per share. In addition the Company issued the note holder 58,000 shares of its common stock as a loan origination fee.
 
In October 2012 the Company received $110,000 from a related party in exchange for a convertible 10%, one year note. The note plus interest is convertible at the option of the note holder into common stock share at $0.14 per share. In addition the Company issued the note holder 44,000 shares of its common stock as a loan origination fee.
 
In October 2012 the Company issued an 8% Convertible Promissory Note in the amount of $63,000 to an unrelated company. The note calls for a $3,000 loan fee to be paid from the proceeds. The note is not convertible by the holder for the first 90 days, in which time the Company can repay the note at the rate of the 8% accrued interest plus 50% additional of both the original $63,000 and the accrued interest.
 
In November 2012 the Company received $12,500 from a related party in exchange for a convertible 10%, one year note. The note plus interest is convertible at the option of the note holder into common stock share at $0.16 per share. In addition the Company issued the note holder 5,000 shares of its common stock as a loan origination fee.
 

 
17

 

 
Advanced Medical Isotope Corporation
Notes to Condensed Financial Statements
For the nine months ended September 30, 2012 (unaudited) and the year ended December 31, 2011


NOTE 13:                    SUBSEQUENT EVENTS - continued

In November 2012 the Company issued an 8% Convertible Promissory Note in the amount of $42,500 to an unrelated company. The note calls for a $2,500 loan fee to be paid from the proceeds. The note is not convertible by the holder for the first 90 days, in which time the Company can repay the note at the rate of the 8% accrued interest plus 50% additional of both the original $42,500 and the accrued interest.
 
In November 2012 the Company issued 750,000 shares of its common stock to an officer of the Company. The shares were valued at $0.20 per share on the date of issuance in exchange for services of $150,000.
 
The Company evaluated subsequent events pursuant ASC Topic 855 and has determined that there are no additional events to report.















































 
18

 


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Except for statements of historical fact, certain information described in this Form 10-Q report contains “forward-looking statements” that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will,” “would” or similar words. The statements that contain these or similar words should be read carefully because these statements discuss our future expectations, including our expectations of our future results of operations or financial position, or state other “forward-looking” information. Advanced Medical Isotope Corporation believes that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or to control. Further, we urge you to be cautious of the forward-looking statements which are contained in this Form 10-Q report because they involve risks, uncertainties and other factors affecting our operations, market growth, service, products and licenses. The risk factors in the section captioned “Risk Factors” in Item 1A of our Form 10-K report for the year ended December 31, 2011, as well as other cautionary language in this Form 10-Q report, describe such risks, uncertainties and events that may cause our actual results and achievements, whether expressed or implied, to differ materially from the expectations we describe in our forward-looking statements. The occurrence of any of the events described as risk factors could have a material adverse effect on our business, results of operations and financial position.

General Development of Business
 
Advanced Medical Isotope Corporation (“we” or the “Company”) was incorporated under the laws of Delaware on December 23, 1994 as Savage Mountain Sports Corporation (“SMSC”) for the purpose of acquiring or investing in businesses which were developing and marketing active sports products, equipment, and apparel.  In April 2000, Earth Sports Products, Inc (“ESP”), a corporation registered in Washington, merged with SMSC.  In April 2000, HHH Entertainment, Inc (“HHH”), a Nevada corporation, merged with SMSC.  As of the date of merger, HHH was the only stockholder of SMSC.
 
SMSC had limited activity from inception and was considered dormant from the period May 1, 2000 through December 31, 2005.  On September 6, 2006, SMSC changed its name to Advanced Medical Isotope Corporation.
 
On September 27, 2006, the Company acquired the assets of Neu-Hope Technologies, Inc (“NHTI”), a Florida corporation and a subsidiary of UTEK Corporation (“UTEK”), a Delaware corporation, and $310,000 from UTEK in exchange for 100,000 shares of Series A Preferred Stock (which Series A Preferred Stock was later converted to shares of the Company’s common stock in March 2009).  The Company conducted the acquisition in order to obtain cash and NHTI’s technology.

On June 13, 2007, the Company acquired the assets of the life sciences business segment of Isonics Corporation (Isonics), a California corporation.  The Company acquired the assets in exchange for $850,000 cash payment for the purpose of combining the assets into our business of marketing medical isotopes.  The assets acquired consist of intellectual property, agreements with third party companies for purchase and marketing of isotopes, customer lists, and equipment located in Buffalo, New York.

On August 1, 2007, the Company began renting office and warehouse space, known as the Production Facility located in Kennewick, Washington. Through this facility and the use of a proton linear accelerator, on June 30, 2008 we began offering regional distribution of F-18 (FDG).

On October 28, 2010, the Company received $1,215,000 net proceeds from the Department of Energy grant for the Proposed Congressionally Directed Project entitled “Research to Develop and Test an Advanced Resorbable Brachytherapy Seed Research for Controlled Delivery of Yttrium-90 Microspheres in Cancer Treatment.” This grant reimburses the Company for anticipated expenditures related to the development of its Brachytherapy project since April 1, 2010. The Company projects this project could cost approximately $5,500,000; however, the Company recognizes the costs could be as high as $8,000,000 before it gets to production.

On October 29, 2010, the Company received notification it had been awarded $244,479 grant funds from the Qualified Therapeutic Discovery Project Program for this same Brachytherapy Project. The $244,479 grant was received February 4, 2011. This grant reimburses the Company for eligible expenditures made during the twelve months ended December 31, 2010.

On October 29, 2010, the Company received notification it had been awarded $244,479 grant funds from the Qualified Therapeutic Discovery Project Program for the Molybdenum Project. On December 3, 2010, the Company received $205,129 and the remaining $39,350 of the grant was received February 4, 2011. The grant funds received in 2010 reimburses the Company for eligible expenditures made during the twelve months ended December 31, 2009.




 
19

 

 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued

Based on our financial history since inception, our auditor has expressed substantial doubt as to our ability to continue as a going concern. We are a company that has a limited amount of revenue and that has accumulated deficits since inception.  If we cannot obtain sufficient funding, we may have to delay the implementation of our business strategy.  
 
Narrative Description of Business
 
We are engaged in the production and distribution of medical isotopes and medical isotope technologies that are changing the practice of medicine and ushering in a new era of improved patient care.  Isotopes are a form of chemical element with the same atomic number as another element but with a different atomic mass.  Medical isotopes are used in molecular imaging, therapy, and nuclear medicine to diagnose, manage and treat diseases.
 
Over 10,000 hospitals worldwide use radioisotopes in medicine, and about 90% of the procedures are for diagnosis. The most common radioisotope used in diagnosis is technetium-99, with some 30 million procedures per year, accounting for 80% of all nuclear medicine procedures worldwide.  In developed countries (26% of world population), the frequency of diagnostic nuclear medicine is 1.9% per year, and the frequency of therapy with radioisotopes is about one tenth of this. In the United States there are some 18 million nuclear medicine procedures per year among 311 million people, and in Europe about 10 million among 500 million people. In Australia there are about 560,000 per year among 21 million people, 470,000 of these using reactor isotopes. The use of radiopharmaceuticals in diagnosis is growing at over 10% per year.  All of the information in this paragraph is derived from “Radioisotopes in Medicine” (updated October 2011) posted by the World Nuclear Association at www.world-nuclear.org/info/inf55.html.
 
We employ innovative production methods to offer a wide range of reliable, domestically produced medical isotopes as well as in vivo delivery systems to aid medical practitioners and medical researchers in the timely diagnosis and effective treatment of diseases such as cancer, heart disease, neurological disorders, and many other medical conditions. 
 
Our objective is to empower physicians, medical researchers, and ultimately, patients, by providing them with essential medical isotopes that, until now, have not been practical or economical to produce, in an effort to detect, manage, and cure human disease, and improve the lives of patients.

We are reviewing possible acquisition candidates as a means of achieving our objective.

Products
 
We currently offer the following products:
 
Stable Isotopes:
 
We currently offer worldwide distribution of O-18 enriched water and a wide range of other stable isotopes.  Our product line of stable isotopes includes the following elements: Antimony, Barium, Cadmium, Calcium, Cerium, Chromium, Copper, Dysprosium, Erbium, Europium, Gadolinium, Gallium, Germanium, Hafnium, Indium, Iron, Krypton, Lanthanum, Lead, Lutetium, Magnesium, Mercury, Molybdenum, Neodymium, Nickel, Osmium, Palladium, Platinum, Potassium, Rhenium, Rubidium, Ruthenium, Samarium, Selenium, Silicon, Silver, Strontium, Sulphur, Tellurium, Thallium, Tin, Titanium, Tungsten, Vanadium, Xenon, Ytterbium, Zinc, and Zirconium.
 
Radiopharmaceuticals:
 
Many of our products are used in connection with Positron Emission Tomography (“PET”).  In cancer, changes in biochemistry occur before tumor mass forms.  As a result, PET can often identify the presence of disease earlier than a test which looks for a tumor mass.  Isotopes identified by PET include radiopharmaceutical Fluorodeoxyglucose (“FDG”), a sugar compound that is labeled with radioactive fluoride.

F-18 FDG: We currently offer regional distribution of F-18 FDG from our Kennewick, WA production facility.  Other regional production facilities are being considered throughout the U.S. and abroad.
 






 
20

 

 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
 
Products - continued

Radio Chemicals:

 F-18:  We currently offer regional distribution of F-18 from our Kennewick, WA production facility.   Other regional production facilities are being considered throughout the U.S. and abroad.  This is the primary PET imaging isotope. It is used for medical and diagnostic purposes, such as cancer detection, heart imaging, and brain imaging.
  
Strontium-82: Used as a myocardial imaging agent, early detection of coronary artery disease, PET imaging, blood flow tracers.
 
Germanium-68: It is used for study of thrombosis and atherosclerosis, PET imaging, detection of pancreatic cancer, and attenuation correction.
 
Actinium-225: Used for advanced research in therapy of leukemia and other cancers. We believe that it holds great promise for treating HIV/AIDS, and we are negotiating with a foreign manufacturer to commence U.S. shipments.
 
Generators:
 
Strontium-82/Rubidium-82 generators: Used as a myocardial imaging agent, early detection of coronary artery disease, PET imaging, blood flow tracers. We have access via a foreign manufacturer and are in negotiations with a domestic source.

Germanium-68/Gallium-68 generators: It is used for study of thrombosis and atherosclerosis, PET imaging, detection of pancreatic cancer, and attenuation correction. We have access via a foreign manufacturer.

Actinium-225/Bismuth-213 generators: Actinium-225 is the parent of Bismuth-213, an isotope which has been used in animal trials to kill human HIV virus.  Bismuth-213 has been used in human clinical trials for the treatment of Acute Myelogenous Leukemia (AML). We are negotiating with a foreign manufacturer for a new patented process to commence manufacturing in the U.S.

Potential New Products

Within the next several years, we intend to offer the following products:
 
A Brachytherapy seed with a Fast-dissolving Matrix for Optimized Delivery of Radionuclides; and a Brachytherapy treatment utilizing a radiogel technology.

Carbon-11: Used in cancer diagnosis/staging. Radiotracer in PET scans to study normal/abnormal brain functions related to various drug addictions and is also used to evaluate disease such as Alzheimer’s, epilepsy, Parkinson’s and heart disease.

Cobalt-57:  Used for gamma camera calibration. Also used as radiotracer in research and a source for X-ray fluorescence spectroscopy.

Copper-64: PET scanning, planar imaging, SPECT imaging, dosimetry studies, cerebral and myocardial blood flow. This isotope is used in stem cell research, and cancer treatments.

Iodine-123:  Used in brain, thyroid, kidney, and myocardial imaging, cerebral blood flow (ideal for imaging) and neurological disease (Alzheimer's).

Molybdenum-99 / Technitium 99:  It is the favored choice among medical professionals because its chemical properties allow it to be bonded to many different chemical materials, thus allowing use for a wide variety of diagnoses. Up to 90% of all procedures involving medical isotopes use this isotope.








 
21

 

 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
 
Status of New Products  - continued

Thallium-201:  Used in clinical cardiology, heart imaging, myocardial perfusion studies and cellular dosimetry.

Iodine-124:  This is a radiotracer primarily used in PET imaging and to create images of human thyroid. Other treatment uses include apoptosis, cancer biotherapy, glioma, heart disease, mediastinal micrometastases, and thyroid cancer.

Indium-111:   In-111 Chloride bulk solution for U.S. distribution.  This radio chemical is used for infection imaging, cancer treatments, and tracer studies.

Manufacturing

The cornerstone equipment selected for our production center is a proton linear accelerator.  Our proton linear accelerator is designed to replace large and demanding cyclotron systems for the production of positron emitting isotopes. Large amounts of fluorine-18, carbon-11, nitrogen-13, and oxygen-15 can be produced for synthesis into compounds used in oncology, cardiology, neurology, and molecular imaging. The radio-labeled glucose analog, FDG, can be synthesized and distributed for use in Positron Emission Tomography.
 
Based on our experience in the industry, it is our belief that no other accelerator in North America has sufficient flexibility to produce the full spectrum of PET imaging radioisotopes, as well as other high-demand isotopes, both short and long lived, for diagnostic and therapeutic applications.

We are also engaged in a number of collaborative efforts with U.S. national laboratories and universities, along with several international teaming partners.  These collaborative effort projects include complementary isotope manufacturing technologies as well as isotope devices.  We have entered into agreements to produce isotopes in conjunction with the University of Missouri at Columbia, Pacific Northwest National Laboratory, operated by Battelle, and the University of Utah.

 In May 2008, we entered into a research agreement with the University of Utah related to the use of brachytherapy seeds for cancer treatments.  Pursuant to the research agreement, we paid the University total project costs of $45,150 in 2008 and 2009 for that research.  We plan to work with the University of Utah to develop and manufacture cancer treatments using brachytherapy seeds.

In June 2008, we entered into a research agreement with the University of Missouri related to the production of radio isotopes.  Pursuant to the research agreement, we paid the University total project costs of $67,500 during 2009 and 2010. We also entered into a one year option agreement in June 2008, which was extended for another year in June 2009, with the University of Missouri.  The option agreement gave us the option to enter into a licensing agreement to utilize certain intellectual property held by the University of Missouri for the production of medical, research, and industrial radioisotopes.  In May 2010, we exercised our option agreement by entering into a License Agreement for the Patent Rights in the area of radioisotope production using electron beam accelerator(s) for creating short lived radioisotopes such as Molybdenum-99 and Technetium-99 with the University of Missouri. This Agreement calls for a $10,000 nonrefundable fee paid upon execution, a royalty agreement on sales, and an equipment licensing fee on equipment sales. Additionally, the Agreement calls for a milestone payment of $250,000, due and payable five years after the May 14, 2010 effective date of this agreement and a milestone payment of $250,000, due and payable upon reaching $50,000,000 in cumulative net sales. The University has the right to either terminate or render the license non-exclusive in a licensed field or individual countries if the Company (i) has not demonstrated within 3 years after the effective date of this agreement access to $25,000,000 of available operating capital to proceed with commercialization of licensed products in such a manner as to cause the expenditure of that capital 4 years after the effective date; (ii) has not within 3 years after the effective date obtained the University’s approval of a new commercialization plan for licensed products not previously introduced by the Company into commercial use; or (iii) has not within 5 years after the effective date achieved, or does not each year thereafter maintain, sales levels of licensed products that result in specified royalties to the University.

In August 2010, we made a $10,000 investment for an exclusive license agreement with Battelle Memorial Institute regarding its technology for the production of a Brachytherapy seed. This license agreement calls for a $10,000 nonrefundable license fee and a royalty based on a percent of net sales for licensed products sold; the license agreement also contains a minimum royalty amount to be paid each year starting with $2,500 due January 2012, which has not yet been paid.






 
22

 

 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued

Manufacturing - continued

In February 2011, we paid $5,000 for a one year option agreement to negotiate an exclusive license agreement with Battelle Memorial Institute regarding its patents for the production of a radiogel technology. This option agreement calls for a $5,000 upfront fee for the option, which expired February 2012.  Effective March 2012, we entered into an exclusive license agreement with Battelle Memorial Institute regarding the use of its patented radiogel technology. This license agreement calls for a $17,500 nonrefundable license fee and a royalty based on a percent of gross sales for licensed products sold; the license agreement also contains a minimum royalty amount to be paid each year starting with 2013.

Competitors
 
The suppliers of radioisotopes for diagnosis, treatment, and research for a wide variety of diseases, in particular cancer, vary in size and product offerings.  Competition is limited because there are many barriers to entry, including regulatory hurdles, including licensing, government approvals and capital outlays associated with starting an isotope company.  Many current competitors are international companies. 
 
Further, competition is limited as some suppliers are closing their facilities or limiting their production.  At one time, the U.S. government was supposed to be the source of medical isotopes, but over the course of the last two decades, it has either closed or failed to adequately fund its production facilities.
 
About 90% of all the non PET radioisotopes used in the United States are imported from two companies, Nordion Inc. (formerly MDS Inc.) and Covidien (formerly Mallinckrodt). The remaining 10% that are produced in the United States are manufactured in a fragmented, piecemeal manner with companies producing a single isotope instead of a wide variety. 

Employees
 
As of September 30, 2012, we had ten employees, of whom three were full-time employees.  At any given time, we utilize eight to ten independent contractors to assist with our operations.  We do not have a collective bargaining agreement with any of our employees, and we believe our relations with our employees are good.

Raw Materials

Some of the materials used in the products we manufacture are currently available only from a limited number of suppliers, many of which are international suppliers.  We obtain many of our stable isotopes from suppliers in Russia.  The Company plans to expand the availability of its supplies and products utilizing manufacturing capability at reactors located at the U.S. Department of Energy's National Laboratories (“National Laboratories”) as well as production capabilities at various universities and foreign countries other than Russia.  This strategy is intended to reduce the risk associated with concentrating isotope production at a single facility.  We obtain supplies, hardware, handling equipment and packaging from several different U.S. and foreign suppliers.

Customers
 
Our customers for sales of stable isotopes have included a broad range of hospitals, universities, research centers and national laboratories, in addition to academic and government institutions.  These customers are located in essentially all major U.S. and international markets.

Our sales for 2011 consisted of F-18 (49.2% of total revenues) and Consulting Income (45.5% of total revenues) and sales of stable isotopes (5.3% of total revenues). Sales of F-18 for 2011 were 100% to Kadlec Hospital in Richland, Washington. Consulting revenues consist of providing a company with assistance in strategic targetry services, and research into production of radiophamaceuticals and the operations of radioisotope production facilities.










 
23

 

 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
 
Patents, Trademarks, Licenses

License Agreement:

On September 27, 2006, we acquired the assets of Neu-Hope Technologies (“NHTI”) from UTEK.  Included in the acquired assets was a Non-Exclusive License Agreement with the Regents of the University of California (“University”) for a neutron generator in exchange for preferred stock.  NHTI paid a non-refundable fee in the amount of $25,000 in connection with the license agreement.  The license fee is non-refundable unless our commercialization plan is deemed unacceptable by the University.  If the plan is deemed unacceptable, the license agreement will terminate.  To date, no commercialization plan has been deemed acceptable or unacceptable.  In consideration for the license, we agreed to pay royalties equal to the greater of three percent of the selling price of each licensed product we sell or the maintenance fee according to the following schedule:
 
2008
 
$
10,000
*
2009
 
$
15,000
*
2010
 
$
15,000
*
2011
 
$
45,000
*
2012 and each year thereafter
 
$
60,000
 *
   
$
145,000
 
                                                                                                 * These items have not been paid to date.

The License Agreement may be cancelled by giving 90 days written notice to the University.  We did not have a relationship with UTEK before the acquisition of Neu-Hope Technologies, and we do not currently have any business relationship or affiliation with UTEK.  In 2008, partially due to the Company’s lack of funds to act upon the patent license for the neutron generator and develop the technology, the Company lost considerable ground towards the advantages of utilization of the patent license.  Since other companies made progress towards the development of the patent license technology and management no longer had the means or interest in pursuing the development of this technology, the Company’s management determined that the patent license for the neutron generator no longer had value to the Company and wrote off the net unamortized balance of $643,917 in 2008.
  
Additionally the Company has made the following investments in patent licenses and intellectual property during 2011:

In February 2011, the Company paid $5,000 for a one year option agreement to negotiate an exclusive license agreement with Battelle Memorial Institute regarding its patents for the production of a radiogel technology.  This option agreement calls for a $5,000 upfront fee for the option, which expired February 2012. This fee was fully expensed in the twelve months ended December 31, 2011. Effective March 2012, we entered into an exclusive license agreement with Battelle Memorial Institute regarding the use of its patented radiogel technology. This license agreement calls for a $17,500 nonrefundable license fee and a royalty based on a percent of gross sales for licensed products sold; the license agreement also contains a minimum royalty amount to be paid each year starting with 2013.

Patent filing costs totaling $97,421, were capitalized during the twelve months ended December 31, 2011; resulting in a total $317,224 of capitalized patents and intellectual property at December 31, 2011.  The patents are pending and are being developed, and as such, the patents and filing costs associated with them are not being amortized.  Management has determined the economic life of the patents to be 10 years, and amortization, over such 10-year period and on a straight-line basis, will begin once the patents have been issued and the Company begins utilization of the patents through production and sales, resulting in revenues.  The Company evaluates the recoverability of intangible assets, including patents on a continual basis. Several factors are used to evaluate intangibles, including, but not limited to, management’s plans for future operations, recent operating results and projected and expected undiscounted future cash flows.

Patent filing costs totaling $81,927, and $77,094 were capitalized during the nine months ended September 30, 2012, and 2011; resulting in a total $399,152 of capitalized patents at September 30, 2012.  The patents are pending and are being developed, and as such, they are not being amortized.  Management has determined the economic life of the patents to be 10 years, and amortization, over such 10-year period and on a straight-line basis, will begin once the patents have been issued and the Company begins utilization of the patents through production and sales, resulting in revenues.  The Company evaluates the recoverability of intangible assets, including patents on a continual basis. Several factors are used to evaluate intangibles, including, but not limited to, management’s plans for future operations, recent operating results and projected and expected undiscounted future cash flows.


 
24

 


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
 
Research and Development

The costs expensed in the nine months ended September 30, 2012 and 2011 were $668,541 and $297,965, respectively. The $297,965 spent for the nine months ended September 30, 2011 were $153,673 towards the Brachytherapy Project and $144,292 towards the Molybdenum Project. The $668,541 spent for the nine months ended September 30, 2012 were $410,445 towards the Brachytherapy Project and $258,096 towards the Molybdenum Project and consists of the following:

   
Brachytherapy
   
Molybdenum
 
Supplies
 
$
-
   
$
-
 
Amortization
   
5,537
     
2,499
 
Conferences & seminars
   
-
     
1,034
 
Depreciation expense
   
737
     
-
 
Marketing
   
-
     
-
 
Office Supplies
   
256
     
134
 
Payroll and benefits
   
66,322
     
27,018
 
Consulting fees
   
4,752
     
16,993
 
Consulting fees – stock based
   
52,667
     
187,667
 
Legal fees
   
-
     
-
 
Research
   
270,123
     
-
 
Stock options granted
   
9,000
     
6,000
 
Telephone
   
472
     
221
 
Travel
   
579
     
16,530
 
               Total
 
$
410,445
   
$
258,096
 















 
25

 

 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued

Results of Operations

Comparison of the Nine Months Ended September 30, 2012 and 2011
 
The following table sets forth information from our statements of operations for the nine months ended September 30, 2012 and 2011.
 
   
Nine Months Ended
September 30, 2012
 
Nine Months Ended
September 30, 2011
Revenues
 
$
181,268
   
$
346,043
 
                 
Operating expenses
   
4,526,102
     
2,159,597
 
                 
Operating loss
   
(4,344,834
)
   
(1,813,554
)
Non-operating income (expense)
               
Recognized income from grants
   
410,445
     
153,673
 
Net loss on settlement
   
(550
)
   
(25,000
)
Interest expense
   
(682,086
)
   
(297,934
)
Net income (loss)
 
$
(4,617,025
)
 
$
(1,982,815
)
 
Revenue
 
Revenue was $181,268 for the nine months ended September 30, 2012 and 346,043 for the nine months ended September 30, 2011.  The decrease was the result of consulting revenues and the sales of stable isotopes.  In July 2008 we established our linear accelerator production center and began the production and marketing of F-18 in August 2008.  F-18 sales accounted for $175,160 of the total nine months ended September 30, 2012 revenues and $146,160 of the total nine months ended September 30, 2011 revenues.  Revenues for F-18 were higher in the nine months ended September 30, 2012 as a result of adding a second hospital as a customer; thereby increasing the number of doses sold  for the nine months ended September 30, 2012 (623) from the nine months ended September 30, 2011 (505). Stable isotope sales were $0 and $20,769 for the nine months ended September 30, 2012 and 2011, respectively.  The Company discontinued the sale of stable isotopes in the nine months ended September 30, 2012 due to the reduction in profitability of that line of product. The Company intends to continue to minimize stable isotope sales at this time due to the low profitability. Consulting revenues consisted of $6,108 and $179,114 of the total nine months ended September 30, 2012 and 2011 revenues. Consulting revenues consist of providing a company with assistance in strategic targetry services, and research into production of radiophamaceuticals and the operations of radioisotope production facilities. No proprietary information belonging to our Company is shared during the process of this consulting. The Company has reduced the time provided toward Consulting revenues in the nine months ended September 30, 2012.

Revenue for the nine months ended September 30, 2012 and 2011 consists of the following:

     
Nine months ended
September 30, 2012
   
Nine months ended
September 30, 2011
 
F-18
   
$
175,160
   
$
146,160
 
Stable isotopes
     
-
     
20,769
 
Consulting
     
6,108
     
179,114
 
     
$
181,268
   
$
346,043
 

Cost of Goods Sold
 
Effective with the Statement of Operations for the year ended December 31, 2011, the Company changed its method of reflecting the Cost of Goods Sold. The Company has moved the Cost of Goods Sold into Operating Expenses versus reflecting it as a reduction to Revenues with the resulting Gross Profit.  The change has been made to be in accordance with FASB ASC 225-10-S99, SAB Topic 11.B, Depreciation and Depletion Excluded from Cost of Sales. The Statement of Operations for the nine months ended September 30, 2011 was changed from the way it was originally reflected to correspond with the changes made for the nine months ended September 30, 2012.


 
26

 

 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued

Operating Expenses
 
Operating expenses for the nine months ended September 30, 2012 and 2011 was $4,526,102 and $2,159,597, respectively.  The increase in operating expenses from 2011 to 2012 can be attributed to the increase in Stock Options Granted expense ($50,000 for the nine months ended September 30, 2011 versus $1,052,980 for the nine months ended September 30, 2012); the increase of Professional Fees ($595,659 for the nine months ended September 30, 2011 versus $1,696,882 for the nine months ended September 30, 2012); and the increase of General and Administrative Expenses ($415,856 for the nine months ended September 30, 2011 versus $785,215 for the nine months ended September 30, 2012). Part of this increase in expenses was offset by an decrease in Payroll expenses ($575,539 for the nine months ended September 30, 2011 versus $534,376 for the nine months ended September 30, 2012) and the decrease in Sales and Marketing expenses ($59,097 for the nine months ended September 30, 2011 versus $17,459 for the nine months ended September 30, 2012).
 
   
Nine Months Ended
September 30, 2012
   
Nine Months Ended
September 30, 2011
 
Cost of goods sold
 
$
57,444
   
$
53,658
 
Depreciation and amortization expense
   
381,746
     
409,788
 
Professional fees
   
1,696,882
     
595,659
 
Stock options granted
   
1,052,980
     
50,000
 
Payroll expenses
   
534,376
     
575,539
 
General and administrative expenses
   
785,215
     
415,856
 
Sales and marketing expense
   
17,459
     
59,097
 
   
$
4,526,102
   
$
2,159,597
 

Non-Operating Income (Expense)
 
Non-operating expense for the nine months ended September 30, 2012 and 2011 was $272,191 and $169,261, respectively. The increase in non-operating expense was due to an increase in interest expense ($682,086 for the nine months ended September 30, 2012 versus $297,934 for the nine months ended September 30, 2011). Part of this increase in non-operating expense was offset by an increase in grant income recognized ($410,445 for the nine months ended September 30, 2012 versus $153,673 for the nine months ended September 30, 2011).

Non-Operating income (expense) for the nine months ended September 30, 2012 and 2011 consists of the following:

   
Nine months ended
September 30, 2012
   
Nine months ended
September 30, 2011
 
Interest expense
 
$
(682,086
)
 
$
(297,934
)
Net loss on settlement
   
(550
)
   
(25,000
)
Recognized income from grants
   
410,445
   
 
153,673
 
   
$
(272,191
)
 
$
(169,261
)
 
Net Loss
 
Our net loss for the nine months ended September 30, 2012 and 2011 was $4,617,025 and $1,982,815, respectively.












 
27

 

 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued

Results of Operations

Comparison of the Three Months Ended September 30, 2012 and 2011
 
The following table sets forth information from our statements of operations for the three months ended September 30, 2012 and 2011.
 
   
Three Months Ended
September 30, 2012
 
Three Months Ended
September 30, 2011
Revenues
 
$
65,250
   
$
55,560
 
                 
Operating expenses
   
2,344,777
     
580,147
 
                 
Operating loss
   
(2,279,527
)
   
(524,587
)
Non-operating income (expense)
               
Recognized income from grants
   
242,162
     
47,453
 
Net loss on settlement
   
-
     
(25,000
)
Interest expense
   
(325,481
)
   
(95,890
)
Net income (loss)
 
$
(2,362,846
)
 
$
(598,024
)

Revenue
 
Revenue was $65,250 for the three months ended September 30, 2012 and $55,560 for the three months ended September 30, 2011.  The increase was mainly the result of F-18 sales. In July 2008 we established our linear accelerator production center and began the production and marketing of F-18 in August 2008.  Revenues for F-18 were higher in the three months ended September 30, 2012 as a result of adding a second hospital as a customer; thereby increasing the number of doses sold for the three months ended September 30, 2012 (235) from the three months ended September 30, 2011 (162). F-18 sales accounted for $65,250 of the total three months ended September 30, 2012 revenues and $47,560 of the total three months ended September 30, 2011 revenues. Consulting revenues consisted of $0 and $3,000 of the total revenue for the three months ended September 30, 2012 and 2011, respectively. Consulting revenues consist of providing a company with assistance in strategic targetry services, and research into production of radiophamaceuticals and the operations of radioisotope production facilities. Stable isotope sales were $0 and $5,000 for the three months ended September 30, 2012 and 2011 respectively.  The Company discontinued the sale of stable isotopes in the three months ended September 30, 2012 due to the reduction in profitability of that line of product. The Company intends to continue to minimize stable isotope sales at this time due to the low profitability.
 
Revenue for the three months ended September 30, 2012 and 2011 consists of the following:

     
Three months ended
September 30, 2012
   
Three months ended
September 30, 2011
 
F-18
   
$
65,250
   
47,560
 
Stable isotopes
     
-
     
5,000
 
Consulting
     
-
     
3,000
 
     
$
65,250
   
$
55,560
 













 
28

 

 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued

Results of Operations – Comparison of the Three Months Ended September 30, 2012 and 2011 - continued

Cost of Goods Sold
 
Effective with the Statement of Operations for the year ended December 31, 2011, the Company changed its method of reflecting the Cost of Goods Sold. The Company has moved the Cost of Goods Sold into Operating Expenses versus reflecting it as a reduction to Revenues with the resulting Gross Profit.  The change has been made to be in accordance with FASB ASC 225-10-S99, SAB Topic 11.B, Depreciation and Depletion Excluded from Cost of Sales. The Statement of Operations for the three months ended September 30, 2011 was changed from the way it was originally reflected to correspond with the changes made for the three months ended September 30, 2012.

Operating Expenses
 
Operating expenses for the three months ended September 30, 2012 and 2011 were $2,344,777 and $580,147, respectively.  The increase in operating expenses from 2011 to 2012 can be attributed to the increase in Stock Options Granted ($640,000 for the three months ended September 30, 2012 versus $50,000 for the three months ended September 30, 2011), Professional Fees ($902,655 for the three months ended September 30, 2012 versus $95,093 for the three months ended September 30, 2011, General and Administrative Expenses ($500,716 for the three months ended September 30, 2012 versus $117,708 for the three months ended September 30, 2011, Sales and Marketing Expenses ($8,800 for the three months ended September 30, 2012 versus $508 for the three months ended September 30, 2011. These increases were partially offset by a decrease in Depreciation and Amortization Expenses ($101,454 for the three months ended September 30, 2012 versus $136,596 for the three months ended September 30, 2011).

Operating expenses for the three months ended September 30, 2012 and 2011 consists of the following:

   
Three Months Ended
September 30, 2012
   
Three Months Ended
September 30, 2011
 
Cost of goods sold
 
22,292
   
17,120
 
Depreciation and amortization expense
   
101,454
     
136,596
 
Professional fees
   
902,655
     
95,093
 
Stock options granted
   
640,000
     
50,000
 
Payroll expenses
   
168,860
     
163,122
 
General and administrative expenses
   
500,716
     
117,708
 
Sales and marketing expense
   
8,800
     
508
 
   
$
2,344,777
   
$
580,147
 

Non-Operating Income (Expense)
 
Non-operating expense for the three months ended September 30, 2012 and 2011 was $83,319 and $73,437, respectively. The increase in non-operating expense was due to an increase in interest expense ($325,481 for the three months ended September 30, 2012 versus $95,890 for the three months ended September 30, 2011). The increase in non-operating expenses was partially offset by an increase in Recognized income from Grants ($242,162 for the three months ended September 30, 2012 versus $47,453 for the three months ended September 30, 2011).
 
Non-Operating income (expense) for the three months ended September 30, 2012 and 2011 consists of the following:

   
Three months ended
September 30, 2012
   
Three months ended
September 30, 2011
 
Interest expense
 
$
(325,481
)
 
$
(95,890
)
Net loss on settlement
   
-
     
(25,000
)
Recognized income from grants
   
242,162
     
47,453
 
   
$
(83,319
)
 
$
(73,437
)




 
29

 

 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued

Results of Operations – Comparison of the Three Months Ended September 30, 2012 and 2011 - continued

Income from Grants

On October 28, 2010, the Company received $1,215,000 net proceeds from the Department of Energy grant for the Proposed Congressionally Directed Project entitled “Research to Develop and Test an Advanced Resorbable Brachytherapy Seed Research for Controlled Delivery of Yttrium-90 Microspheres in Cancer Treatment.” This grant reimburses the Company for anticipated expenditures related to the development of its Brachytherapy project since April 1, 2010. The Company projects this project could cost approximately $5,500,000; however, the Company recognizes the costs could be as high as $8,000,000 before it gets to production.
 
The Company has chosen to recognize grant money received as income as it incurs costs associated with those grants, and until such time as it recognizes the grant as income those funds received will be classified as Deferred Income on the balance sheet.

For the twelve months ended December 31, 2011 the Company recognized $245,727 of a $1,215,000 Department of Energy grant as income with the remaining $945,765 recorded as deferred income as of December 31, 2011. The $245,727 recognized as of December 31, 2011 was for costs incurred for the twelve months ended December 31, 2011. For the three months ended September 30, 2012 the Company recognized an additional $242,162 as income leaving a remaining balance of $535,320 recorded as deferred income as of September 30, 2012. The $242,162 was for costs incurred for the three months ended September 30, 2012.

As of September 30, 2012 the grant money received and grant money recognized as income and deferred income can be summarized as follows:

   
$1,215,000 Brachytherapy Grant
 
Grant money received during 2010
 
$
1,215,000
 
Recognized income from grants in 2010
   
23,508
 
Deferred income at December 31, 2010
   
1,191,492
 
Recognized income from grants in 2011
   
245,727
 
Deferred income at December 31, 2011
   
945,765
 
Recognized income from grants for the nine months ended September 30, 2012
   
410,445
 
Deferred income at September 30, 2012
 
$
535,320
 

Net Loss
 
Our net loss for the three months ended September 30, 2012 and 2011 was $2,362,846 and $598,024, respectively.





















 
30

 

 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued

Liquidity and Capital Resources
 
At September 30, 2012, we had negative working capital of $6,234,036, as compared to $4,601,084 at September 30, 2011.  During the nine months ended September 30, 2012 we experienced negative cash flow from operations of $1,447,998 and we expended $114,178 for investing activities while adding $1,557,000 of cash flows from financing activities.  As of September 30, 2012, we had $0 commitments for capital expenditures.

Cash used in operating activities increased from $577,693 for the nine month period ending September 30, 2011 to $1,447,998 for the nine month period ending September 30, 2012.  Cash used in operating activities was primarily a result of our net loss, partially offset by non-cash items, such as amortization and depreciation, included in that net loss, and common stock and stock options issued for services and other expenses.  Cash used in investing activities increased from $77,094 for the nine month period ended September 30, 2011 to $114,178 for the nine month period ended September 30, 2012.  Cash was used to acquire equipment and patents and intellectual property during the 2012 nine month period and patents and intellectual property during the 2011 nine month period. Cash provided from financing activities increased from $84,049 for the nine month period ending September 30, 2011 to $1,557,000 for the nine month period ending September 30, 2012. The increase in cash provided from financing activities was primarily a result of increase in proceeds from convertible debt along with a decrease in payments on convertible debt and a decrease in proceeds from exercise of options and warrants.

We have generated material operating losses since inception.  We have incurred a net loss of $25,811,431 from January 1, 2006 through September 30, 2012, including a net loss of $4,055,026 for the twelve months ended December 31, 2010, and a net loss of $2,749,616 for the twelve months ended December 31, 2011. We expect to continue to experience net operating losses.  Historically, we have relied upon investor funds to maintain our operations and develop our business.  We anticipate raising additional capital within the next twelve months from investors for working capital as well as business expansion, although we can provide no assurance that additional investor funds will be available on terms acceptable to us.  If we are unable to obtain additional financing to meet our working capital requirements, we may have to curtail our business.
 
We have modified our growth and operating plans as a result of our continuing losses.  The going concern disclosure in Note 1 to our audited financial statements for the year ended December 31, 2011 anticipated that we would need $1.5 million in funds over the next twelve months to maintain current operation activities.  As a result of changes and additions to our business plans, our current cash run rate is approximately $1.5 million.

Based on the current cash run rate, approximately $1,500,000 will be needed to fund operations for an additional year.  As disclosed in the risk factors set forth in our Form 10-K report for the year ended December 31, 2011, we are presently taking steps to raise additional funds to continue operations for the next 12 months and beyond.  We will need to raise an additional $15,000,000 in the next year to develop an infrastructure for Brachytherapy production and distribution as well as to initiate a Molybdenum 99 production facility.  However, we may choose to further modify our growth and operating plans to the extent of available funding, if any.
 
The recent economic events, including the substantial decline in global capital markets, as well as the lack of liquidity in the capital markets, could impact our ability to obtain financing and our ability to execute our business plan. Although market conditions have deteriorated, we believe healthcare institutions will continue to purchase the medical solutions that we distribute.  Having only modest sales since our inception, we are unable to determine the effect of the recent economic crises on our sales.


















 
31

 

 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued

Liquidity and Capital Resources - continued

Contractual Obligations (payments due by period as of September 30, 2012)

Contractual Obligation
 
Total Payments Due
   
Less than 1 Year
   
1-3 Years
   
3-5 Years
   
More than 5 Years
 
Capital Lease Obligation
  $ 741,768     $ 366,700     $ 375,068     $ -     $ -  
Production Center Lease
  $ -     $ -     $ -     $ -     $ -  
License Agreement with Regents of the University of California
  $ 565,000     $ 145,000     $ 180,000     $ 180,000     $
60,000 each year
 
License Agreement with Battelle Memorial Institute
  $ 125,000     $ 2,500     $ 22,500     $ 75,000     $
25,000 each year
 

The capital lease obligations represent two lease agreements for $1,875,000 and $631,000, secured by equipment and personal guarantee of two of our major stockholders, which we obtained during September 2007.  The purpose of the lease agreements was to acquire a Pulsar 10.5 PET Isotope Production System for a contracted amount of $1,875,000 plus ancillary equipment and facility for $631,000.

We were in default on the capital lease obligation as of December 31, 2008 due to failure to maintain the minimum debt service coverage ratio identified in the Lease by an amount of $35,000 as per notice from the debtor.  We believed at the time of the issuance of the December 31, 2008 financial statements that we had remedied the default which existed at year end.  Accordingly we recorded a current and long term portion of the capital leases.  Subsequent to the issuance of the December 31, 2008 financial statements, we determined that more likely than not that the Company is in default of the terms of the capital leases.  Accordingly we recorded the entire value of the leases as a current obligation.  The Company was in default on the capital lease obligation as of December 31, 2009 due to failure to maintain the minimum debt service ratio identified in the lease.  However, the Company was in compliance with the minimum debt service coverage ratio stipulated in the loan covenants at December 31, 2010 and accordingly recognized current and long term portions of the lease on its balance sheet at December 31, 2010. We were in default on a covenant in the capital lease obligations as of December 31, 2011 due to failure to maintain the minimum debt service ratio required by the leases. Accordingly we recorded the entire value of the leases as a current obligation in our audited December 31, 2011 financial statements. However, the Company was in compliance with the minimum debt service coverage ratio stipulated in the loan covenants at September 30, 2012 and accordingly recognized current and long term portions of the lease on its balance sheet at September 30, 2012 and reclassified the December 31, 2011 capital lease obligations to current and long term portions as of that date. The reason the Company was able to come into compliance with the minimum debt service coverage ratio stipulated in the loan covenants was due to the additional convertible debt raised during the nine months ended September 30, 2012.

We began renting office and warehouse space effective August 1, 2007, located in Kennewick, Washington from a non-affiliated stockholder.  The lease agreement calls for monthly rental payments starting at $3,500, increasing every August 1st until they become $4,762 as of August 1, 2011 and continue through the month ended July 31, 2012. Subsequent to July 31, 2012, the Company is renting this space on a month to month basis at $11,904 per month.  During the year ended December 31, 2011 and 2010 the Company incurred rent expenses for this facility totaling $54,869 and $50,622, respectively.  During the nine months ended September 30, 2012 and 2011 the Company incurred rent expenses for this facility totaling $52,374 and $40,385, respectively. In addition, the lease agreement calls for the issuance of $187,500 in common stock valued at $0.40 per share for a total of 416,667 shares.  The Company recognized the issuance of all 416,667 shares in 2007 and will amortize the $187,500 value of that stock over the sixty month term of the lease.  For the twelve months ended December 31, 2011 the Company amortized $37,500 of this stock issuance and recognized it as rent expense. For the nine months ended September 30, 2012 and 2011 the Company amortized $21,875 and $28,125, respectively, of this stock issuance and recognized it as rent expense.
 

















 
32

 

 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued

Critical Accounting Policies

The Securities and Exchange Commission (“SEC”) defines “critical accounting policies” as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of the accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition. 

Use of Estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Changes in Accounting and Financial Disclosures

Effective with the Statement of Operations for the year ended December 31, 2011, the Company changed its method of reflecting the Cost of Goods Sold. The Company has moved the Cost of Goods Sold into Operating Expenses versus reflecting it as a reduction to Revenues with the resulting Gross Profit.  The change has been made to be in accordance with FASB ASC 225-10-S99, SAB Topic 11.B, Depreciation and Depletion Excluded from Cost of Sales. The Statement of Operations for the nine months ended September 30, 2011 was changed from the way it was originally reflected to correspond with the changes made for the nine months ended September 30, 2012.

Cash Equivalents

For the purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

Accounts Receivable

Accounts receivables are stated at the amount that management of the Company expects to collect from outstanding balances. Management provides for probable uncollectible amounts through an allowance for doubtful accounts. Additions to the allowance for doubtful accounts are based on management’s judgment, considering historical write-offs, collections and current credit conditions. Balances which remain outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and a credit to the applicable accounts receivable. Payments received subsequent to the time that an account is written off are considered bad debt recoveries. As of September 30, 2012, the Company has experienced no bad debt write offs from operations.

Inventory

Inventory is reported at the lower of cost or market, determined using the first-in, first-out basis, or net realizable value. All inventories consist of Finished Goods. The company had no Raw Materials or Work in Process.

















 
33

 

 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued

Fixed Assets

Fixed assets are carried at the lower of cost or net realizable value. Production equipment with a cost of $2,500 or greater and other fixed assets with a cost of $1,500 or greater are capitalized. Major betterments that extend the useful lives of assets are also capitalized. Normal maintenance and repairs are charged to expense as incurred. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in operations.

Depreciation is computed using the straight-line method over the following estimated useful lives:

Production equipment 
3 to 7 years
Office equipment 
2 to 5 years
Furniture and fixtures 
2 to 5 years

Leasehold improvements and capital lease assets are amortized over the shorter of the life of the lease or the estimated life of the asset.

Management of the Company reviews the net carrying value of all of its equipment on an asset by asset basis whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. These reviews consider the net realizable value of each asset, as measured in accordance with the preceding paragraph, to determine whether impairment in value has occurred, and the need for any asset impairment write-down.

The types of events and circumstances that management believes could indicate impairment are as follows:

 
·
A significant decrease in the market price of a live-lived asset.
 
·
A significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition.
 
·
A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator.
 
·
An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset.
 
·
A current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset.
 
·
A current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

The fair value of assets is first determined by quoted market prices, if available. Otherwise, the estimate of fair value is based on the best information available in the circumstances, including prices for similar assets and the results of using other valuation techniques. If quoted market prices are not available a present value technique is often the best available valuation technique with which to estimate fair value. It is believed that an expected present value technique is superior to a traditional present value technique, especially in situations in which the timing or amount of estimated future cash flows is certain.

The traditional approach is useful for many measurements, especially those in which comparable assets and liabilities can be observed in the marketplace. However, the traditional approach does not provide the tools needed to address some complex measurement problems, including the measurement of nonfinancial assets and liabilities for which no market for the item or a comparable item exists. The traditional approach places most of the emphasis on selection of an interest rate. A proper search for “the rate commensurate with the risk” requires analysis of at least two items – one asset or liability that exists in the marketplace and has an observed interest rate and the asset or liability being measured. The appropriate rate of interest for the cash flows being measured must be inferred from the observable rate of interest in some other asset or liability and, to draw that inference, the characteristics of the cash flows must be similar to those of the asset being measured.
 
Although management has made its best estimate of the factors that affect the carrying value based on current conditions, it is reasonably possible that changes could occur which could adversely affect management’s estimate of net cash flows expected to be generated from its assets, and necessitate asset impairment write-downs.






 
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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued

License Fees

License fees are stated at cost, less accumulated amortization. Amortization of license fees is computed using the straight-line method over the estimated economic useful life of the assets.  The Company periodically reviews the carrying values of patents and any impairments are recognized when the expected future operating cash flows to be derived from such assets are less than their carrying value.

Patents and Intellectual Property

The Company  has determined that the economic life of its patents and intellectual property to be 10 years and will begin amortization over such 10-year period and on a straight-line basis once the patents have been issued and the Company begins utilization of the patents through production and sales, resulting in revenues.  The Company evaluates the recoverability of intangible assets, including patents on a continual basis. Several factors are used to evaluate intangibles, including, but not limited to, management’s plans for future operations, recent operating results and projected and expected undiscounted future cash flows.

Revenue Recognition
 
The Company recognized revenue related to product sales when (i) persuasive evidence of the arrangement exists, (ii) shipment has occurred, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured.

Revenue for the nine months ended September 30, 2012 consisted of the sales of Flouride 18 and Consulting Revenue. Revenue for the nine months year ended September 30, 2011 consisted of the sales of Oxygen 18 (stable isotope), Flouride 18 and Consulting Revenue. The Company recognizes revenue once an order has been received and shipped to the customer or services have been performed. Prepayments, if any, received from customers prior to the time products are shipped are recorded as deferred revenue. In these cases, when the related products are shipped, the amount recorded as deferred revenue is recognized as revenue. The Company does not accrue for sales returns and other allowances as it has not experienced any returns or other allowances.

Income from Grants and Deferred Income

The Company has chosen to recognize grant money received as income as it incurs costs associated with those grants, and until such time as it recognizes the grant as income those funds received will be classified as Deferred Income on the balance sheet.

Net Loss Per Share

The Company accounts for its income (loss) per common share by replacing primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings/loss per share is computed by dividing income (loss) available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period, and does not include the impact of any potentially dilutive common stock equivalents. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares had been issued.
 
Securities, all of which represent common stock equivalents, that could be dilutive in the future as of September 30, 2012 and September 30, 2011 are as follows:
 
   
September 30, 2012
   
September 30, 2011
 
Convertible debt
   
30,891,283
     
7,255,493
 
Common stock warrants
   
11,433,334
     
-
 
Common stock options
   
10,275,000
     
5,490,000
 
Total potential dilutive securities
   
52,599,617
     
12,745,493
 










 
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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued

Research and Development Costs

Research and developments costs, including salaries, research materials, administrative expenses and contractor fees, are charged to operations as incurred. The cost of equipment used in research and development activities which has alternative uses is capitalized as part of fixed assets and not treated as an expense in the period acquired. Depreciation of capitalized equipment used to perform research and development is classified as research and development expense in the year computed.

Advertising and Marketing Costs

Advertising and marketing costs are expensed as incurred except for the cost of tradeshows which are deferred until the tradeshow occurs. There were no tradeshow expenses incurred and not expensed as of the nine months ended September 30, 2012 and 2011. During the nine months ended September 30, 2012 and 2011, the Company incurred $17,459 and $59,097, respectively, in advertising and marketing costs.

Shipping and Handling Costs

Shipping and handling costs are expensed as incurred and included in cost of product sales.

Legal Contingencies

In the ordinary course of business, the Company is involved in legal proceedings involving contractual and employment relationships, product liability claims, patent rights, and a variety of other matters. The Company records contingent liabilities resulting from asserted and unasserted claims against it, when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. The Company discloses contingent liabilities when there is a reasonable possibility that the ultimate loss will exceed the recorded liability. Estimated probable losses require analysis of multiple factors, in some cases including judgments about the potential actions of third-party claimants and courts. Therefore, actual losses in any future period are inherently uncertain. Currently, the Company does not believe any probable legal proceedings or claims will have a material impact on its financial position or results of operations. However, if actual or estimated probable future losses exceed the Company’s recorded liability for such claims, it would record additional charges as other expense during the period in which the actual loss or change in estimate occurred.

Income Taxes

To address accounting for uncertainty in tax positions, the Company clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. The Company also provides guidance on de-recognition, measurement, classification, interest, and penalties, accounting in interim periods, disclosure and transition.
 
The Company files income tax returns in the U.S. federal jurisdiction, and Delaware.  The Company did not have any tax expense for the year ended December 31, 2011 or the nine months ended September 30, 2012.  The Company did not have any deferred tax liability or asset on its balance sheet on December 31, 2011 or on September 30, 2012.
 
Interest costs and penalties related to income taxes, if any, will be classified as interest expense and general and administrative costs, respectively, in the Company's financial statements. For the year ended December 31, 2011 and the nine months ended September 30, 2012, the Company did not recognize any interest or penalty expense related to income taxes. The Company believes that it is not reasonably possible for the amounts of unrecognized tax benefits to significantly increase or decrease during the year 2012.
 













 
36

 

 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued

Fair Value of Financial Instruments

The carrying amounts of cash, receivables and accrued liabilities approximate fair value due to the short-term maturity of the instruments.

Stock-Based Compensation

The Company recognizes in the financial statements compensation related to all stock-based awards, including stock options, based on their estimated grant-date fair value. The Company has estimated expected forfeitures and is recognizing compensation expense only for those awards expected to vest. All compensation is recognized by the time the award vests.

We account for equity instruments issued in exchange for the receipt of goods or services from non-employees. Costs are measured at the fair market value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of the date on which there first exists a firm commitment for performance by the provider of goods or services or on the date performance is complete.  The Company recognizes the fair value of the equity instruments issued that result in an asset or expense being recorded by the company, in the same period(s) and in the same manner, as if the Company has paid cash for the goods or services.

Recently Issued Accounting Pronouncements

The Company reviews recently issued accounting pronouncements on a quarterly basis. As of September 30, 2012 there are no recently issued accounting pronouncements that the Company believes are applicable or would have a material impact on the financial statements of the Company.

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
 
This item is not applicable to us because we are a smaller reporting company as defined by Rule 12b-2 under the Securities Exchange Act of 1934.


























 
37

 

 
Item 4.  Controls and Procedures.

Disclosure Controls and Procedures

Based on an evaluation as of the date of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Exchange Act Rule 13a-15.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, because of a previously disclosed material weakness in our internal control over financial reporting, our disclosure controls and procedures were ineffective as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.