Attached files

file filename
EX-5.1 - OPINION OF SICHENZIA ROSS FRIEDMAN FERENCE LLP - ADVANCED MEDICAL ISOTOPE Corpexhibit_5-1.htm
EX-10.15 - CONSULTING AGREEMENT WITH LIDINGO HOLDINGS, LLC, DATED JUNE 4, 2012 - ADVANCED MEDICAL ISOTOPE Corpexhibit_10-15.htm
EX-10.16 - CONSULTING AGREEMENT WITH TUNGSTEN 74, LLC, DATED JULY 1, 2012 - ADVANCED MEDICAL ISOTOPE Corpexhibit_10-16.htm
EX-10.14 - CONSULTING AGREEMENT WITH LAVOS, LLC, DATED JUNE 4, 2012 - ADVANCED MEDICAL ISOTOPE Corpexhibit_10-14.htm
EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - ADVANCED MEDICAL ISOTOPE Corpexhibit_23-1.htm

As filed with the Securities and Exchange Commission on  November 28,  2012
Registration No. 333-183705


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

FORM S-1/A
Amendment No. 3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
ADVANCED MEDICAL ISOTOPE CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
2810
80-0138937
(State of incorporation or organization)
(Primary Standard Industrial Classification Code)
(I.R.S. Employer Identification Number)

6208 W Okanogan Avenue
Kennewick, WA  99336
(509)736-4000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
James C. Katzaroff
Chief Executive Officer
Advanced Medical Isotope Corporation
6208 W Okanogan Avenue
Kennewick, WA  99336
Phone: (509)736-4000
 (Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:
Peter DiChiara, Esq.
Sichenzia Ross Friedman Ference LLP
61 Broadway
New York, New York 10006
(212) 930-9700
Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement, as determined by the selling stockholders.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.¨
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.¨
 
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.
 
 
Large accelerated filer ¨
Accelerated filer ¨
     
 
Non-accelerated filer ¨
Smaller reporting company x
 
 
 
 
 
 

 
 



CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered
 
Amount to be Registered
   
Proposed Maximum Offering Price Per Share
   
Proposed Maximum Aggregate Offering Price
   
Amount of Registration Fee
 
Common Stock issuable upon conversion of Convertible Notes due on January 13, 2014(1)(2)
   
5,830,000
   
$
0.10
   
$
583,000
   
$
79.52
 
Common Stock issuable upon conversion of Convertible Notes due on January 13, 2014(1)(3)
   
1,060,000
   
$
0.15
   
$
159,000
   
$
21.70
 
Common Stock issuable upon exercise of Common Stock Purchase Warrants(1)(4)
   
5,830,000
   
$
0.15
   
$
874,5 00
   
$
119.28
 
SUBTOTAL
   
12,720,000
           
$
1,616,500
   
$
220.50
 
Common Stock issuable upon exercise of Common Stock Purchase Warrants(1)(5)
   
6,740,297
   
$
0.15
   
$
1,011,045
   
$
137.90
 
Common Stock issuable upon exercise of Common Stock Purchase Warrants(1)(5)
   
1,200,000
   
$
0.09
   
$
108,000
   
$
14.75
 
Common Stock issuable upon exercise of Common Stock Purchase Warrants(1)(5)
   
2,000,000
   
$
0.25
   
$
500,000
   
$
68.20
 
TOTAL
   
22,660,297
           
$
3,235,545
   
$
441.35
 (6)
 
(1)
The shares of our common stock being registered hereunder are being registered hereunder for sale by the Selling Stockholders named in the prospectus.
   
(2)
Pursuant to Rule 457(g) under the Securities Act of 1933, the proposed maximum offering price (and, accordingly, the amount of the registration fee) has been calculated based on the conversion price of the Convertible Notes held by the Selling Stockholders.
   
(3)
Represents our good faith estimate of the number of shares of common stock that may be issuable in the future if we elect to pay all interest due under the terms of the convertible notes in shares of common stock. Under the terms of the convertible notes, Interest payable on the convertible notes shall compound annually and accrue at the annual rate of 12%.  Interest shall be payable quarterly in arrears on the last day of each calendar quarter commencing September 30, 2012.  Interest will be payable with shares of Common Stock provided (i) an event of default or an event which with the passage of time or the giving of notice could become an event of default has not occurred, (ii) such Common Stock is immediately resellable pursuant to an effective resale registration statement or Rule 144 without transfer or volume restrictions, (iii) such payment in Common Stock would not cause the holder to exceed the restrictions on ownership percentage of the Company, and (iv) we provide the holder not less than fifteen business days’ notice prior to the due date of our intention to pay such interest with Common Stock.  Interest paid with shares of Common Stock shall be payable on the third business day after the date such interest would be due if paid in cash.  Common Stock employed to pay interest shall be valued at 80% of the average of the volume weighted average prices of the Common Stock as reported by Bloomberg L.P. for the five trading days ending on the due date of the interest payment being made with Common Stock. For our estimate, we used an estimated volume weighted average price of $0.15  and estimated that the convertible notes will be outstanding, on average, for twelve months .  In the event that additional shares are required to be issued to cover interest payments in excess of such upper limit of our good faith estimate, such additional shares will be registered on a new registration statement.
   
(4)
Pursuant to Rule 457(g) under the Securities Act of 1933, the proposed maximum offering price (and, accordingly, the amount of the registration fee) has been calculated based on the exercise price of the Common Stock Purchase Warrants held by the Selling Stockholders that purchased the convertible notes.
   
(5)
Pursuant to Rule 457(g) under the Securities Act of 1933, the proposed maximum offering price (and, accordingly, the amount of the registration fee) has been calculated based on the exercise price of the common stock purchase warrants issued to consultants for services rendered pursuant to consulting agreements.
   
(6)
Previously paid.
 
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 

 
 

 
 
 

 
SUBJECT TO COMPLETION, DATED NOVEMBER 28, 2012
 
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
ADVANCED MEDICAL ISOTOPE CORPORATION
 
22,660,297 Shares
Common Stock
 
_________________________________________
 
This prospectus covers an aggregate of up to 22,660,297 shares of our common stock, $0.001 par value per share, that may be offered from time to time by the selling stockholders named in this prospectus. The shares being offered by this prospectus consist of:

 
up to 5,830,000 shares issuable upon the conversion of our Convertible Notes due on January 13, 2014 issued by us in connection with a private placement in July 2012; and

  
up to 1,060,000 shares of common stock that may be issuable in the future if we elect to pay all interest due under the terms of the Convertible Notes in shares of common stock
 
  
up to 5,830,000 shares issuable upon the exercise of the common stock purchase warrants issued by us in our July 2012 private placement and up to 3,140,297 shares issuable upon the exercise of the common stock purchase warrants issued by us as commissions to brokers for sales of the Convertible Notes ) and

  
Up to 6,800,000 shares issuable upon the conversion of warrants issued to consultants for services rendered pursuant to consulting agreements.
 
 
We are registering these shares of our common stock for resale by the selling stockholders named in this prospectus, or their transferees, pledgees, donees or successors.  We will not receive any of the proceeds from the sale of common stock by the selling stockholders, although we may receive proceeds from the exercise of the Warrants by the selling stockholders, if exercised. We cannot guarantee that the selling stockholders will exercise the Warrants. Any proceeds we receive from the selling stockholders upon their exercise of the Warrants will be used for general working capital.   The selling stockholders may sell this common stock through ordinary brokerage transactions, directly to market makers of our shares or through any other means described in the section entitled “PLAN OF DISTRIBUTION” beginning on page 18.
 
We are an "emerging growth company" under applicable Securities and Exchange Commission rules and, as such, will be subject to reduced public company reporting requirements. Before purchasing any of the shares covered by this prospectus, carefully read and consider the risk factors in the section entitled “RISK FACTORS” beginning on page 6.
 
Our common stock is currently quoted on the OTC Bulletin Board under the symbol “ADMD.” On November 27 , 2012, the last reported sales price of our common stock was $0.19 per share.
 
Our principal executive offices are located at 6208 W Okanogan Avenue, Kennewick, WA  99336, and our telephone number at that address is (509)736-4000.

_________________________________________
 
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
 
The date of this prospectus is _______, 2012.
 
 
 

 
 
 

 
 
 

TABLE OF CONTENTS
PROSPECTUS SUMMARY
2
RISK FACTORS
8
FORWARD-LOOKING STATEMENTS
16
SELLING STOCKHOLDERS
17
USE OF PROCEEDS
19
DETERMINATION OF OFFERING PRICE
19
PLAN OF DISTRIBUTION
20
DESCRIPTION OF SECURITIES
21
DIVIDEND POLICY
23
MARKET PRICE OF COMMON STOCK AND RELATED STOCKHOLDER MATTERS
23
DESCRIPTION OF BUSINESS
24
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
33
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
47
EXECUTIVE COMPENSATION
49
BENEFICIAL OWNERSHIP OF OUR COMMON STOCK
52
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
52
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
54
EXPERTS
54
LEGAL MATTERS
54
WHERE YOU CAN FIND MORE INFORMATION
54
INDEX TO DECEMBER 31, 2011 FINANCIAL STATEMENTS
F-1
INDEX TO (UNAUDITED) SEPTEMBER 30, 2012 FINANCIAL STATEMENTS
F-39
SIGNATURES
S-1

This prospectus is a part of the registration statement that we filed with the Securities and Exchange Commission. The selling stockholders named in this prospectus may from time to time sell the securities described in this prospectus.

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from the information contained in this prospectus. The common stock is not being offered in any jurisdiction where offers and sales are not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of when this prospectus is delivered or when any sale of our securities occurs.



 
1

 

PROSPECTUS SUMMARY

This summary highlights information that we present more fully in the rest of this prospectus and does not contain all of the information you should consider before investing in our securities. This summary contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements. You should read the entire prospectus carefully, including the “Risk Factors” section and our consolidated financial statements and related notes. Unless the context requires otherwise, as used in this prospectus, the terms “Advanced Medical Isotope Corporation,” “ADMD,” “we,” “us,” “our,” “the Company,” and similar references refer to Advanced Medical Isotope Corporation.

COMPANY OVERVIEW
 
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.  Our principal executive offices are located at 6208 W Okanogan Avenue,  Kennewick, WA  99336 and  our phone number is (509)736-4000.

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.
 
 
 
2

 
 
PROSPECTUS SUMMARY - continued
 
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.

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 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.
 
 
 
3

 
 
PROSPECTUS SUMMARY - 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 execution of this agreement and a milestone payment of $250,000, due and payable upon reaching $50,000,000 in cumulative net sales.

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 2012.

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.

Any of the risk factors described below could cause our business or financial performance to differ from any expectations or other forward-looking statements set forth in this prospectus. Any of the risks described below, as well as other risks or uncertainties set forth elsewhere in this report, could materially and adversely affect our business, operations, prospects, results of operation, financial condition, or the value of our stock or other securities.


 
4

 
 
PROSPECTUS SUMMARY - continued
 
OFFERING SUMMARY

July 2012 Offering
 
On July 13, 2012, we issued $550,000 of Secured Convertible Promissory Notes (the “Notes”) to two investors and, on August 2, 2012, we issued $510,000 of Secured Convertible Promissory Notes to 25 investors (collectively, the “Investors”) pursuant to the terms of a Subscription Agreement (the “Subscription Agreement”). The Subscription Agreement contains customary representations, warranties and agreements by the Company. The Investors also received warrants (the “Warrants”), exercisable until July 13, 2017, to purchase shares of the Company’s common stock (“Common Stock”) and additional investment rights (“Additional Investment Rights”) to purchase additional notes. The Company and Investors also entered into a Security Agreement (“Security Agreement”) to provide collateral for the Notes. The Notes are also secured by a pledge of stock owned by the Company’s directors.  On July 13, 2012, the market price per share of the Company’s common stock was $0.24 based on trading volume of 2,000 shares.  On August 2, 2012, the market price of the Company’s common stock was $0.2895 based on a trading volume of 3,500.

Convertible Promissory Notes

The Company issued and completed the sale to the Investors of Notes equal to $1,060,000 (the “Principal Amount”). The Notes mature on January 13, 2014 (“Maturity Date”) and bear interest at a rate of 12.0% per annum, payable on the Maturity Date. The outstanding Principal Amount and accrued and unpaid interest on the Notes will be convertible into shares of Common Stock of the Company or so long as each Note is outstanding. The effective conversion rate for this Note shall be $0.10 per share. As a result, the Notes are convertible into 10,600,000 shares of common stock.  This conversion rate will be adjusted upon the occurrence of any split, combination or other similar recapitalization with respect to the Common Stock and shall be reduced if the Company issues Common Stock at a price lower than the then-current Conversion Price other than for issuances in connection with mergers, licensing agreements, certain stock options and other transactions as described in the Notes.

Interest payable on this Note shall compound annually and accrue at the annual rate of 12%.  Interest shall be payable quarterly in arrears on the last day of each calendar quarter commencing September 30, 2012.  Interest will be payable with shares of Common Stock provided (i) an event of default or an event which with the passage of time or the giving of notice could become an event of default has not occurred, (ii) such Common Stock is immediately resellable pursuant to an effective resale registration statement or Rule 144 without transfer or volume restrictions, (iii) such payment in Common Stock would not cause the holder to exceed the restrictions on ownership percentage of the Company, and (iv) we provide holder not less than fifteen business days’ notice prior to the due date of Company’s intention to pay such interest with Common Stock.  Interest paid with shares of Common Stock shall be payable on the third business day after the date such interest would be due if paid in cash.  Common Stock employed to pay interest shall be valued at 80% of the average of the volume weighted average prices of the Common Stock as reported by Bloomberg L.P. for the five trading days ending on the due date of the interest payment being made with Common Stock.

Warrants

The Investor also received warrants, exercisable until July 13, 2017, to purchase the number of shares of common stock of the Company (“Warrant Shares”) equal to the product obtained by multiplying the Investor’s Loan Amount by ten, with a per share exercise price of $0.15 (“Exercise Price”).  On the sale of the $1,060,000 of Notes, the Investors were entitled to receive warrants to purchase 10,600,000 Warrant Shares.  The number of Warrant Shares will be appropriately adjusted upon the occurrence, prior to the issuance of such Warrant, of any stock dividend, stock split, combination or the like with respect to the Company’s common stock. The Exercise Price will be adjusted upon the occurrence of any split, combination or other similar recapitalization with respect to the Common Stock and shall be reduced if the Company issues Common Stock at a price lower than the then-current Conversion Price other than for issuances in connection with mergers, licensing agreements, certain stock options and other transactions as described in the Warrant.  We also issued Warrants to consultants for services rendered pursuant to consulting agreements.  Warrants, exercisable until July 13, 2017 at a price of $0.15, to purchase 3,140,297 Warrant Shares were issued as a commission on sales of the Notes.
 
Additional Investment Rights

We issued Additional Investment Rights to the Investors. The Additional Investment Rights will represent the right to purchase additional Principal Amount of Notes up to 40% of the Principal Amount of Notes acquired by the Selling stockholders and a corresponding amount of Warrants.
 
Security Agreement

The Company and certain also entered into a Security Agreement (the “Security Agreement”) pursuant to which the Company granted a continuing security interest (“Security Interest”) in the Collateral (as defined herein) to secure all obligations and performance of each of the Company’s duties under the Notes and any related documentation. “Collateral” shall include all goods, contract rights and other general intangibles, accounts, chattel paper, commercial tort claims, deposit accounts and cash, documents, investment property and other property described in the security agreement, including intellectual property.
 
 
 
5

 
 
Registration Rights

The Subscription agreement with the Investors stated the Investors registration rights. The Company agrees that the Selling Stockholders will be entitled to damages if the registration statement is not filed or is not declared effective by the Commission on a timely basis, if (A) due to the action or inaction of the Company a registration statement is not declared effective within five days after receipt by the Company or its attorneys of a written or oral communication from the Commission that the registration statement will not be reviewed or that the Commission has no further comments, (B) any registration statement described filed timely, or (C) any registration statement is filed and declared effective but shall thereafter cease to be effective without being succeeded within twenty-two business days by an effective replacement or amended registration statement or for a period of time which shall exceed thirty days in the aggregate per year (each such event shall be a “Non-Registration Event”), then the Company shall pay as “Liquidated Damages” to the holder of the securities an amount equal to 1% for the initial 30 days, and 1.5% for 30 days thereafter (or such lesser pro-rata amount for any period of less than 30 days) of the principal amount of the outstanding Notes (which are subject to such Non-Registration Event) with a maximum aggregate amount of Liquidated Damages not to exceed 10% of the sum of the Note principal.  The Company must pay the Liquidated Damages in cash.

Warrants issued to Consultants
 
The Company is also registering (1) warrants, exercisable until July 13, 2017 at a price of $0.15, to purchase 3,600,000 Shares to three consultants engaged by the Company and (2) warrants to two consultants exercisable until June 4, 2012 with 1,200,000 warrants exercisable at $0.09 per share and 2,000,000 warrants exercisable at $0.25 per share.
 
 
The Offering
 
Common Stock Offered by the Selling Security Holders
 
22,660,297 shares, including (i) up to 5,830,000 shares of common stock underlying convertible notes, (ii) up to 1,060,000 shares of common stock that may be issuable in the future if we elect to pay all interest due under the terms of the Convertible Notes in shares of common stock. (iii) up to 5,830,000 shares issuable upon the exercise of the common stock purchase warrants issued by us in our July 2012 private placement and up to 3,140,297 shares issuable upon the exercise of the common stock purchase warrants issued as commissions to brokers for sales of the Convertible Notes) and (iv)  up to 6,800,000 shares issuable upon the conversion of warrants issued to consultants for services rendered pursuant to consulting agreements.
     
Common Stock Outstanding Before the Offering
 
79,099,019  shares of common stock as of September 30, 2012.
     
Common Stock Outstanding After the Offering
 
101,759,316 shares of common stock (1).
     
Terms of the Offering
 
The selling security holder will determine when and how they will sell the common stock offered in this prospectus.
     
Termination of the Offering
 
The offering will conclude upon such time as all of the common stock has been sold pursuant to the registration statement.
     
Use of Proceeds
 
We will not receive any of the proceeds from the sale of common stock by the selling stockholders, although we may receive proceeds from the exercise of the Warrants by the selling stockholders, if exercised. See Use of Proceeds.”
     
Risk Factors
 
Before purchasing any of the shares covered by this prospectus, carefully read and consider the risk factors in the section entitled “RISK FACTORS” beginning on page 6.
     
OTCBB Symbol
 
ADMD.OB
 
(1) Assumes the conversion of all convertible notes and the exercise of all shares underlying warrants being registered hereunder.
 
 
 
6

 
 
 
The following table sets forth the potential profit to be realized upon conversion by the selling stockholders of the Convertible Notes based on the market price and conversion price at the date of issuance:
 
Potential Profit from Conversion of Convertible Notes Issued to Investors
Assuming the Investors Sold at the Market Price as of the Date of Issuance
             
Date of Issuance
 
July 13, 2012
   
August 2, 2012
 
             
Market price per share at date of issuance
  $ 0.24       0.2895  
                 
Conversion Price per share
  $ 0.10       0.10  
                 
Total shares underlying Convertible Notes
    5,500,000       5,100,000  
                 
Aggregate market value of underlying shares based on market price as of date of issuance
  $ 1,320,000       1,476,450  
                 
Aggregate conversion price of underlying shares
  $ 550,000       510,000  
                 
Total dollar amount of discount to market price
  $ 770,000       966,450  
                 
Percentage discount to market price of underlying shares
    58.3 %     65.5 %
 
The following table sets forth the potential profit to be realized upon exercise of the Warrants by the selling stockholders based on the market price and exercise price at the date of issuance:

Potential Profit from Exercise of Warrants Issued to Investors
Assuming the Investors Sold at the Market Price as of the Date of Issuance
             
Date of Issuance
 
July 13, 2012
   
August 2, 2012
 
             
Market price per share at date of issuance
  $ 0.24       0.2895  
                 
Exercise Price per share
  $ 0.15       0.15  
                 
Total shares underlying Warrants
    5,500,000       5,100,000  
                 
Aggregate market value of underlying shares based on market price as of date of issuance
  $ 1,320,000       1,476,450  
                 
Aggregate exercise price of underlying shares
  $ 825,000       765,000  
                 
Total dollar amount of discount to market price
  $ 495,000       711,450  
                 
Total discount to market price of underlying shares
    37.5 %     48.2 %


 
 
 

 
7

 
 
 
RISKS FACTORS

RISKS ASSOCIATED WITH OUR BUSINESS

Our independent registered public accounting firm’s report on our financial statements questions our ability to continue as a going concern.

Our independent registered public accounting firm’s report on our financial statements for the years ended December 31, 2011 and 2010 expresses doubt about our ability to continue as a going concern. The report includes an explanatory paragraph stating that we have suffered recurring losses, used significant cash in support of our operating activities and, based on our current operating levels, require additional capital or significant restructuring to sustain our operation for the foreseeable future. There is no assurance that we will be able to obtain sufficient additional capital to continue our operations and to alleviate doubt about our ability to continue as a going concern. If we obtain additional financing, such funds may not be available on favorable terms. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that restrict our ability to conduct our business. Inclusion of a “going concern qualification” in the report of our independent accountants or in any future report may have a negative impact on our ability to obtain debt or equity financing and may adversely impact our stock price.

We have generated operating losses since inception, which are expected to continue, and we have increasing cash requirements, which we may be unable to satisfy.

We have generated material operating losses since inception. We 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 year ended December 31, 2010 and a net loss of $2,749,616 for the year ended December 31, 2011. We expect to continue to experience net operating losses for the foreseeable future. Historically, we have relied upon investor funds to maintain our operations and develop our business. We need to raise additional capital within the next 12 months from investors for working capital as well as business expansion, and there is no assurance that additional investor funds will be available on terms acceptable to us, or at all. If we are unable to unable to obtain additional financing to meet our working capital requirements, we may have to curtail or cease our operations.

Based on our current cash run rate, approximately $1,500,000 will be needed to fund operations for an additional year. We are presently taking steps to raise additional funds to continue operations for the next 12 months and beyond, but there is no assurance that we will be able to raise additional funds. We will need to raise an additional $15,000,000 in the next year to develop new isotope manufacturing centers and complete our aggressive growth plans. However, we may choose to modify our growth and operating plans to the extent of available funding, if any.

Recent economic events, including the substantial decline in global capital markets, as well as the lack of liquidity in the capital markets, could adversely impact our ability to obtain financing and our ability to execute our business plan. As a company with modest sales from our inception, we are unable to determine the effect of the recent economic crises on our business.

Our business plan is at an early stage of development, and we have a limited operating history, which may make it difficult to evaluate our business and prospects.

We have a limited operating history upon which you can base an evaluation of our business and prospects. As a start-up company in the early stage of development, there are substantial risks, uncertainties, expenses and difficulties to which our business is subject. To address these risks and uncertainties, we must successfully develop and execute our business strategy, respond to competitive developments; and
 attract, integrate, retain and motivate qualified personnel.

There is no assurance that we will achieve or maintain profitable operations or that we will obtain or maintain adequate working capital to meet our obligations as they become due. We cannot be certain that our business strategy will be successfully developed and implemented or that we will successfully address the risks that face our business. In the event that we do not successfully address these risks, our business, prospects, financial condition, and results of operations could be materially and adversely affected.

We are heavily dependent on our key personnel and consultants. The loss of any of these key personnel or consultants could have a material adverse effect on our business, results of operations and financial condition.

Our success is heavily dependent on the continued active participation of our current executive officers and certain consultants and collaborating scientists. Certain key employees have no written employment contracts. We do not have key-man insurance on any of our executive officers or consultants. Loss of the services of any one or more of our executive officers or consultants could have a material adverse effect upon our business, results of operations and financial condition.

If we are unable to hire and retain additional qualified personnel, our business and financial condition may suffer.

Our success and achievement of our growth plans depend on our ability to recruit, hire, train and retain highly qualified technical, scientific, regulatory and managerial employees, consultants and advisors. Competition for qualified personnel among pharmaceutical and biotechnology companies is intense, and an inability to attract and motivate additional highly skilled personnel required for the expansion of our activities, or the loss of any such persons, could have a material adverse effect on our business, results of operations and financial condition.
 
 
 
8

 
 
RISKS FACTORS - continued
 
Our revenues have been derived from sales made to a small number of customers. We need to expand the number of customers purchasing our products and services.
 
Our sales of F-18 for the years ended December 31,  2010 and 2011  and the nine months ended September 30, 2012 were made to one hospital located close to our production facility until we added a second hospital April 2012, and those sales constituted 61.3%, 49.2% and 96.6% , respectively, of our total revenues for those periods. Our Consulting revenues for the years ended December 31, 2010, 2011, and the nine months ended September 30, 2012 were made to one customer, and those sales constituted 38.7%, 45.5% and 3.4% , respectively, of our total revenues for those years. We need to expand the number of customers purchasing our products and services in order to increase our revenues and implement our business strategy. There is no assurance that we will be successful in achieving an expansion of the customers purchasing our products and services.
 
Our future revenues depend upon acceptance of our current and future products in the markets in which they compete.
 
Our future revenues depend upon the successful production, marketing, and sales of the various isotopes we currently market and expect to market in the future. The rate and level of market acceptance of each of these products may vary depending on the perception by physicians and other members of the healthcare community of its safety and efficacy as compared to that of any competing products; the clinical outcomes of any patients treated; the effectiveness of our sales and marketing efforts in the United States, Europe, and Russia; any unfavorable publicity concerning our products or similar products; the price of our products relative to other products or competing treatments; any decrease in current reimbursement rates from the Centers for Medicare and Medicaid Services or third-party payers; regulatory developments related to the manufacture or continued use of our products; availability of sufficient supplies to either purchase or manufacture our products; our ability to produce sufficient quantities of our products; and the ability of physicians to properly utilize our products and avoid excessive levels of radiation to patients. Any material adverse developments with respect to the commercialization of the products we currently market or expect to market may adversely affect our revenues and may cause us to continue to incur losses in the future.

Many of our competitors have greater resources and experience than we have.

Many of our competitors have greater financial resources, longer history, broader experience, greater name recognition, and more substantial operations than we have, and they represent substantial long-term competition for us. Our competitors may be able to devote more financial and human resources than we can to research, new product development, regulatory approvals, and marketing and sales. Our competitors may develop or market products that are viewed by customers as more effective or more economical than our products. There is no assurance that we will be able to compete effectively against our current and future competitors, and such competitive pressures may adversely affect our business and results of operations.

Future production increases will depend on our ability to acquire larger quantities of O-18.

We currently obtain O-18 through international sources. The amount of O-18 that can be produced from a given source is limited by the power level and volume available within the reactor for irradiating targets. There is no assurance that we will have a continuing sufficient supply of O-18.

We rely heavily on a limited number of suppliers.

Some of the products we market and 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 plan to expand the availability of our supplies and products utilizing manufacturing capability at reactors located at National Laboratories as well as production capabilities at various universities and foreign countries other than Russia. This strategy is intended to reduce the risks associated with concentrating isotope production at a single reactor facility. Failure to obtain deliveries from these sources could have a material adverse effect on our production, and there may be a delay before we could locate alternative suppliers. We may not be able to locate alternative suppliers capable of producing the level of output at the quality standards we require. Additional factors that could cause interruptions or delays in our source of materials include limitations on the availability of raw materials or manufacturing performance experienced by our suppliers or a breakdown in our commercial relations with one or more suppliers. Some of these factors may be completely out of our control and our suppliers’ control. We do not have formal written agreements with any key supplier. Any interruption or delay in the supply of materials required to produce our products could harm our business if we were unable to obtain an alternative supplier or substitute equivalent materials in a cost-effective and timely manner.
 
 
9

 
 
RISKS FACTORS - continued
 
We are in default on a financial covenant in the capital leases that finance our isotope production system. That default may adversely affect our ability to continue to use the production system, which may adversely affect our operations and financial results.

We have two capital lease obligations, initially for $1,875,000 and $631,000, secured by equipment and the personal guarantee of two of our major stockholders, which we obtained in September 2007. The purpose of the capital 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 obligations as of December 31, 2009 due to failure to maintain the minimum debt service coverage ratio required by the leases. We were in compliance with the minimum debt service coverage ratio as of December 31, 2010. We were in default on the capital lease obligations as of December 31, 2011 and September 30, 2012 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 as of December 31, 2011 and September 30, 2012. During 2009, the lessor did not take any action based on our financial covenant default. There is no assurance that the lessor will not take action under the capital leases based on the current financial covenant default. That default, and any future defaults, on those leases may adversely affect our ability to continue to use the isotope production system, which may adversely affect our operations and financial results.

We may incur material losses and costs as a result of product liability claims that may be brought against us.

We face an inherent business risk of exposure to product liability claims in the event that products supplied by us fail to perform as expected or such products result, or are alleged to result, in bodily injury. Any such claims may also result in adverse publicity, which could damage our reputation by raising questions about the safety and efficacy of our products, and could interfere with our efforts to market our products. A successful product liability claim against us in excess of our available insurance coverage or established reserves may have a material adverse effect on our business. Although we currently maintain liability insurance in amounts we believe are commercially reasonable, any product liability we incur may exceed our insurance coverage.

Our operations expose us to the risk of material environmental liabilities, including the risk that certain third parties may mishandle our product.

We are subject to potentially material liabilities related to the remediation of environmental hazards and to personal injuries or property damages that may be caused by hazardous substance releases and exposures. We are subject to various federal, state, local and foreign government requirements regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. These laws and regulations can impose substantial fines and criminal sanctions for violations, and can require installation of costly equipment or operational changes to limit emissions and/or decrease the likelihood of accidental hazardous substance releases. We expect to incur capital and operating costs to comply with these laws and regulations. In addition, changes in laws, regulations and enforcement of policies, the discovery of previously unknown contamination or new technology or information related to individual sites, or the imposition of new clean-up requirements or remedial techniques may require us to incur costs in the future that would have a negative effect on our financial condition or results of operations. Operational hazards could result in the spread of contamination within our facility and require additional funding to correct.  We rely on third parties, such as commercial air courier companies, to deliver our products, and on other third parties to package our products in certain specialized packaging forms requested by customers. We are subject to the risk that these third parties may mishandle our product, which could result in material adverse effects, particularly given the radioactive nature of some of our products.

We are subject to uncertainties regarding reimbursement for use of our products.

Hospitals and freestanding clinics may be less likely to purchase our products if they cannot be assured of receiving favorable reimbursement for treatments using our products from third-party payers, such as Medicare and private health insurance plans. Third-party payers are increasingly challenging the pricing of certain medical services or devices, and there is no assurance that they will reimburse our customers at levels sufficient for us to maintain favorable sales and price levels for our products. There is no uniform policy on reimbursement among third-party payers, and there is no assurance that our products will continue to qualify for reimbursement from all third-party payers or that reimbursement rates will not be reduced. A reduction in or elimination of third-party reimbursement for treatments using our products would likely have a material adverse effect on our revenues.
 
 
 
10

 
 
RISKS FACTORS - continued
 
Our future growth is largely dependent upon our ability to develop new technologies that achieve market acceptance with acceptable margins.

Our business operates in global markets that are characterized by rapidly changing technologies and evolving industry standards. Accordingly, our future growth rate depends upon a number of factors, including our ability to (i) identify emerging technological trends in our target end-markets, (ii) develop and maintain competitive products, (iii) enhance our products by adding innovative features that differentiate our products from those of our competitors, and (iv) develop, manufacture and bring products to market quickly and cost-effectively. Our ability to develop new products based on technological innovation can affect our competitive position and requires the investment of significant resources. These development efforts divert resources from other potential investments in our business, and they may not lead to the development of new technologies or products on a timely basis or that meet the needs of our customers as fully as competitive offerings. In addition, the markets for our products may not develop or grow as we currently anticipate. The failure of our technologies or products to gain market acceptance due to more attractive offerings by our competitors could significantly reduce our revenues and adversely affect our competitive standing and prospects.

We may rely on third parties to represent us locally in the marketing and sales of our products in international markets, and our revenue may depend on the efforts and results of those third parties.

Our future success may depend, in part, on our ability to enter into and maintain collaborative relationships with one or more third parties, the collaborator’s strategic interest in our products and our products under development, and the collaborator’s ability to successfully market and sell any such products. We intend to pursue collaborative arrangements regarding the marketing and sales of our products; however, we may not be able to establish or maintain such collaborative arrangements, or if we are able to do so, our collaborators may not be effective in marketing and selling our products. To the extent that we decide not to, or are unable to, enter into collaborative arrangements with respect to the sales and marketing of our products, significant capital expenditures, management resources and time will be required to establish and develop an in-house marketing and sales force with technical expertise. To the extent that we depend on third parties for marketing and distribution, any revenues received by us will depend upon the efforts and results of such third parties, which may not be successful.

We may pursue strategic acquisitions that may have an adverse impact on our business.

Executing our business strategy may involve pursuing and consummating strategic transactions to acquire complementary businesses or technologies. In pursuing these strategic transactions, even if we do not consummate them, or in consummating such transactions and integrating the acquired business or technology, we may expend significant financial and management resources and incur other significant costs and expenses. There is no assurance that any strategic transactions will result in additional revenues or other strategic benefits for our business. We may issue our stock as consideration for acquisitions, joint ventures or other strategic transactions, and the use of stock as purchase consideration could dilute the interests of our current stockholders. In addition, we may obtain debt financing in connection with an acquisition. Any such debt financing could involve restrictive covenants relating to capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and pursue business opportunities, including potential acquisitions. In addition, such debt financing may impair our ability to obtain future additional financing for working capital, capital expenditures, acquisitions, general corporate or other purposes, and a substantial portion of cash flows, if any, from our operations may be dedicated to interest payments and debt repayment, thereby reducing the funds available to us for other purposes.

We will need to hire additional qualified accounting personnel in order to remediate a material weakness in our internal control over financial accounting, and we will need to expend any additional resources and efforts that may be necessary to establish and to maintain the effectiveness of our internal control over financial reporting and our disclosure controls and procedures.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. Our management is required to evaluate and disclose its assessment of the effectiveness of our internal control over financial reporting as of each year-end, including disclosing any “material weakness” in our internal control over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As a result of its assessment, management has determined that there is a material weakness due to the lack of segregation of duties and, due to this material weakness, management concluded that, as of December 31, 2011, our internal control over financial reporting was ineffective. This material weakness was first identified in our Form 10-K/A amended annual report for the year ended December 31, 2008. This material weakness has the potential of adversely impacting our financial reporting process and our financial reports. Because of this material weakness, management also concluded that our disclosure controls and procedures were ineffective as of December 31, 2011. We need to hire additional qualified accounting personnel in order to resolve this material weakness. We also will need to expend any additional resources and efforts that may be necessary to establish and to maintain the effectiveness of our internal control over financial reporting and our disclosure controls and procedures.
 
 
 
11

 
 
RISKS FACTORS - continued
 
Our patented or other technologies may infringe on other patents, which may expose us to costly litigation.

It is possible that our patented or other technologies may infringe on patents or other rights owned by others. We may have to alter our products or processes, pay licensing fees, defend infringement actions or challenge the validity of the patents in court, or cease activities altogether because of patent rights of third parties, thereby causing additional unexpected costs and delays to us. Patent litigation is costly and time consuming, and we may not have sufficient resources to pursue such litigation. If we do not obtain a license under such patents, if we are found liable for infringement, or if we are not able to have such patents declared invalid, we may be liable for significant money damages, may encounter significant delays in bringing products to market or may be precluded from participating in the manufacture, use or sale of products or methods of treatment requiring such licenses.

Protecting our intellectual property is critical to our innovation efforts.

We own or have a license to use several U.S. and foreign patents and patent applications, trademarks and copyrights. Our intellectual property rights may be challenged, invalidated or infringed upon by third parties, or we may be unable to maintain, renew or enter into new licenses of third party proprietary intellectual property on commercially reasonable terms. In some non-U.S. countries, laws affecting intellectual property are uncertain in their application, which can adversely affect the scope or enforceability of our patents and other intellectual property rights. Any of these events or factors could diminish or cause us to lose the competitive advantages associated with our intellectual property, subject us to judgments, penalties and significant litigation costs, or temporarily or permanently disrupt our sales and marketing of the affected products or services.

We may not be able to protect our trade secrets and other unpatented proprietary technology, which could give our competitors an advantage over us.

We rely upon trade secrets and other unpatented proprietary technology. We may not be able to adequately protect our rights with regard to such unpatented proprietary technology, or competitors may independently develop substantially equivalent technology. We seek to protect trade secrets and proprietary knowledge, in part through confidentiality agreements with our employees, consultants, advisors and collaborators. Nevertheless, these agreements may not effectively prevent disclosure of our confidential information and may not provide us with an adequate remedy in the event of unauthorized disclosure of such information, and as a result our competitors could gain a competitive advantage.

General economic conditions in markets in which we do business can impact the demand for our goods and services. Decreased demand for our products and services could have a negative impact on our financial performance and cash flow.

Demand for our products and services, in part, depends on the general economic conditions affecting the countries and industries in which we do business. A downturn in economic conditions in a country or industry that we serve may adversely affect the demand for our products and services, in turn negatively impacting our operations and financial results. Further, changes in demand for our products and services can magnify the impact of economic cycles on our businesses. Unanticipated contract terminations by current customers can negatively impact operations, financial results and cash flow. Our earnings, cash flow and financial position are exposed to financial market risks worldwide, including interest rate and currency exchange rate fluctuations and exchange rate controls. Fluctuations in domestic and world financial markets could adversely affect interest rates and impact our ability to obtain credit or attract investors.

We are subject to extensive government regulation in jurisdictions around the world in which we do business. Regulations address, among other things, environmental compliance, import/export restrictions, healthcare services, taxes and financial reporting, and those regulations can significantly increase the cost of doing business, which in turn can negatively impact our operations, financial results and cash flow.

If we are successful in expanding our manufacturing capability, we will be subject to extensive government regulation and intervention both in the United States and in all foreign jurisdictions in which we conduct business. Compliance with applicable laws and regulations will result in higher capital expenditures and operating costs, and changes to current regulations with which we comply can necessitate further capital expenditures and increases in operating costs to enable continued compliance. Additionally, from time to time, we may be involved in proceedings under certain of these laws and regulations. Foreign operations are subject to political instabilities, restrictions on funds transfers, import/export restrictions, and currency fluctuation.

Volatility in raw material and energy costs, interruption in ordinary sources of supply, and an inability to recover from customers our unanticipated increases in energy and raw material costs could result in lost sales or could increase significantly the cost of doing business.
 
 
12

 
 
RISKS FACTORS - continued
 
Market and economic conditions affecting the costs of raw materials, utilities, energy costs, and infrastructure required to provide for the delivery of our products and services are beyond our control. Any disruption or halt in supplies, or rapid escalations in costs, could adversely affect our ability to manufacture products or to competitively price our products in the marketplace. To date, the ultimate impact of energy costs increases have been mitigated through price increases or offset through improved process efficiencies; however, continuing escalation of energy costs could have a negative impact upon our business and financial performance.

If we are successful in increasing the size of our organization, we may experience difficulties in managing growth.

We are a small organization with a minimal number of employees. If we are successful, we may experience a period of significant expansion in headcount, facilities, infrastructure and overhead, and further expansion may be required to address potential growth and market opportunities. Any such future growth will impose significant added responsibilities on members of management, including the need to improve our operational and financial systems and to identify, recruit, maintain and integrate additional managers. Our future financial performance and our ability to compete effectively will depend, in part, on the ability to manage any future growth effectively.

We are an "emerging growth company" under the JOBS Act of 2012 and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
 
We are an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
 
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
 
We will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
 
Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” and because we will have an extended transition period for complying with new or revised financial accounting standards, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.
 
 
 

 

 
13

 
 
RISKS FACTORS - continued
 
RISKS RELATED TO OUR COMMON STOCK

There is a limited public market for our common stock. Failure to develop or maintain a more active trading market may negatively affect the value of our common stock, may deter some potential investors from purchasing our common stock or other equity securities, and may make it difficult or impossible for stockholders to sell their shares of common stock.

There is a limited public trading market for our common stock on the OTC Bulletin Board. Our average daily volume of shares traded for the years ended December 31, 2011 and 2010 was 8,430 and 8,540, respectively. Failure to develop or maintain an active trading market may negatively affect the value of our common stock, may make some potential investors unwilling to purchase our common stock or equity securities that are convertible into or exercisable for our common stock, and may make it difficult or impossible for our stockholders to sell their shares of common stock and recover any part of their investment in us.

Our outstanding derivative securities, the stock or derivative securities that we may become obligated to issue under existing agreements, and certain provisions of those derivative securities, may cause immediate and substantial dilution to our existing stockholders and may make it more difficult for us to raise additional equity capital.

We had 78,242,019 shares of common stock outstanding on September 30, 2012. We also had outstanding on that date derivative securities consisting of options and convertible notes that if they had been exercised and converted in full on September 30, 2012, would have resulted in the issuance of a total of 25,349,895 additional shares of common stock. The issuance of shares upon the exercise of options or the conversion of convertible notes may result in substantial dilution to each stockholder by reducing that stockholder’s percentage ownership of our total outstanding common stock. One outstanding convertible note provides for conversion of principal at 50%, and the payment in shares of accrued interest at 100%, of the market price of our common stock determined over the 10 trading days preceding the date of conversion, and so the amount of dilution to other stockholders will depend upon the market price for our stock and the resulting conversion price when the note is converted by the holder. Conversion of that note on September 30, 2012 would have resulted in the issuance of 3,625,245 shares, which are included in the total above. Additionally, we have outstanding notes that if not prepaid by specific dates entitle the holder to convert the principal and accrued interest into common stock at 61% of an average trading price of our common stock prior to conversion as provided in the notes. See the Notes to our Financial Statements included in this registration statement. In addition, under an existing agreement, we may become obligated to issue additional warrants to purchase up to 20,133,333 shares of common stock with an exercise price of $0.20 per share, and those warrants would require a reduction in the exercise price if we issued stock below the then-applicable exercise price of the warrants, or if we issued stock below the market price of our stock. See the section entitled “Agreement for Strategic Relationship” in Item 1 above. The issuance of some or all of those warrants and any exercise of those warrants will have the effect of further diluting the percentage ownership of our other stockholders. That agreement also provides for stock compensation for consulting services. The existence and terms of these derivative securities and other obligations may make it more difficult for us to raise additional capital through the sale of stock or other equity securities.

Future sales of our stock, including sales following exercise or conversion of derivative securities, or the perception that such sales may occur, may depress the price of our common stock and could encourage short sales.

The sale or availability for sale of substantial amounts of our shares in the public market, including shares issuable upon exercise of options or warrants or upon the conversion of convertible securities, or the perception that such sales may occur, may adversely affect the market price of our common stock. Any decline in the price of our common stock may encourage short sales, which could place further downward pressure on the price of our common stock.

Our stock price is likely to be volatile.

For the nine months ended September 30, 2012, the reported low closing price for our common stock was $0.08 per share, and the reported high closing price was $0.26 per share. For the year ended December 31, 2011, the reported low closing price for our common stock was $0.09 per share, and the reported high closing price was $0.48 per share. For the year ended December 31, 2010, the reported low closing price for our common stock was $0.09 per share, and the reported high closing price was $0.57 per share. There is generally significant volatility in the market prices, as well as limited liquidity, of securities of early stage companies, particularly early stage medical product companies. Contributing to this volatility are various events that can affect our stock price in a positive or negative manner. These events include, but are not limited to: governmental approvals, refusals to approve, regulations or other actions; market acceptance and sales growth of our products; litigation involving us or our industry; developments or disputes concerning our patents or other proprietary rights; changes in the structure of healthcare payment systems; departure of key personnel; future sales of our securities; fluctuations in our financial results or those of companies that are perceived to be similar to us; investors’ general perception of us; and general economic, industry and market conditions. If any of these events occur, it could cause our stock price to fall, and any of these events may cause our stock price to be volatile.
 
 
 
14

 
 
RISKS FACTORS - continued
 
Our common stock is subject to the “Penny Stock” rules of the SEC and the trading market in our securities is limited, which makes transactions in our common stock cumbersome and may reduce the value of an investment in our stock.

The Securities and Exchange Commission has adopted Rule 3a51-1 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires that a broker or dealer approve a person's account for transactions in penny stocks and that the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

In order to approve a person's account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and must make a reasonable determination that the transactions in penny stocks are suitable for that person and that the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which sets forth the basis on which the broker or dealer made the suitability determination, and that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and may cause a decline in the market value of our stock.

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

Our controlling stockholders may exercise significant control over us.

Our directors, executive officers and principal stockholders beneficially own approximately 54.1% of the outstanding shares of our common stock as of September 30, 2012. Our stockholders do not have cumulative voting rights with respect to the election of directors. If our principal stockholders vote together, they could effectively elect all of our directors, and they could determine or influence the outcome of any other matter submitted for a vote of stockholders.

If we were to issue preferred stock, the rights of holders of our common stock and the value of our common stock may be adversely affected.

Our board of directors is authorized to issue classes or series of preferred stock, without any action on the part of the stockholders. Our board of directors also has the power, without stockholder approval, to set the terms of any such classes or series of preferred stock, including voting rights, dividend rights and preferences over the common stock with respect to dividends or upon the liquidation, dissolution or winding-up of our business, and other terms. If we issue preferred stock in the future that has a preference over the common stock, with respect to the payment of dividends or upon liquidation, dissolution or winding-up, or if we issue preferred stock with voting rights that dilute the voting power of the common stock, the rights of holders of the common stock or the value of the common stock may be adversely affected.

We do not expect to pay any dividends on our common stock for the foreseeable future.

We have not paid any cash dividends on our common stock to date and do not anticipate we will pay cash dividends on our common stock in the foreseeable future. Accordingly, stockholders must be prepared to rely on sales of their common stock after price appreciation to earn an investment return, which may never occur. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend on our results of operations, financial conditions, contractual restrictions, restrictions imposed by applicable law, and other factors that our board deems relevant.
 
 

 

 
15

 

 
FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions, or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions. Examples of forward-looking statements include, without limitation:

 
statements regarding our strategies, results of operations or liquidity;
 
statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance;
 
statements of management’s goals and objectives;
 
projections of revenue, earnings, capital structure and other financial items;
 
assumptions underlying statements regarding us or our business; and
 
other similar expressions concerning matters that are not historical facts.
 
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, factors discussed under the headings “RISK FACTORS,” “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” and “BUSINESS.”

Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances, or achievements expressed or implied by the forward-looking statements. These risks include, but are not limited to, those listed below and those discussed in greater detail under the heading “RISK FACTORS” above:

our ability to fund our operations in the short and long term through financing transactions on terms acceptable to us, or at all;
our history of operating losses and uncertainty surrounding our ability to achieve or sustain profitability;
our limited history of developing and selling currently producing or expected to producing in the future;
lengthy customer adoption cycles and unpredictable customer adoption practices;
our ability to identify, develop, and commercialize new product applications for our technology;
competition from current suppliers of incumbent materials or producers of competing products;
our ability to identify, consummate, and/or integrate strategic partnerships;
the potential for manufacturing problems or delays;
potential difficulties associated with protecting or expanding our intellectual property position;
the volatility of our stock price; and
the unpredictability of the market for our common stock.
 
The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Consequently, you should not place undue reliance on forward-looking statements.


 
16

 

 
SELLING STOCKHOLDERS

The shares of common stock being offered by the selling stockholders are those issuable to the selling stockholders pursuant to the terms of the Convertible Notes and upon exercise of the Warrants. For additional information regarding the issuance of those Convertible Notes and Warrants, see “MANAGEMENT’S DISCUSSION AND ANALYSIS—“ under “July 2012 Offering” and “Warrants issued to Consultants” of this prospectus. We are registering the shares of common stock in order to permit the selling stockholders to offer the shares for resale from time to time. Except for the ownership of the Convertible Notes and the Warrants issued pursuant to the Securities Purchase Agreement, the selling stockholders have not had any material relationship with us or our affiliates within the past three years.

The table below lists the selling stockholders and other information regarding the beneficial ownership of the shares of common stock by each of the selling stockholders. The second column lists the number of shares of common stock beneficially owned by each selling stockholder, based on its ownership of the Convertible Notes and Warrants, as of September 30, 2012, assuming conversion of all Convertible Notes and exercise of the Warrants held by the selling stockholders on that date, without regard to any limitations on conversions, amortizations, redemptions or exercises.

The third column lists the shares of common stock being offered by this prospectus by the selling stockholders.
 
The fourth column assumes the sale of all of the shares offered by the selling stockholders pursuant to this prospectus.
 
 
 
 
 
 
 
 
 
 

 

 
17

 
 
SELLING STOCKHOLDERS - continued
 
Under the terms of the Convertible Notes and the Warrants, a selling stockholder may not convert the Convertible Notes or exercise the Warrants to the extent such conversion or exercise would cause such selling stockholder, together with its affiliates, to beneficially own a number of shares of common stock which would exceed 4.99% of our then outstanding shares of common stock following such conversion or exercise, excluding for purposes of such determination shares of common stock issuable upon conversion of the Convertible Notes which have not been converted and upon exercise of the Warrants which have not been exercised. The number of shares in the second column does not reflect this limitation (the "Maximum Percentage"). The selling stockholders may sell all, some or none of their shares in this offering. See "Plan of Distribution."
 
   
Number of Shares of
Common Stock Owned
Prior to Offering
             
Name of Selling Stockholder
 
Underlying Convertible Notes (1)
   
Underlying Warrants (1)
   
Maximum Number of Shares of Common Stock to be Sold
Pursuant to this Prospectus
   
Number of Shares of Common Stock Owned
After Offering
 
                         
Alpha Capital Anstalt (1)(2)
    2,600,000       2,200,000       4,800,000       0  
Brio Capital L.P. (1)(3)
    975,000       825,000       1,800,000       0  
Tungsten 74 LLC (1)(4)
    325,000       275,000       600,000       0  
Kenneth L. Frieda (1)
    325,000       275,000       600,000       0  
Manish Singh (1)
    162,500       137,500       300,000       0  
Shahriyar Neman (1)
    97,500       82,500       180,000       0  
Kenneth Wickwar (1)
    65,000       55,000       120,000       0  
Daniel Bernstein (1)
    65,000       55,000       120,000       0  
Christine Orlando (1)
    97,500       82,500       180,000       0  
Steve A. Borhi (1)
    97,500       82,500       180,000       0  
Isaac Dweck (1)
    162,500       137,500       300,000       0  
Global Innovations Network (1)(5)
    162,500       137,500       300,000       0  
Leonid Pismen (1)
    130,000       110,000       240,000       0  
Alfred G. Yates, Jr. (1)
    65,000       55,000       120,000       0  
Lori Bechter (1)
    130,000       110,000       240,000       0  
Cynergy Health Care Investors (1)(6)
    130,000       110,000       240,000       0  
Gilbert Hammond (1)
    130,000       110,000       240,000       0  
Brian K. Johnson(1)
    162,500       137,500       300,000       0  
Anthony M. Laizure (1)
    65,000       55,000       120,000       0  
Richard J. Levin (1)
    65,000       55,000       120,000       0  
Marsha Mah (1)
    32,500       27,500       60,000       0  
Stephen R. Mut (1)
    65,000       55,000       120,000       0  
George G. Newcomb (1)
    130,000       110,000       240,000       0  
Richard Oliver (1)
    325,000       275,000       600,000       0  
Parsons Health Company Inc. (1) (7)
    65,000       55,000       120,000       0  
Richard J. Prati (1)
    162,500       137,500       300,000       0  
Elizabeth V. Tanico (1)
    97,500       82,500       180,000       0  
SUBTOTAL
    6,890,000       5,830,000       12,720,000          
Patrick Adams(11)
            1,570,149       1,570,149       0  
Ben Hamilton(11)
            785,074       785,074       0  
Kerry Withrow (11)
            785,074       785,074       0  
Lavos LLC (8)
            1,600,000       1,600,000       0  
Lidingo Holdings LLC (9)
            1,600,000       1,600,000       0  
Tungsten 74 LLC (1)(4)
            3,000,000       3,000,000       0  
                                 
Chi Squared Capital (10)(12)
            550,000       550,000       0  
Isaiah Friedman (12)
            50,000       50,000       0  
      6,890,000       15,770,297       22,660,297       0  
 
 

 
18

 
 
SELLING STOCKHOLDERS - continued

(1) Represents shares of Common Stock issuable pursuant to the terms of the Convertible Notes without regard to the Maximum Percentage (using the principal amount invested at a conversion rate for this Note shall be $0.10 per share), the number of shares common stock that we estimate may be issuable in the future if we elect to pay all interest due under the terms of the convertible notes in shares of common stock and the shares of Common Stock issuable upon exercise of the Warrants, exercisable until July 13, 2017, to purchase the number of shares of Warrant Shares equal to the product obtained by multiplying the Investor’s Loan Amount by ten, with a per share exercise price of $0.15.

(2) Ackerman (“Mr. Ackerman”) is the director of Alpha Capital Anstalt (“Alpha”) and in such capacity may be deemed to have voting control and investment discretion over the securities held for the account of Alpha. As a result of the foregoing, Mr. Ackerman may be deemed to have beneficial ownership (as determined under Section 13(d) of the Exchange Act) of any shares of our common stock deemed to be beneficially owned by Alpha.

(3) Shaye Hirsch has the power to vote and dispose of the shares being registered on behalf of Brio Capital L.P.

(4) Theodore E. Kalem has the power to vote and dispose of the shares being registered on behalf of Tungsten 74 LLC.  Underlying warrants include Warrants, exercisable until July 13, 2017, to purchase 3,000,000 Shares with a per share exercise price of $0.15

(5) Morris Dweck has the power to vote and dispose of the shares being registered on behalf of Global Innovations Network.

(6) Patrick Adams has the power to vote and dispose of the shares being registered on behalf of Cynergy Health Care Investors.

(7) Julia Parson has the power to vote and dispose of the shares being registered on behalf of Parsons Health Company, Inc.

(8) Maria Santos has the power to vote and dispose of the shares being registered on behalf of Lavos LLC.  Underlying warrants exercisable until June 4, 2012 with 600,000 warrants exercisable at $0.09 per share and 1,000,000 warrants exercisable at $0.25 per share.

(9) Kamilla Bjorlin has the power to vote and dispose of the shares being registered on behalf of Lidingo Holdings, LLC.  Underlying warrants exercisable until June 4, 2012 with 600,000 warrants exercisable at $0.09 per share and 1,000,000 warrants exercisable at $0.25 per share.

(10) Yosef Milgrom has the power to vote and dispose of the shares being registered on behalf of Chi Squared Capital, Inc.

(11) Underlying warrants include Warrants, exercisable until July 13, 2017, to purchase Shares with a per share exercise price of $0.15.  Represents warrants issued as commission for services provided in connection with the sale of securities to the Selling Stockholders.

(12) Underlying warrants include Warrants, exercisable until July 13, 2017, to purchase Shares with a per share exercise price of $0.15.  Represents warrants issued for providing consulting services to the Company.
  
USE OF PROCEEDS

The selling stockholders will receive all of the proceeds from the sale of the common stock offered by this prospectus. We will not receive any of the proceeds from the sale of common stock by the selling stockholders, although we may receive proceeds from the exercise of the Warrants by the selling stockholders, if exercised. We cannot guarantee that the selling stockholders will exercise the Warrants. Any proceeds we receive from the selling stockholders upon their exercise of the Warrants will be used for general working capital.
 
DETERMINATION OF OFFERING PRICE
 
Our common stock currently trades on the OTCBB under the symbol ADMD.OB”. The effective conversion rate for this Note shall be $0.10 per share. The Warrants have a per share exercise price of $0.15 (“Exercise Price”). The Selling Security Holders may sell shares in any manner at the current market price.

 
19

 

 
PLAN OF DISTRIBUTION
 
We are registering the shares of common stock issuable pursuant to the terms of the Convertible Notes and upon exercise of the Warrants to permit the resale of these shares of common stock by the holders of the Convertible Notes and Warrants from time to time after the date of this prospectus.  We will not receive any of the proceeds from the sale by the selling stockholders of the shares of common stock.  We will bear all fees and expenses incident to our obligation to register the shares of common stock.
 
The selling stockholders may sell all or a portion of the shares of common stock beneficially owned by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents.  If the shares of common stock are sold through underwriters or broker-dealers, the selling stockholders will be responsible for underwriting discounts or commissions or agent's commissions.  The shares of common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices.  These sales may be effected in transactions, which may involve crosses or block transactions,
 
 
·
on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale;
 
·
in the over-the-counter market;
 
·
in transactions otherwise than on these exchanges or systems or in the over-the-counter market;
 
·
through the writing of options, whether such options are listed on an options exchange or otherwise;
 
·
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
 
·
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
 
·
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
 
·
an exchange distribution in accordance with the rules of the applicable exchange;
 
·
privately negotiated transactions;
 
·
short sales;
  
·
sales pursuant to Rule 144;
  
·
broker-dealers may agree with the selling securityholders to sell a specified number of such shares at a stipulated price per share;
 
·
a combination of any such methods of sale; and
 
·
any other method permitted pursuant to applicable law.
 
If the selling stockholders effect such transactions by selling shares of common stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling stockholders or commissions from purchasers of the shares of common stock for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved).  In connection with sales of the shares of common stock or otherwise, the selling stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of common stock in the course of hedging in positions they assume.  The selling stockholders may also sell shares of common stock short and deliver shares of common stock covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales.  The selling stockholders may also loan or pledge shares of common stock to broker-dealers that in turn may sell such shares.
 
The selling stockholders may pledge or grant a security interest in some or all of the Convertible Notes, Warrants or shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933, as amended (the “Securities Act”), amending, if necessary, the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus.  The selling stockholders also may transfer and donate the shares of common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
 
The selling stockholders and any broker-dealer participating in the distribution of the shares of common stock may be deemed to be "underwriters" within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act.  At the time a particular offering of the shares of common stock is made, a prospectus supplement, if required, will be distributed which will set forth the aggregate amount of shares of common stock being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling stockholders and any discounts, commissions or concessions allowed or reallowed or paid to broker-dealers.
 
 
 
20

 
 
PLAN OF DISTRIBUTION - continued
 
Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers.  In addition, in some states the shares of common stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.  There can be no assurance that any selling stockholder will sell any or all of the shares of common stock registered pursuant to the registration statement, of which this prospectus forms a part.
 
The selling stockholders and any other person participating in such distribution will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, including, without limitation, Regulation M of the Securities Exchange Act of 1934, as amended, which may limit the timing of purchases and sales of any of the shares of common stock by the selling stockholders and any other participating person.  Regulation M may also restrict the ability of any person engaged in the distribution of the shares of common stock to engage in market-making activities with respect to the shares of common stock.  All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to the shares of common stock.
 
We will pay all expenses of the registration of the shares of common stock pursuant to the registration rights agreement, estimated to be $63,301 in total, including, without limitation, SEC filing fees and expenses of compliance with state securities or "blue sky" laws; provided, however, that a selling stockholder will pay all underwriting discounts and selling commissions, if any.  We will indemnify the selling stockholders against liabilities, including some liabilities under the Securities Act, in accordance with the registration rights agreements, or the selling stockholders will be entitled to contribution.  We may be indemnified by the selling stockholders against civil liabilities, including liabilities under the Securities Act, that may arise from any written information furnished to us by the selling stockholder specifically for use in this prospectus, in accordance with the related registration rights agreement, or we may be entitled to contribution.
 
Once sold under the registration statement, of which this prospectus forms a part, the shares of common stock will be freely tradable in the hands of persons other than our affiliates.

DESCRIPTION OF SECURITIES

General
 
We are authorized to issue up to 200,000,000 shares of common stock, par value $0.001 per share, of which 78,242,019 shares were issued and outstanding as of September 30, 2012.  We are also authorized to issue up to 20,000,000 shares of preferred stock, par value $0.001 per share, of none have been issued as of September 30, 2012.
 
Common Stock
 
All outstanding shares of Common Stock are of the same class and have equal rights and attributes. The holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of stockholders of the Company. All stockholders are entitled to share equally in dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available. In the event of liquidation, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of all liabilities. The stockholders do not have cumulative or preemptive rights.

The description of certain matters relating to the securities of the Company is a summary and is qualified in its entirety by the provisions of the Company's Certificate of Incorporation and By-Laws, copies of which have been filed as exhibits to this registration statement.
  
July 2012 Offering
 
On July 13, 2012, we issued $550,000 of Secured Convertible Promissory Notes (the “Notes”) to two investors and, on August 2, 2012, we issued $510,000 of Secured Convertible Promissory Notes to 25 investors (collectively, the “Investors”) pursuant to the terms of a Subscription Agreement (the “Subscription Agreement”). The Subscription Agreement contains customary representations, warranties and agreements by the Company. The Investors also received warrants (the “Warrants”), exercisable until July 13, 2017, to purchase shares of the Company’s common stock (“Common Stock”) and additional investment rights (“Additional Investment Rights”) to purchase additional notes. The Company and Investors also entered into a Security Agreement (“Security Agreement”) to provide collateral for the Notes. The Notes are also secured by a pledge of stock owned by the Company’s directors.  On July 13, 2012, the market price per share of the Company’s common stock was $0.24 based on trading volume of 2,000 shares.  On August 2, 2012, the market price of the Company’s common stock was $0.2895 based on a trading volume of 3,500.

Convertible Promissory Notes
 
The Company issued and completed the sale to the Investors of Notes equal to $1,060,000 (the “Principal Amount”). The Notes mature on January 13, 2014 (“Maturity Date”) and bear interest at a rate of 12.0% per annum, payable on the Maturity Date. The outstanding Principal Amount and accrued and unpaid interest on the Notes will be convertible into shares of Common Stock of the Company or so long as each Note is outstanding. The effective conversion rate for this Note shall be $0.10 per share. As a result, the Notes are convertible into 10,600,000 shares of common stock.  This conversion rate will be adjusted upon the occurrence of any split, combination or other similar recapitalization with respect to the Common Stock and shall be reduced if the Company issues Common Stock at a price lower than the then-current Conversion Price other than for issuances in connection with mergers, licensing agreements, certain stock options and other transactions as described in the Notes.
 
21

 
PLAN OF DISTRIBUTION - continued

Interest payable on this Note shall compound annually and accrue at the annual rate of 12%.  Interest shall be payable quarterly in arrears on the last day of each calendar quarter commencing September 30, 2012.  Interest will be payable with shares of Common Stock provided (i) an event of default or an event which with the passage of time or the giving of notice could become an event of default has not occurred, (ii) such Common Stock is immediately resellable pursuant to an effective resale registration statement or Rule 144 without transfer or volume restrictions, (iii) such payment in Common Stock would not cause the holder to exceed the restrictions on ownership percentage of the Company, and (iv) we provide holder not less than fifteen business days’ notice prior to the due date of Company’s intention to pay such interest with Common Stock.  Interest paid with shares of Common Stock shall be payable on the third business day after the date such interest would be due if paid in cash.  Common Stock employed to pay interest shall be valued at 80% of the average of the volume weighted average prices of the Common Stock as reported by Bloomberg L.P. for the five trading days ending on the due date of the interest payment being made with Common Stock.
 

Warrants
 
The Investor also received warrants, exercisable until July 13, 2017, to purchase the number of shares of common stock of the Company (“Warrant Shares”) equal to the product obtained by multiplying the Investor’s Loan Amount by ten, with a per share exercise price of $0.15 (“Exercise Price”).  On the sale of the $1,060,000 of Notes, the Investors were entitled to receive warrants to purchase 10,600,000 Warrant Shares.  The number of Warrant Shares will be appropriately adjusted upon the occurrence, prior to the issuance of such Warrant, of any stock dividend, stock split, combination or the like with respect to the Company’s common stock. The Exercise Price will be adjusted upon the occurrence of any split, combination or other similar recapitalization with respect to the Common Stock and shall be reduced if the Company issues Common Stock at a price lower than the then-current Conversion Price other than for issuances in connection with mergers, licensing agreements, certain stock options and other transactions as described in the Warrant.  We also issued Warrants to consultants for services rendered pursuant to consulting agreements.  Warrants, exercisable until July 13, 2017 at a price of $0.15, to purchase 3,140,297 Warrant Shares were issued as a commission on sales of the Notes.
 
Additional Investment Rights
 
We issued Additional Investment Rights to the Investors. The Additional Investment Rights will represent the right to purchase additional Principal Amount of Notes up to 40% of the Principal Amount of Notes acquired by the Selling stockholders and a corresponding amount of Warrants.
 
Security Agreement
 
The Company and certain also entered into a Security Agreement (the “Security Agreement”) pursuant to which the Company granted a continuing security interest (“Security Interest”) in the Collateral (as defined herein) to secure all obligations and performance of each of the Company’s duties under the Notes and any related documentation. “Collateral” shall include all goods, contract rights and other general intangibles, accounts, chattel paper, commercial tort claims, deposit accounts and cash, documents, investment property and other property described in the security agreement, including intellectual property.

Registration Rights

The Subscription agreement with the Investors granted the Investors registration rights. The Company agrees that the Selling Stockholders will be entitled to damages if the registration statement is not filed or is not declared effective by the Commission on a timely basis, if (A) due to the action or inaction of the Company a registration statement is not declared effective within five days after receipt by the Company or its attorneys of a written or oral communication from the Commission that the registration statement will not be reviewed or that the Commission has no further comments, (B) any registration statement described filed timely, or (C) any registration statement is filed and declared effective but shall thereafter cease to be effective without being succeeded within twenty-two business days by an effective replacement or amended registration statement or for a period of time which shall exceed thirty days in the aggregate per year (each such event shall be a “Non-Registration Event”), then the Company shall pay as “Liquidated Damages” to the holder of the securities an amount equal to 1% for the initial 30 days, and 1.5% for 30 days thereafter (or such lesser pro-rata amount for any period of less than 30 days) of the principal amount of the outstanding Notes (which are subject to such Non-Registration Event) with a maximum aggregate amount of Liquidated Damages not to exceed 10% of the sum of the Note principal.  The Company must pay the Liquidated Damages in cash.

Warrants issued to Consultants
 
The Company is also registering (1) warrants, exercisable until July 13, 2017 at a price of $0.15, to purchase 3,600,000 Shares to three consultants engaged by the Company and (2) warrants to two consultants exercisable until June 4, 2012 with 1,200,000 warrants exercisable at $0.09 per share and 2,000,000 warrants exercisable at $0.25 per share.

Indemnification of Directors and Executive Officers and Limitation of Liability
 
Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses including attorneys' fees, judgments, fines and amounts paid in settlement in connection with various actions, suits or proceedings, whether civil, criminal, administrative or investigative other than an action by or in the right of the corporation, a derivative action, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, if they had no reasonable cause to believe their conduct was unlawful. A similar standard is applicable in the case of derivative actions, except that indemnification only extends to expenses including attorneys' fees incurred in connection with the defense or settlement of such actions, and the statute requires court approval before there can be any indemnification where the person seeking indemnification has been found liable to the corporation. The statute provides that it is not exclusive of other indemnification that may be granted by a corporation's certificate of incorporation, bylaws, agreement, a vote of stockholders or disinterested directors or otherwise.

The Company’s Certificate of Incorporation provides that it will indemnify and hold harmless, to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, as amended from time to time, each person that such section grants us the power to indemnify.
 
22

 
 
DESCRIPTION OF SECURITIES - continued
 
The Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for:

 
any breach of the director's duty of loyalty to the corporation or its stockholders;
 
acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
 
payments of unlawful dividends or unlawful stock repurchases or redemptions; or
 
any transaction from which the director derived an improper personal benefit.
 
The Company’s Certificate of Incorporation provides that, to the fullest extent permitted by applicable law, none of our directors will be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of this provision will be prospective only and will not adversely affect any limitation, right or protection of a director of our company existing at the time of such repeal or modification.

Transfer Agent and Registrar
 
Our transfer agent is American Registrar & Transfer Co., 342 East 900 South, Salt Lake City, UT 84111; telephone (801) 363-9065.
 
DIVIDEND POLICY

We have never paid a cash dividend on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future, and we plan to retain our earnings to finance our operations and future growth.

MARKET PRICE OF COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Market for our Stock and Quarterly High/Low Bid Quotations
 
Our common stock is currently quoted on the OTC Bulletin Board under the symbol “ADMD.” On November 27 , 2012, the last reported sales price of our common stock was $0.  19 per share.  The following table sets forth, on a per share basis, the range of high and low bid information for the shares of our common stock for each full quarterly period within the two most recent fiscal years and any subsequent interim period for which financial statements are included, as reported by the OTC Bulletin Board. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

       
   
High
   
Low
 
2012
           
October 1 to November 27   $ 0.23     $ 0.12  
Quarter ended September 30, 2012
 
 
0.29
   
 
0.17
 
Quarter ended June 30
   
0.26
     
0.09
 
Quarter ended March 31
   
0.17
     
0.08
 
             
2011
           
Quarter ended December 31
 
$
0.29
   
$
0.09
 
Quarter ended September 30
   
0.33
     
0.20
 
Quarter ended June 30
   
0.30
     
0.20
 
Quarter ended March 31
   
0.48
     
0.25
 
                 
2010
               
Quarter ended December 31
 
$
0.48
   
$
0.11
 
Quarter ended September 30
   
0.23
     
0.09
 
Quarter ended June 30
   
0.47
     
0.14
 
Quarter ended March 31
   
0.57
     
0.20
 

Number of Common Shareholders

As of September 30, 2012, we had approximately 185 record holders of our common stock.


 
23

 
 
MARKET PRICE OF COMMON STOCK AND RELATED STOCKHOLDER MATTERS - continued
 
Securities Authorized for Issuance Under Equity Compensation Plans

We currently do not have any compensation plan under which equity securities are authorized for issuance. We have however granted and issued options and warrants to purchase and acquire shares of our common stock. The following table sets forth information as of December 31, 2011 with respect to our equity compensation plans previously approved by stockholders and equity compensation plans not previously approved by stockholders.

   
Equity Compensation Plan Information
 
Plan Category
 
Number of securities to be issued upon exercise of outstanding options,
warrants and rights
 
Weighted-average
exercise price of
outstanding options,
warrants and rights
   
Number of securities
remaining available for future issuance under equity compensation
plans (excluding
securities reflected in
column (a))
 
   
(a)
 
(b)
   
(c)
 
Equity compensation plans approved by stockholders
    0     $ 0       0  
Equity compensation plans not approved by stockholders
    5,135,000       0.35       0  
Total
    5,135,000 (1)   $ 0.35 (1)     0  

(1) While there are no equity compensation plans in general, the Company does have individual compensation arrangements under which equity securities are authorized for issuance in exchange for consideration in the form of goods or services of certain individuals.
 
DESCRIPTION OF BUSINESS

When you read this section of this prospectus, it is important that you also read the consolidated financial statements and related notes included elsewhere in this prospectus. This section of this prospectus contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons set forth herein, including the factors described below and in “RISK FACTORS.”

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).
 
 
 
24

 
 
DESCRIPTION OF BUSINESS - continued
 
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 over the period April 1, 2010 through March 31, 2012. 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.

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 accumulated deficits since inception. If we cannot obtain sufficient funding, we may have to delay the implementation of our business strategy.

Emerging Growth Company” Status under the Jumpstart Our Business Startups Act (“JOBS Act”)
 
We qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:
 
·
have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
   
·
comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);
   
·
submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay” and “say-on-frequency;” and
   
·
disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive’s compensation to median employee compensation.
 
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period.
 
We will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
 
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.
 
 
 
25

 
 
DESCRIPTION OF BUSINESS - continued
 
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.

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 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.


 
26

 
 
DESCRIPTION OF BUSINESS - continued
 
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.

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.

 
 
27

 
 
DESCRIPTION OF BUSINESS - continued
 
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 execution of this agreement and a milestone payment of $250,000, due and payable upon reaching $50,000,000 in cumulative net sales.

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 2012.

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.
 
 
 
28

 
 
DESCRIPTION OF BUSINESS - continued
 
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 2010 consisted of F-18 (61.3% of total revenues) and Consulting Income (38.7% of total revenues). We had no sales of stable isotopes in 2010 due to the decrease in profit margins for that product; however we are looking into selling more stable isotopes in 2012 and beyond due to the possibility of obtaining lower prices from our vendors. Sales of F-18 for 2010 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.

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.

Our sales for the nine months ended September 30, 2012 consisted of F-18 ( 96.6% of total revenues) and Consulting Income ( 3.4% of total revenues). Sales of F-18 for the nine months ended September 30, 2012 were 100% to Kadlec Hospital in Richland, Washington until April 2012 when we added sales to Kennewick General Hospital in Kennewick, 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.

Licenses, Patents, and Intellectual Property

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 2010:

In May 2010 the Company entered into a License Agreement with the University of Missouri for the exclusive 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. 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. The $10,000 nonrefundable fee paid upon execution was capitalized as license fees and is amortized on the straight line basis over a three year life.
 
 
 
29

 
 
DESCRIPTION OF BUSINESS - continued
 
In August 2010, the Company entered into a License Agreement with Battelle Memorial Institute for the patent rights in the area of a Brachytherapy seed with a Fast-dissolving matrix for Optimized Delivery of Radionuclids. This Agreement calls for a $10,000 nonrefundable fee upon execution, a royalty agreement on sales and on funds received from any sublicenses. The $10,000 nonrefundable fee paid upon execution was capitalized as license fees and is amortized on the straight line basis over a three year life. Additionally, the Agreement calls for a minimum annual fee as follows:

Calendar Year
 
Minimum Royalties per Calendar Year
 
2010
 
$
-
 
2011
 
$
-
 
2012
 
$
2,500
 
2013
 
$
5,000
 
2014
 
$
7,500
 
2015
 
$
10,000
 
2016 and each calendar year thereafter
 
$
25,000
 

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, and $113,326, were capitalized during the twelve months ended December 31, 2011 and 2010; resulting in a total $317,224 of capitalized patents at December 31, 2011. 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.

Research and Development

We spent approximately $67,006 and $90,150 during the years ended December 31, 2009 and 2008, respectively, on research and development. The costs incurred in 2008 and 2009 were to a University for tests involved in the making of isotopes. The costs incurred in the twelve months ended December 31, 2010 consisted of $513,416 towards the Brachytherapy Project and $655,006 towards the Molybdenum Project, for a total cost of $1,168,422. The costs incurred in the twelve months ended December 31, 2011 were $245,727 towards the Brachytherapy Project and $235,950 towards the Molybdenum Project, for a total cost of $481,677. The costs expensed to the twelve months ended December 31, 2011 and 2010 consist of the following:

   
For the twelve months ended
 
   
December 31, 2011
   
December 31, 2010
 
   
Brachytherapy
   
Molybdenum
   
Brachytherapy
   
Molybdenum
 
Supplies
  $ 5,175     $ 390     $ 623     $ 2,342  
Amortization
    3,334       3,334       1,666       1,944  
Conferences & seminars
    8,338       10,682       639       13,968  
Dues & subscriptions
    688       1,335       -       1,395  
Marketing
    12,070       19,441       9,500       314  
Office Supplies
    1,119       942       87       2,927  
Payroll and benefits
    32,290       78,739       17,496       19,560  
Consulting fees
    67,116       36,832       119,457       77,476  
Consulting fees – stock based
    8,000       -       362,250       472,402  
Legal fees
    51,794       77,794       -       4,000  
Research
    54,174       -       -       -  
Stock options granted
    50       750       950       14,250  
Telephone
    852       867       508       2,870  
Travel
    727       4,844       240       41,558  
Total
  $ 245,727     $ 235,950     $ 513,416     $ 655,006  
 

 
 
30

 
 
DESCRIPTION OF BUSINESS - continued
 
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
 
 
Agreement for Strategic Relationship

In August 2011, the Company entered into a Memorandum of Agreement for Strategic Relationship (referred to as the “MASR”) between the Company and Spivak Management, Inc. (referred to as “SMI”) setting forth the terms of a strategic relationship among the Company, SMI, and Mann Healthcare Partners, Inc. (referred to as “MHP”). The Company and SMI agreed to form a joint venture through which SMI will provide management and consulting services to the Company relating to commercial and growth strategies, acquisitions and other ventures, and SMI will introduce the Company to potential investors and investment bankers. Under the MASR, MHP is to introduce to the Company one or more entities prepared to invest $1.2 million to $2.0 million in the Company. If the Company accepts an investment, the Company must pay SMI a fee of $75,000 and must prepay $200,000 of the expenses of SMI and MHP with respect to the joint venture (subject to specified adjustments).

In consideration of SMI’s and MHP’s time, efforts and contributions to the joint venture, the Company is to issue to SMI and MHP warrants to purchase a total of 20,133,333 shares of common stock of the Company with an initial exercise price of $0.20 per share (with the exercise price subject to specified adjustments, including a weighted average anti-dilution adjustment for issuances below market, and a full ratchet anti-dilution adjustment for issuances below the then-applicable exercise price). Portions of the warrants will be forfeited pursuant to provisions in the MASR if the Company has not entered into contracts to secure (i) capital in excess of $1.2 million by a date determined under the MASR, or (ii) capital in excess of $10 million by a later date determined under the MASR, although warrants to be issued to SMI for 3,523,333 shares and warrants to be issued to MHP for 3,523,333 shares are not subject to forfeiture under the MASR. The Company may require exercise of the warrants if the Company’s stock trades above $1.00 per share (subject to adjustment). The MASR provides that SMI has the right to designate one member of the board of directors of the Company.

Under the MASR, the Company is to engage SMI as a consultant for 5 years and MHP as a consultant for 3 years, with each of SMI and MHP to be paid by the Company an annual consulting fee equal to one-third of the cash and stock compensation payable to the highest compensated executive officer of the Company in each year, except that if the Company contracts for less than $10 million of capital by a date determined under the MASR, the one-third is subject to specified reduction as provided in the MASR, but not below 20% for SMI and not below 5% for MHP. As of the date of this report, the Company is not aware that any joint venture has been formed, the Company has not met with or received any funds or any commitments for funds from any potential investors introduced by SMI or MHP, no warrants have been issued by the Company to SMI or MHP, and no fees have been paid by the Company to SMI or MHP.
 
 
 
31

 
 
DESCRIPTION OF BUSINESS - continued
 
Properties

Our headquarters has office and production space which makes it adequate for the Company to conduct its ongoing business operations.

On July 17, 2007, the Company entered into a lease at 6208 West Okanogan Avenue, Kennewick, Washington, 99336 which has been used as the Company’s production center. The term of the lease was five years, commencing on August 1, 2007. Monthly rent for the first year of tenancy was $3,500. Under the terms of the lease, the monthly rent would increase 8% each year so that monthly rent for the year beginning August 1, 2008 was $3,780, monthly rent for the year beginning August 1, 2009 was $4,082, monthly rent for the year beginning August 1, 2010 was $4,408, and monthly rent for the year beginning August 1, 2011 was $4,762. The landlord of this space is a non-affiliated stockholder of the Company, who holds less than 5 percent of the total outstanding shares.

Additionally, in June 2008, the Company entered into two 12-month leases for its corporate offices with three 4-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 call for monthly rental payments of $2,733 and $2,328 per month respectively. Effective November 1, 2009, the Company terminated that portion of the lease agreements consisting of the $2,328 per month payment.

Legal Proceedings

There are no material pending legal proceedings to which the Company is a party or as to which any of its property is subject, and the Company does not know of any legal proceedings contemplated against it.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
32

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

Results of Operations

Comparison for the Year Ended December 31, 2011 and December 31, 2010

The following table sets forth information from our statements of operations for the years ended December 31, 2011 and 2010.

   
Year Ended
December 31,
2011
   
Year Ended
December 31,
2010
 
Revenues
 
$
393,603
   
$
360,613
 
                 
Operating expenses
   
2,955,472
     
4,085,952
 
                 
Operating loss
   
(2,561,869
)
   
(3,725,339
)
                 
Non-operating income (expenses)
               
    Loss on sale of assets
   
(25,000
)
   
(10,000
)
    Net gain (loss) on settlement of debt
   
-
     
27,500
 
    Recognized income from grants
   
245,727
     
512,466
 
    Interest income
   
-
     
599
 
    Interest expense
   
(408,474
)
   
(860,252
)
Net income (loss)
 
$
(2,749,616
)
 
$
(4,055,026
)

Revenue

Revenue was $393,603 for the year ended December 31, 2011 and $360,613 for the year ended December 31, 2010. The increase was the result of consulting revenues. 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 $193,720 of the total twelve months ended December 31, 2011 revenues and $221,220 of the total twelve months ended December 31, 2010 revenues. Revenues for F-18 were lower in the twelve months ended December 31, 2011 as a result of a reduction in price to our sole customer effective April 2010 and a decrease in the quantity of F-18 sold during the twelve months ended December 31, 2011 (662 doses) versus the twelve months ended December 31, 2010 (745 doses). Stable isotope sales were $20,700 and $0 for the twelve months ended December 31, 2011 and 2010 respectively. The Company discontinued the sale of stable isotopes in the twelve months ended December 31, 2010 due to the reduction in profitability of that line of product. Consulting revenues consisted of $179,114 and $139,393 of the total twelve months ended December 31, 2011 and 2010 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.

Revenue for the twelve months ended December 31, 2011 and 2010 consists of the following:

     
Twelve months ended
December 31, 2011
   
Twelve months ended
December 31, 2010
 
F-18
   
$
193,720
   
$
221,220
 
Stable isotopes
     
20,700
     
-
 
Consulting
     
179,114
     
139,393
 
     
$
393,603
   
$
360,613
 

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 year ended December 31, 2010 was changed from the way it was originally reflected to correspond with the changes made for the year ended December 31, 2011.
 
 
 
 
 
 
33

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS - continued
 
Operating Expenses
 
Operating expenses for the twelve months ended December 31, 2011 and 2010 were $2,955,472 and $4,085,952 respectively. The decrease in operating expenses from 2010 to 2011 can be attributed largely to professional fees ($1,492,883 for the twelve months ended December 31, 2010 versus $906,417 for the twelve months ended December 31, 2011), impairment expense ($150,000 for the twelve months ended December 31, 2010 versus $0 for the twelve months ended December 31, 2011), and stock options granted ($400,535 for the twelve months ended December 31, 2010 versus $63,602 for the twelve months ended December 31, 2011) partially offset by an increase in sales and marketing expenses ($29,072 for the twelve months ended December 31, 2010 versus $58,880 for the twelve months ended December 31, 2011).

Operating expenses for the twelve months ended December 31, 2011 and 2010 consists of the following:

   
Twelve months ended
December 31, 2011
   
Twelve months ended
December 31, 2010
 
Cost of goods sold
 
$
64,042
   
70,130
 
Depreciation and amortization expense
   
546,388
     
545,192
 
Impairment expense
   
-
     
150,000
 
Professional fees
   
906,417
     
1,492,883
 
Stock options granted
   
63,602
     
400,535
 
Payroll expenses
   
751,488
     
853,641
 
General and administrative expenses
   
564,656
     
544,499
 
Sales and marketing expense
   
58,880
     
29,072
 
   
$
2,955,472
   
$
4,085,952
 

Non-Operating Income (Expense)

Non-operating income (expense) for the twelve months ended December 31, 2011 varied from the twelve months ended December 31, 2010 primarily due to a reduction of interest expense from $860,252 in 2010 versus a $408,474 in 2011 and $512,466 of recognized income from grants in 2010 versus $245,727 in 2011.

Non-Operating income (expense) for the twelve months ended December 31, 2011 and 2010 consists of the following:

   
Twelve months ended
December 31, 2011
   
Twelve months ended
December 31, 2010
 
Interest expense
 
$
(408,474
 
$
(860,252
Loss on sale of assets
   
(25,000
   
(10,000
Net gain (loss) on settlement of debt
   
-
     
27,500
 
Recognized income from grants
   
245,727
     
512,466
 
Interest income
   
-
     
599
 
   
$
(187,747
 
$
(329,687

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 over the period April 1, 2010 through March 31, 2012. 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.
 
 
 
34

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS - continued
 
Additionally, 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, up to the maximum $488,958 allowable expenditures available for this grant, and so the $244,479 has been recorded as a receivable as of 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 $205,129 grant funds received in 2010 reimburses the Company for eligible expenditures made during the twelve months ended December 31, 2009. And the $39,350 reimburses the Company for eligible expenditures made during the twelve months ended December 31, 2010, up to the maximum $488,958 for the years 2009 and 2010 allowable expenditures available for this grant. The $39,350 has been recorded as a receivable as of December 31, 2010.

The Company has chosen to recognize the 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, 2010 the Company recognized $23,508 of the $1,215,000 Department of Energy grant as income with the remaining $1,191,492 recorded as deferred income as of December 31, 2010. The $23,508 recognized as of December 31, 2010 was for costs incurred for the twelve months ended December 31, 2010. For the twelve months ended December 31, 2011 the Company recognized $245,727 of the $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.

The Company fully recognized the $244,479 grant money received on both the Molybdenum tax grant and the Brachytherapy tax grant as income in the twelve months ended December 31, 2010.

As of December 31, 2011 and 2010 the grant money received and grant money recognized as income and deferred income is:

   
$1,215,000 Brachytherapy Grant
   
$244,479 Molybdenum Grant
   
$244,479 Brachytherapy Grant
   
Total
 
Grant money received during 2010
 
$
1,215,000
   
$
205,129
   
$
-
   
$
1,420,129
 
Grant money recorded as account receivable
   
-
     
39,350
     
244,479
     
283,829
 
Total grant money
   
1,215,000
     
244,479
     
244,479
     
1,703,958
 
Recognized income from grants in 2010
   
23,508
     
244,479
     
244,479
     
512,466
 
Deferred income at December 31, 2010
   
1,191,492
     
-
     
-
     
1,191,492
 
Recognized income from grants in 2011
   
245,727
     
-
     
-
     
245,727
 
Deferred income at December 31, 2011
 
$
945,765
   
$
-
   
$
-
   
$
945,765
 

Net Loss

Our net loss for the twelve months ended December 31, 2011 and 2010 was $2,749,616, and $4,055,026, respectively, as a result of the items described above.

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
)

 
 
 
35

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS - continued
 
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
 
 
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
 

 
 
 
 
 
 
36

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS - continued
 
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
)
 
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.
 
 
 
 
 
 
37

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS - continued
 
Liquidity and Capital Resources

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 years ended December 31, 2010 anticipated that we would need $1 million in funds over the next twelve months to maintain current operation activities, and for the years 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, 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.
 
September30, 2012
 
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.
 
December 31, 2011

At December 31, 2011, we had negative working capital of $5,840,107, as compared to $4,439,799 at December 31, 2010. During the twelve months ended December 31, 2011 we experienced negative cash flow from operations of $858,844 and we expended $97,421 for investing activities while adding $419,432 of cash flows from financing activities. As of December 31, 2011, we had $0 commitments for capital expenditures.

Cash used in operating activities decreased from $634,319 for the twelve month period ending December 31, 2010 to $858,844 for the twelve month period ending December 31, 2011. 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 $24,377 for the twelve month period ended December 31, 2010 to $97,421 for the twelve month period ended December 31, 2011. Cash was used to acquire equipment and patents during the 2011 and 2010 twelve month periods. This purchase of equipment and patents in 2010 was largely offset by the $125,000 received from the sale of a cyclotron. Cash provided from financing activities decreased from $1,210,524 for the twelve month period ending December 31, 2010 to $419,432 for the twelve month period ending December 31, 2011. The decrease in cash provided from financing activities was primarily a result of decrease in proceeds from convertible debt along with payments on convertible debt, and a decrease in cash sales of common stock. The decrease in cash provided from financing activities was partially offset by an increase in proceeds from the exercise of options and warrants.
 
 
38

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS - continued
 
We have generated material operating losses since inception. We have incurred a net loss of $21,194,406 from January 1, 2006 through December 31, 2011, 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.

July 2012 Offering
 
On July 13, 2012, we issued $550,000 of Secured Convertible Promissory Notes (the “Notes”) to two investors and, on August 2, 2012, we issued $510,000 of Secured Convertible Promissory Notes to 25 investors (collectively, the “Investors”) pursuant to the terms of a Subscription Agreement (the “Subscription Agreement”). The Subscription Agreement contains customary representations, warranties and agreements by the Company. The Investors also received warrants (the “Warrants”), exercisable until July 13, 2017, to purchase shares of the Company’s common stock (“Common Stock”) and additional investment rights (“Additional Investment Rights”) to purchase additional notes. The Company and Investors also entered into a Security Agreement (“Security Agreement”) to provide collateral for the Notes. The Notes are also secured by a pledge of stock owned by the Company’s directors.  On July 13, 2012, the market price per share of the Company’s common stock was $0.24 based on trading volume of 2,000 shares.  On August 2, 2012, the market price of the Company’s common stock was $0.2895 based on a trading volume of 3,500.
 
Convertible Promissory Notes
 
The Company issued and completed the sale to the Investors of Notes equal to $1,060,000 (the “Principal Amount”). The Notes mature on January 13, 2014 (“Maturity Date”) and bear interest at a rate of 12.0% per annum, payable on the Maturity Date. The outstanding Principal Amount and accrued and unpaid interest on the Notes will be convertible into shares of Common Stock of the Company or so long as each Note is outstanding. The effective conversion rate for this Note shall be $0.10 per share. As a result, the Notes are convertible into 10,600,000 shares of common stock.  This conversion rate will be adjusted upon the occurrence of any split, combination or other similar recapitalization with respect to the Common Stock and shall be reduced if the Company issues Common Stock at a price lower than the then-current Conversion Price other than for issuances in connection with mergers, licensing agreements, certain stock options and other transactions as described in the Notes.

Interest payable on this Note shall compound annually and accrue at the annual rate of 12%.  Interest shall be payable quarterly in arrears on the last day of each calendar quarter commencing September 30, 2012.  Interest will be payable with shares of Common Stock provided (i) an event of default or an event which with the passage of time or the giving of notice could become an event of default has not occurred, (ii) such Common Stock is immediately resellable pursuant to an effective resale registration statement or Rule 144 without transfer or volume restrictions, (iii) such payment in Common Stock would not cause the holder to exceed the restrictions on ownership percentage of the Company, and (iv) we provide holder not less than fifteen business days’ notice prior to the due date of Company’s intention to pay such interest with Common Stock.  Interest paid with shares of Common Stock shall be payable on the third business day after the date such interest would be due if paid in cash.  Common Stock employed to pay interest shall be valued at 80% of the average of the volume weighted average prices of the Common Stock as reported by Bloomberg L.P. for the five trading days ending on the due date of the interest payment being made with Common Stock.
 
 
39

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS - continued
 
Warrants
 
The Investor also received warrants, exercisable until July 13, 2017, to purchase the number of shares of common stock of the Company (“Warrant Shares”) equal to the product obtained by multiplying the Investor’s Loan Amount by ten, with a per share exercise price of $0.15 (“Exercise Price”).  On the sale of the $1,060,000 of Notes, the Investors were entitled to receive warrants to purchase 10,600,000 Warrant Shares.  The number of Warrant Shares will be appropriately adjusted upon the occurrence, prior to the issuance of such Warrant, of any stock dividend, stock split, combination or the like with respect to the Company’s common stock. The Exercise Price will be adjusted upon the occurrence of any split, combination or other similar recapitalization with respect to the Common Stock and shall be reduced if the Company issues Common Stock at a price lower than the then-current Conversion Price other than for issuances in connection with mergers, licensing agreements, certain stock options and other transactions as described in the Warrant.  We also issued Warrants to consultants for services rendered pursuant to consulting agreements.  Warrants, exercisable until July 13, 2017 at a price of $0.15, to purchase 3,140,297 Warrant Shares were issued as a commission on sales of the Notes.
 
Additional Investment Rights
 
We issued Additional Investment Rights to the Investors. The Additional Investment Rights will represent the right to purchase additional Principal Amount of Notes up to 40% of the Principal Amount of Notes acquired by the Selling stockholders and a corresponding amount of Warrants.
 
Security Agreement
 
The Company and certain also entered into a Security Agreement (the “Security Agreement”) pursuant to which the Company granted a continuing security interest (“Security Interest”) in the Collateral (as defined herein) to secure all obligations and performance of each of the Company’s duties under the Notes and any related documentation. “Collateral” shall include all goods, contract rights and other general intangibles, accounts, chattel paper, commercial tort claims, deposit accounts and cash, documents, investment property and other property described in the security agreement, including intellectual property.

Registration Rights

The subscription agreement with the Investors granted the Investors registration rights. The Company agrees that the Selling Stockholders will be entitled to damages if the registration statement is not filed or is not declared effective by the Commission on a timely basis, if (A) due to the action or inaction of the Company a registration statement is not declared effective within five days after receipt by the Company or its attorneys of a written or oral communication from the Commission that the registration statement will not be reviewed or that the Commission has no further comments, (B) any registration statement described filed timely, or (C) any registration statement is filed and declared effective but shall thereafter cease to be effective without being succeeded within twenty-two business days by an effective replacement or amended registration statement or for a period of time which shall exceed thirty days in the aggregate per year (each such event shall be a “Non-Registration Event”), then the Company shall pay as “Liquidated Damages” to the holder of the securities an amount equal to 1% for the initial 30 days, and 1.5% for 30 days thereafter (or such lesser pro-rata amount for any period of less than 30 days) of the principal amount of the outstanding Notes (which are subject to such Non-Registration Event) with a maximum aggregate amount of Liquidated Damages not to exceed 10% of the sum of the Note principal.  The Company must pay the Liquidated Damages in cash.

Warrants issued to Consultants
 
The Company is also registering (1) warrants, exercisable until July 13, 2017 at a price of $0.15, to purchase 3,600,000 Shares to three consultants engaged by the Company and (2) warrants to two consultants exercisable until June 4, 2012 with 1,200,000 warrants exercisable at $0.09 per share and 2,000,000 warrants exercisable at $0.25 per share.


 
40

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS - 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 and September 30, 2012 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 for the year ended December 31, 2011 and for 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.
 
Off-Balance Sheet Arrangements

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

Critical Accounting Policies

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.


 
41

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS - continued
 
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 year ended December 31, 2010 was changed from the way it was originally reflected to correspond with the changes made for the year ended December 31, 2011.

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 December 31, 2011, 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.

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.

 
 
42

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS - continued
 
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.

License Fees

The Company made an acquisition of a patent license in 2007, for the production of Actinium 225, from a related individual for common stock valued, at the time of acquisition, at $75,000. The cost of the patent license was capitalized as License Fees and amortized on the straight line basis over a three life. This license fee was fully amortized as of December 31, 2010.

The Company made a $10,000 investment in 2010 for a patent license regarding its technology for the production of Mo-99. In May 2010 the Company entered 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 execution of this agreement and a milestone payment of $250,000, due and payable upon reaching $50,000,000 in cumulative net sales. The $10,000 nonrefundable fee paid upon execution was capitalized as License Fees and is amortized on the straight line basis over a three year life.

The Company made a $10,000 investment in 2010 for an exclusive license agreement with Battelle Memorial Institute regarding its technology for the production of a Brachytherapy seed. In August 2010 the Company entered into a License Agreement for the Patent Rights in the area of a Brachytherapy seed with a Fast-dissolving Matrix for Optimized Delivery of Radionuclides. This Agreement calls for a $10,000 nonrefundable fee upon execution, a royalty agreement on sales and on funds received from any sublicenses. The $10,000 nonrefundable fee paid upon execution was capitalized as License Fees and is amortized on the straight line basis over a three year life. Additionally the Agreement calls for a minimum annual fee as follows:

Calendar Year
 
Minimum Royalties per Calendar Year
 
2010
 
$
-
 
2011
 
$
-
 
2012
 
$
2,500
 
2013
 
$
5,000
 
2014
 
$
7,500
 
2015
 
$
10,000
 
2016 and each calendar year thereafter
 
$
25,000
 

 
 
43

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS - continued
 
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.
 
Amortization is computed using the straight-line method over the estimated useful live of three years. Amortization of license fees was $8,036 , $6,666, and $5,695 for the nine months ending September 30, 2012 and for the years ended December 31, 2011, and 2010, respectively. Based on the license fees recorded at September 30, 2012, and assuming no subsequent impairment of the underlying assets, the remaining unamortized portion of $19,186 , will be fully amortized during the year ending December 31, 2015. Future annual amortization is expected to be as follows:
 
Calendar Year
 
Annual Amortization
 
2012
  $ 3,214  
2013
  $ 8,888  
2014
  $ 5,832  
2015
  $ 1,340  

The Company periodically reviews the carrying values of capitalized license fees 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

Patent filing costs and intellectual property costs totaling $81,297 , $97,421, and $113,326, were capitalized during the nine months ending September 30, 2012 and the twelve months ended December 31, 2011, and 2010; resulting in a total $399,152 , $317,224, and $219,803 of capitalized patents and intellectual property costs at September 30, 2012 and December 31, 2011 and 2010, respectively.
 
While patents are being developed or pending they are not being amortized. Management has determined that 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 and intellectual property 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 ending September 30, 2012 consisted of the sales of Flouride18 and Consulting Revenue. Revenue for the fiscal year ended December 31, 2011 consisted of the sales of Oxygen 18 (stable isotope), Flouride 18 and Consulting Revenue. Revenue for the fiscal year ended December 31, 2010 consisted of the sales of 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.


 
44

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS - continued
 
Income from Grants

Government grants are recognized when all conditions of such grants are fulfilled or there is reasonable assurance that they will be fulfilled. The Company has chosen to recognize income from grants 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, 2010 the Company recognized $23,508 of the $1,215,000 Department of Energy grant as income. The $23,508 recognized as of December 31, 2010 was for costs incurred for the twelve months ended December 31, 2010.

For the twelve months ended December 31, 2011 the Company recognized $245,727 of the $1,215,000 Department of Energy grant as income. 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 $410,445 of the $1,215,000 Department of Energy grant as income. The $410,445 recognized as of September 30, 2012 was for costs incurred for the nine months ended September 30, 2012.

The Company fully recognized the $244,479 grant money received on both the Molybdenum tax grant and the Brachytherapy tax grant as income in the twelve months ended December 31, 2010.

As of September 30, 2012 and December 31, 2011 and 2010 the grant money received and grant money recognized as income and deferred income is:
 
   
$1,215,000 Brachytherapy Grant
   
$244,479 Molybdenum Grant
   
$244,479 Brachytherapy Grant
   
Total
 
Grant money received during 2010
 
$
1,215,000
   
$
205,129
   
$
-
   
$
1,420,129
 
Grant money recorded as account receivable
   
-
     
39,350
     
244,479
     
283,829
 
Total grant money
   
1,215,000
     
244,479
     
244,479
     
1,703,958
 
Recognized income from grants in 2010
   
23,508
     
244,479
     
244,479
     
512,466
 
Deferred income at December 31, 2010
   
1,191,492
     
-
     
-
     
1,191,492
 
Recognized income from grants in 2011
   
245,727
     
-
     
-
     
245,727
 
Deferred income at December 31, 2011
   
945,765
     
-
     
-
     
945,765
 
Recognized income from grants for the nine months ended September 30, 2012
   
410,445
     
-
     
-
     
410,445
 
Deferred income at September 30, 2012
 
$
535,320
   
$
-
   
$
-
   
$
535,320
 

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.