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FORM 10-Q

 

 

(Mark One)

 

	ý	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended June 30, 2003
	o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the transition period from             to

 

Commission file number   0-26886

 

MEDICSIGHT, INC.

(Exact name of registrant as specified in its charter)

 

 

Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes       ý        No         o

 

Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):  Yes       o        No         ý

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

 

Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by court.  Yes        o         No         o

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  As of July 31, 2003:  21,155,189 shares of Common Stock, par value $0.001 per share.

 

 

PART I

FINANCIAL INFORMATION

 

Item 1.                       Financial Statements

 

Medicsight, Inc. and its subsidiaries are collectively referred to in this Report as the “Company”.  For purposes of the discussion contained herein, all financial information is reported on a consolidated basis. The financial statements for the Company’s fiscal quarter ended June 30, 2003 are attached to this Report, commencing at page F-1.

 

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

 

NOTE REGARDING FORWARD LOOKING STATEMENTS

 

Some of the statements in this Quarterly Report are forward-looking statements within the meaning of the federal securities laws. Generally forward-looking statements can be identified by the use of terms like “believe,” “may,” “will,” “expect,” “anticipate,” “plan,” “hope” and similar words, although this is not a complete list and we may express some forward-looking statements differently. Discussions relating to our plan of operation, our business strategy and our competition, among others, contain such statements. Actual results may differ materially from those contained in our forward-looking statements for a variety of reasons. We have based these forward-looking statements on our current expectations and projections about future events.  These forward-looking statements are subject to risks, uncertainties and assumptions about the Company, discussed elsewhere in this Report.

 

We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  In light of these risks, uncertainties and assumptions, the forward-looking events contained or incorporated by reference in this Prospectus might not occur.

 

The Company’s main operating currency is UK sterling (£).

 

BACKGROUND

 

Medicsight, Inc. was originally incorporated as a Utah corporation in 1977. On December 19, 2000, the Company entered into an Agreement and Plan of Merger with its wholly-owned subsidiary HTTP Technology, Inc., a Delaware corporation, and thereby effected a re-incorporation of the Company from Utah to Delaware. All references in this Report to “the Company” refer to Medicsight, Inc., the Delaware corporation, if the event occurred on or after December 19, 2000 or to HTTP Technology, Inc., the Utah corporation, if the event occurred prior to December 19, 2000. On October 28, 2002, the Company’s name was changed from HTTP Technology, Inc. to Medicsight, Inc. On July 31, 2003 the Company reduced its authorized share capital from 100,000,000 shares to 25,000,000 shares.

 

The Company maintains its corporate offices at 46 Berkeley Square, London, W1J 5AT, United Kingdom, telephone +44 (0) 207-598-4070, facsimile: +44 (0) 207-598-4071, Internet address: http://www.medicsight.com.

 

BUSINESS STRATEGY

 

We are developers of software technology for medical diagnostic applications and provide medical diagnostic services in differing business models. We have four principal operating subsidiaries: Medicsight PLC (“MS-PLC”), Medicsight Asset Management Limited (“MAM”), Lifesyne UK Limited (“Lifesyne UK”) and Lifesyne US, Inc (“Lifesyne US”). HTTP Insights Ltd (“Insights”) and HTTP Software PLC (“Software”), formerly subsidiaries of the Company, were sold to independent third parties during the fourth quarter of 2002.

 

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MS-PLC.  Our majority-owned subsidiary, MS-PLC, is currently engaged in commercializing a state-of-the-art digital expert recognition software system for digital data derived from medical imaging hardware. At June 30, 2003, the Company owned 67,127,300 ordinary shares in MS-PLC, constituting 83.3% of the outstanding shares. MS-PLC undertook a private offering outside the United States of an additional 6,131,398 ordinary shares, which was closed on December 31, 2002. As part of this offering, in December 2002 we acquired a further 1,258,718 shares in MS-PLC for £1,258,718 ($ 2,014,000). On December 23, 2002, we entered into a share swap with General Nominees and Asia IT Nominees whereby the Company issued 1,866,666 shares to General Nominees (1,674,894 shares) and Asia IT Nominees (191,772 shares) in return for 7,000,000 MS-PLC shares held by General Nominees (6,280,852 shares) and Asia IT Nominees (719,148 shares) respectively. In the six months to June 30, 2003 MS-PLC issued a further 595,000 shares to independent third parties at approximately $1.60 per share.

 

Lifesyne UK and Lifesyne US.  Lifesyne UK and US are wholly owned subsidiaries of MS-PLC that were established in September 2002 and June 2003 respectively for the purpose of providing branded CT scanning operating entities for the United Kingdom and United States markets.

 

MAM.  MAM is also a wholly owned subsidiary of MS-PLC that was established in September 2002 for the purpose of acquiring fixed assets on behalf of the operating entities in the group. MAM will negotiate and acquire equipment and fund leasehold improvements and development, which in turn will be leased to the relevant operating entity.

 

We restructured our business in 2001 to focus on the medical imaging applications derived from our core technology. We have concluded the process of incorporating research, software development, management and marketing activities related to our medical imaging initiatives into MS-PLC. In November 2001, assets were transferred from our other subsidiaries to MS-PLC and the costs incurred on the development of the Medicsight™ system (our expert recognition software system for the analysis of digital data derived from medical imaging hardware) were reimbursed and assigned by way of a loan note from MS-PLC. The amount of the loan note to Medicsight, Inc. was £3,659,104, and this loan note was converted into 57,868,582 ordinary shares of MS-PLC issued to the Company and 15,000,000 ordinary shares of MS-PLC issued to the former parent of Insights in November 2001.

 

It is now widely accepted that the most effective way to achieve early detection of the principal deadly diseases is through radiological scanning. The Medicsight™ system analyzes digital data from the new generation of multi-slice computed tomography (“MSCT”) scanners and then provides information to enable the clinician to identify and characterize possible areas of abnormality. We believe that in the future the Medicsight™ system will be capable of reliably detecting isolated pulmonary nodules in the lung, calcification of the coronary arteries, polyps in the colon and other abnormalities indicative of disease. The potential advantage of the Medicsight™ system is that it increases precision and reliability while also providing scalability that will be cost-effective. The system uses its technology to provide tools to radiologists for the identification of possible abnormalities. The clinician will then apply his/her experience to determine the next steps in medical diagnosis and treatment. We believe that the Medicsight™ system will:

 

•                  enable accurate and reliable scan analysis;

 

•                  provide a service that will be significantly cheaper than at present as it reduces the burden on radiologists who in current practice account for a significant proportion of the scan cost; and

 

•                  allow significant patient volume to be achieved because the analysis is semi automated and scanning volumes are not then constrained by the finite number of radiologists.

 

The step change in technology that increases the potential of the Medicsight™ system is the 16 detector CT scanner. This allows sub-millimeter cross-sectional slices to be captured with increased speed and reduced radiological dose when compared with traditional single slice machines. This can provide over 600 images

 

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of the chest instead of 30-60 for single slice scanners. The amount of detail now available, while enabling early detection of smaller nodules and areas of calcification, increases the time required for analysis by radiologists. Therefore the automation of scan analysis is essential. MS-PLC has identified GE Medical Systems, part of the General Electric Company of America, as a supplier of the new 16 detector CT scanners.

 

We are now supported by some of the most prominent names in European medicine. The Company’s Medical Board has been substantially expanded to include three Specialist Boards, each consisting of recognized authorities in the fields of heart, lung and colon, bringing a significant level of expertise to the development of our products and services.

 

We intend to establish a number of service centers to provide a referral-only service for the early detection of coronary heart disease, lung and colorectal cancer. Referring medical practitioners will send high-risk individuals or those displaying non-specific signs of ill health to the center for a specific scan. No self-referrals will be accepted. MS-PLC will operate its new scanning centers under the Lifesyne™ brand name. The first Lifesyne™ center was commissioned in the fourth quarter of 2002 and was followed by the scanning of our first target group at the end of Fiscal 2002. This center currently scans primarily for the earliest signs of heart disease and lung cancer. The center is located in West London within the Hammersmith Hospitals NHS Trust (“NHS Trust”). The second development phase was completed in February 2003. This phase included the creation of private pre-scan rooms for the recording of patient information, providing customer changing facilities as well as containing patient video education films and information related to the health and well-being of our customers.  This feature will also be available in all future Lifesyne™ Centers.   The Center has now been fully branded as Lifesyne™ and has begun to generate revenues from scanning services.

 

It is Medicsight’s intention to establish two further Lifesyne™ centers within the coming months and lease negotiations are concluding in The City of London and Manchester. In addition our flagship center in Westminster, London is expected to open in September 2003. The success of Lifesyne™ is largely dependent upon the effective implementation of its strategic marketing plan.  A number of strategic programs have been launched, all of which are supported by an integrated promotions campaign.  These programs include a series of direct mailings to over 2,000 clinicians within the London area to introduce them to the Company and its services, and advertisements in target medical journals.  The Company has recently completed recruitment of a medical sales force for London.  These people comprise primary and secondary healthcare specialists who will call on doctors in London to provide them with education and information about scan analysis while promoting Lifesyne’s services.

 

The characteristics of markets around the world directly affect how MS-PLC will commercialize its technology. In the UK there is a shortage of diagnostic imaging capacity and under-investment in the health system. The vast majority of all diagnostic procedures are carried out in a hospital environment making them inefficient, inconvenient and costly. It is therefore commercially attractive and necessary to establish owned and operated diagnostic centers. However, in the United States and Western Europe, many diagnostic procedures already take place outside of a hospital environment and are carried out in privately owned clinics or diagnostic imaging centers. For these markets, it is unnecessary for Lifesyne™ to establish new operating units, which would in effect compete with the existing market. Therefore, MS-PLC anticipates that it will create licensees or franchises to achieve rapid penetration of the market at lower capital expenditure and risk.

 

Operational and development costs for Fiscal 2003 are estimated at approximately $8.5 million. MS-PLC has raised approximately $8.8 million during Fiscal 2002 by way of a private placement of 6.1 million shares (of which the Company has purchased 1,258,718 shares for consideration of $2 million) which was underwritten by Asia IT Capital Investments Limited (“Asia IT”). Additionally, MS-PLC has entered into a £10.0 million (approximately $16.0 million) secured credit facility with Asia IT that ceases in November 2004. MS-PLC expects to become financially self-sufficient during 2004.

 

Besides the Company-operated Lifesyne™ scanning centers in the United Kingdom, we will operate partnerships with industry leaders to achieve rapid market penetration across our target regions.

 

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MS-PLC’s progress in the UK market is vital to the early success of the Company’s business.  However, the largest market opportunity is in the United States.  With this in mind, the Company is concluding negotiations with a university-affiliated medical center to open the first US Lifesyne™ center within their environs by the end of this year.  This physical presence and endorsement in the US is designed to promote the Lifesyne™ concept and the Medicsight™ system as one license package.

 

Revenue streams for the Medicsight™ system are expected to include scan analysis fees and license fees. However, we have yet to derive any revenue from the Medicsight™ system. We cannot assure you that MS-PLC will be successful in commercializing the Medicsight™ system, or if such system is commercialized, that its use will be profitable to MS-PLC. We face obstacles in commercializing our core technology and in generating operating revenues such as, but not limited to, successful development, testing of and gaining regulatory approval for the technology.

 

MS-PLC does not believe that there is currently any direct comparative competition to the Medicsight™ system. There are computer-aided diagnostic systems that work in the field, but, in our view, such existing systems are overly dependent on human resources to carry out the analysis, as none have the capability of the Medicsight™ system.

 

The Company has had only a limited operating history upon which an evaluation of its prospects can be made. The Company’s prospects must be considered keeping in mind the risks, expenses and difficulties frequently encountered in the establishment of a new business in an ever-changing industry. There can be no assurance that the Company will be able to achieve profitable operations.

 

The Company has identified a number of other specific risk areas that may affect the Company’s operations and results in the future:

 

Technical Risks.  The Medicsight™ system may not deliver the levels of accuracy and reliability needed, or the development of such accuracy and reliability may be delayed.

 

Market Risks.  The market for the Medicsight™ system may be slower to develop or smaller than estimated or it may be more difficult to build the market than anticipated. The medical community may resist the Medicsight™ system or be slower to accept it than we expect. Revenues from the Lifesyne™ scanning centers and the licensing of the Medicsight™ system may be delayed or costs may be higher than expected which may result in the Company requiring additional funding.

 

Regulatory Risks.  The Medicsight™ system is subject to regulatory requirements in both the United States and Europe. Approval may be delayed or incur additional cost to the Medicsight™ system.

 

Competitive Risks.  There are a number of organizations, such as software companies in the medical imaging field and scanner manufacturers that have an interest in developing a competitive offering to the Medicsight™ system. We cannot make any assurance that they will not attempt to develop such offerings, that they will not be successful in developing such offerings or that any offerings they do successfully develop will not have a competitive edge versus the Medicsight™ system.

 

RESULTS OF OPERATIONS

 

Revenues. For the six months ended June 30, 2003 and the six months ended June 30, 2002, the Company’s gross revenues from operations were $54,000 and $37,000, respectively.  For the quarter ended June 30, 2003 and the quarter ended June 30, 2002, the Company’s gross revenues from operations were $44,000 and $21,000, respectively.  The Company’s revenue in the six months and quarter ended June 30, 2003 was derived from the Company’s Lifesyne™ scanning operations. The Company’s revenue in the six months

 

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and quarter ended June 30, 2002 was derived from the Company’s consulting activities provided by Software.

 

Research and Development.  The Company’s research and development expenses for the six months and quarter ended June 30, 2003 were $nil and $nil respectively as compared to $554,000 and $355,000 for the six months and quarter ended June 30, 2002 respectively. In Fiscal 2003, in accordance with Statement of Financial Accounting Standards (FAS) 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, the Company capitalized certain computer software development costs.  Technical feasibility was established on completion of working models for MedicHeart, MedicLung and MedicColon software products in January 2003. Subsequently, the Company capitalized costs of $1,249,000 under FAS 86. These costs capitalised comprise staff, consultants, regulatory and clinical trial costs specific to the three products. In Fiscal 2002, the Company’s research and development costs were comprised of staff and consultancy costs expensed on the Medicsight™ system.

 

Selling, General and Administrative Expenses.  The Company’s selling, general and administrative expenses for the six months and quarter ended June 30, 2003, were $6,569,000 and $3,592,000 respectively as compared to $4,977,000 and $2,609,000 for the six months and quarter ended June 30, 2002.  Professional fees, including consulting services, were $568,000 and $188,000 for the six months and quarter ended June 30, 2003 respectively as compared to $669,000 and $426,000 respectively for the six months and quarter ended June 30, 2002. Also included in the six months and quarter ended June 30, 2003 were salaries and directors’ compensation (including sub-contractors) of $1,762,000 and $1,198,000, service charges and rates for property leasing of $267,000 and $130,000, and rent of $316,000 and $149,000 respectively.  The primary components of the increased selling, general and administrative expenses for the six months and quarter ended June 30, 2003 was an increase in staff cost (including directors and sub-contractors) of $400,000 and $406,000 respectively and marketing costs of $338,000 and $233,000 respectively as the Company initiated its various marketing strategies.  Staff cost (including directors and sub-contractors) amounted to $1,362,000 and $792,000 respectively in the six months and quarter ended June 30, 2002 and no marketing costs were incurred in the six months ended June 30, 2002.

 

Depreciation and Amortization Expense.  During Fiscal 2000, the Company acquired an intangible asset from the former parent of Insights consisting of technology valued at $22,470,000. Under SFAS No.142, this is considered an intangible asset with a definite life of 5 years. Therefore the value of the asset is amortized on a straight-line basis over this period.  The amortization charge for the six months and quarters ended June 30, 2003 and June 30, 2002 was $2,247,000 and $1,124,000 respectively.  The Company evaluates the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company’s assessment for impairment of an asset involves estimating the undiscounted cash flows expected to result from use of the asset and its eventual disposition. An impairment loss recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.  No impairment of intangibles was recorded in the six months and quarter ended June 30, 2003.

 

Impairment of excess of purchase price over net assets acquired.  For the six months and quarters ended June 30, 2003 and June 30, 2002, the Company had excess of purchase price over net assets acquired of $100,119,000 and $88,919,000 respectively. The increase in the six months ended June 30, 2003 of $11,200,000 was due to the Company acquiring an additional 7,000,000 shares in MS-PLC in December 2002. The excess of purchase price over net assets acquired of $88,919,000 was primarily attributable to the Company’s acquisition of Insights. As stated above, the Company adopted SFAS No. 142 on January 1, 2002. Under this standard, goodwill will no longer be amortized over its estimated useful life, but instead will be tested for impairment on an annual basis or whenever indicators of impairment arise. The Company completed its annual impairment tests as of January 1, 2003 and no impairment was recorded. Prior to January 1, 2002, goodwill was tested for impairment in a manner consistent with property, plant and equipment and intangible assets with a definite life.

 

Impairment Loss of Investment. For the six months and quarter ended June 30, 2003, the Company incurred an impairment loss on investments of $nil. For the six months and quarter ended June 30, 2002, the Company incurred an impairment loss on investments of $30,000 related to the impairment in the carrying

 

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value of one of the Company’s minority investments, Top Tier, Inc. Based on the financial status of Top Tier, Inc, the investment was permanently impaired, and the Company has recorded an impairment for the entire carrying value of this investment.

 

Impairment of Vendor Guarantee In the six months and quarter ended June 30, 2003 the Company recorded a reduction in the impairment of the guarantee of $697,000 to reflect its estimated realizable value. An impairment of a vendor guarantee in the amount of $6,720,000 was incurred in the six months and quarter ended June 30, 2002. These adjustments relate to the guarantee provided by Dr. Alexander Nill as to the fair value of certain assets acquired under the Company’s acquisition of Core Ventures Limited (“Core”) in September 2000. The vendor guarantee represents the fair value of Dr Nill’s stock in the Company, the proceeds of the sale of which are to be remitted to the Company. In the six months and quarter ended June 30, 2003 the Company received proceeds under the guarantee of $2,259,000 from the sale of 579,000 shares. These funds were used to reduce Medicsight, Inc’s $20m facility with Asia IT. The vendor guarantee represents the fair value of the remaining 616,000 shares at June 30, 2003 and 1,195,000 shares at June 30, 2002.

 

Net Loss and Net Loss per Share.  Net loss was $5,124,000 and $2,446,000 for the six months and quarter ended June 30, 2003 respectively compared to a net loss of $11,549,000 and $9,249,000 respectively for the six months and quarter ended June 30, 2002.  Net loss per share for the six months and quarter ended June 30, 2003 was $0.24 and $0.12 respectively, based on weighted average shares outstanding of 21,155,189 and 21,155,032 respectively, compared to a net loss per share of $0.60 and $0.48 respectively for the six months and quarter ended June 30, 2002, based on weighted average shares outstanding of 19,289,361. The increase in net loss for the quarter ended June 30, 2003, are principally due to the increased selling, general and administrative expenses.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Working Capital.  At June 30, 2003, the Company had $1,130,000 in current assets. Cash and cash equivalents amounted to $nil. Current liabilities were $11,355,000 at June 30, 2003.  At December 31, 2002, the Company had $2,284,000 in current assets and cash and cash equivalents amounted to $1,778,000.  Current liabilities were $8,945,000 at December 31, 2002. Working capital deficit at June 30, 2003 was  $(10,225,000), as compared to  $(6,661,000) at December 31, 2002.  The ratio of current assets to current liabilities was 0.1 to 1.0 at June 30, 2003 as compared to 0.25 to 1.0 at December 31, 2002. The decrease is primarily due to the decrease in cash and cash equivalents and increase in short term debt.

 

Net Decrease in Cash and Cash Equivalents.  During the six months ended June 30, 2003, the Company’s cash and cash equivalents decreased by $1,778,000. This decrease was primarily the result of cash flows received from shares issued by MS-PLC, cash received under the vendor guarantee and the increase in short term debt being exceeded by net cash used in operating and investing activities as Asia IT’s significant cash balances held on behalf of MS-PLC at December 31, 2002 were drawn on. The Company used net cash of $4,576,000 in operations. The Company received net cash of $4,633,000 in financing activities and used  $1,775,000 in investing activities.

 

Net Cash Used in Operations.  The use of cash in operations of  $4,576,000 in the six months ended June 30, 2003, was attributable to the Company’s relatively minimal revenues at the same time that the Company incurred significant operating costs. These significant costs included professional fees, salaries and director compensation, marketing costs and service charges associated with rental property and rent. The Company used cash in operations in the six months ended June 30, 2002 of  $2,872,000.

 

Net Cash Used in Investment Activities.  In the six months ended June 30, 2003, the Company had a net cash outflow from investment activities of $1,775,000. The Company used $526,000 to purchase additional fixed assets and $1,249,000 on development of its software products. In the six months ended June 30, 2002, the Company had a net cash outflow from investment activities of $29,000. The Company used the funds to purchase additional fixed assets.

 

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Net Cash Provided by Financing Activities.  In the six months ended June 30, 2003, the Company had a net cash inflow from financing activities of $4,633,000. The funds received in the six months ended June 30, 2003, comprised of $919,000 received from the private offering of Medicsight stock, $2,259,000 received under the vendor guarantee and $1,401,000 drawn from our debt facilities with Asia IT. For the six months ended June 30, 2002, the Company had a net cash inflow from financing activities of  $5,857,000. The funds received comprised of $5,232,000 received from the private offering of Medicsight stock and $644,000 received under our debt facilities with Asia IT.

 

Stockholders’ Equity.  The Company’s stockholders’ equity at June 30, 2003 was  $104,892,000, including an accumulated deficit of $(77,298,000), as compared to $107,807,000 at December 31, 2002, including an accumulated deficit of $(72,174,000). Additional paid-in capital was $183,931,000 and $182,897,000, at June 30, 2003 and December 31, 2002 respectively. The reduction in stockholders’ equity was a result of an increase in accumulated deficit of $5,124,000 offset by an increase in additional paid-in capital of $1,034,000 resulting from the placement of Medicsight stock (par value approximately $0.08 per share) at a premium of  $1.52 per share.

 

Additional Capital.  The Company will require additional capital during its fiscal year ending December 31, 2003 to implement its business strategies, including cash for (i) payment of increased operating expenses such as salaries for additional employees; and (ii) further implementation of those business strategies. Such additional capital may be raised through additional public or private financing, as well as borrowings and other resources. Currently, the Company has two available lines of credit.

 

On December 15, 2000, the Company entered into an unsecured credit facility with Asia IT which provides a $20,000,000 line of credit. Such line of credit originally expired on December 31, 2001, but has been extended until June 30, 2004. Interest on advances under the credit facility accrues at 2% above US LIBOR. The Company can draw down on this credit facility for its financing requirements, upon approval by the Company’s Board of Directors and subject to approval by Asia IT (such approval not to be unreasonably withheld). The Company is restricted from borrowing funds, directly or indirectly, other than through the credit facility with Asia IT, without the consent of Asia IT. The availability of the credit facility reduces upon the Company’s sale of any of its investment assets. The amounts drawn and interest charged under this facility are repayable on demand or at the maturity of the facility.

 

During the six months ended June 30, 2003 the Company received $2,259,000 for the sale of 579,000 shares as per the oral agreement reached with Dr Nill under the vendor guarantee. These funds were used to reduce Asia IT’s facility with the Company.

 

On November 20, 2001, Asia IT entered into a £10,000,000 ($16,000,000) credit facility with MS-PLC.  Such facility matures in November 2004 and is secured by a lien on all assets of Medicsight.  Interest on outstanding amounts accrues at 2% above GBP LIBOR.  Pursuant to such credit facility, MS-PLC had covenanted to undertake a public offering of its ordinary shares in an amount not less than £25,000,000 not later than March 2002.  MS-PLC did not complete such an offering but the facility nevertheless remains in place. The loan is convertible into ordinary shares in MS-PLC on announcement of an Offer to Subscribe, Placing or other public offering of its ordinary shares, at the same price per share as the offering price. Due to the private offering being undertaken by MS-PLC, the loan is currently convertible.

 

At June 30, 2003, the Company had drawn down  $2,553,000 under the $20,000,000 facility with Asia IT, and MS-PLC had drawn down $1,180,000 under its £10,000,000 ($16,000,000) facility with Asia IT.

 

To the extent that additional capital is raised through the sale of equity or equity-related securities of the Company or its subsidiaries, the issuance of such securities could result in dilution to the Company’s stockholders. No assurance can be given, however, that the Company will have access to the capital markets in the future, or that financing will be available on acceptable terms to satisfy the Company’s cash requirements to implement its business strategies. If we are unable to access the capital markets or obtain acceptable financing, our results of operations and financial conditions could be materially and adversely affected.  We may be required to raise substantial additional funds through other means.   The products derived from our proprietary software, including the Medicsight™ system, are expected to account for

 

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substantially all of our revenues from operations in the foreseeable future.  Our technology has not yet been fully commercialized and we have not begun to receive any significant revenues from commercial operations.  We cannot assure our stockholders that our technology and products will be commercialized successfully, or that if so commercialized, that revenues will be sufficient to fund our operations.  If adequate funds are not available to us, we may be required to curtail operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies or products that we would not otherwise relinquish.

 

Critical Accounting Policies. In December 2001 and January 2002, the Securities and Exchange Commission requested that all registrants list their three to five most “critical accounting policies” in the Management’s Discussion and Analyses of Financial Condition and Results of Operations. The Securities and Exchange Commission indicated a “critical accounting policy” is one which is both important to the portrayal of the company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe that the following accounting policies fit the definition of critical accounting policies.

 

Impairment of Long-lived Assets and Long-lived Assets To Be Disposed of. The Company evaluates the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company’s assessment for impairment of an asset involves estimating the undiscounted cash flows expected to result from use of the asset and its eventual disposition. An impairment loss recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.

 

Impairment of Excess of Purchase Price Over Net Assets Acquired. The Company adopted SFAS No. 142 on January 1, 2002.  Under this standard, goodwill will no longer be amortized over its estimated useful life, but will be tested for impairment on an annual basis and whenever indicators of impairment arise.  Under the provisions of SFAS No. 142, any impairment loss identified upon adoption of this standard is recognized as a cumulative effect of a change in accounting principle.  Any impairment loss incurred subsequent to the initial adoption of SFAS No 142 is recorded as a charge to current period earnings.  Under the transitional provisions of SFAS No. 142, the Company’s goodwill was tested for impairment as of January 1, 2002.  The Company completed its annual impairment tests as of January 1, 2003 and no impairment was recorded.

 

Software Development Costs. Costs incurred in connection with the development of software products that are intended for sale are accounted for in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”. Costs incurred prior to technological feasibility being established for the product are expensed as incurred. For the Company, technical feasibility was established on completion of working models for MedicHeart, MedicLung and MedicColon software products in January 2003. Thereafter, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product. Amortization commences when the product is available for general release to customers.

 

Management regularly reviews the carrying value of its software development costs to assess whether or not there has been an impairment in its carrying value. When the carrying values of these assets exceed their estimated net recoverable amounts, an impairment provision is recorded.

 

Recent Accounting Pronouncements.  In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 specifies that freestanding financial instruments within its scope constitute obligations of the issuer and that, therefore, the issuer must classify them as liabilities. Such freestanding financial instruments include mandatorily redeemable financial instruments, obligations to repurchase the issuer’s equity shares by transferring assets, and certain obligations to issue a variable number of shares. SFAS No. 150 is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other

 

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instruments, SFAS No. 150 is effective at the beginning of the third quarter of 2003. The Company has determined that the statement will not have a material impact on the consolidated financial position, results of operations and cash flows of the Company.

 

Contractual Obligations

 

The Company has the following contractual obligations:

 

				Payments Due By Period
Contractual Obligations ($000’s)		Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long-Term Debt		3,250		3,250		—		—		—
Capital Lease Obligations		95		47		48		—		—
Operating Lease Obligations		739		131		262		262		84
Total		4,084		3,428		310		262		84

 

Item 3.                       Quantitative and Qualitative Disclosures About Market Risk

 

Interest Rate Risk

 

The Company’s exposure to market risk associated with changes in interest rates relates to its debt obligations. The Company has the following debt facilities all repayable on demand:

 

Debt Holder		Facility			Balance			Interest rate		At June 30
Nightingale Technologies Ltd		$	10,000,000		$	3,250,000		Nil		0.00	%
Asia IT Capital Investments Ltd		$	20,000,000		$	2,553,000		US Libor + 2%		3.20	%
Asia IT Capital Investments Ltd		$	16,000,000		$	1,180,000		GBP Libor + 2%		4.06	%

 

A hypothetical 100 basis point adverse movement in interest rates would increase interest cost by approximately $37,000 per annum assuming no further drawdowns or repayments are made.

 

Foreign Exchange Risk

 

The Company’s exposure to market risk associated with changes in exchange rates relate to its debt facility with Nightingale Technologies Ltd. This US$3.25m facility is translated into British Pounds as Medicsight Finance Ltd (“Finance”) accounts for its transactions in British Pounds and is therefore exposed to fluctuations between British Pounds and U.S. Dollar rates. A hypothetical 100 basis point adverse movement ($1.50 to $1.49 to £1.00) would increase the principal to repaid by  $16,000.

 

The Company holds limited cash balances in British Pounds so any adverse movements in the exchange rates are considered immaterial.

 

Item 4.                       Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain controls and procedures designed to ensure that information required to be disclosed in this report is recorded, processed, accumulated and communicated to our management, including our chief executive officer and our chief financial officer, to allow timely decisions regarding the required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives. At June 30, 2003, our management, with the participation of our chief executive officer and

 

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chief financial officer, carried out an evaluation of the effectiveness of the design and operation of these disclosure controls and procedures. Our chief executive officer and chief financial officer concluded that these disclosure controls and procedures are effective.

 

Changes in Internal Controls

 

During the quarter ended June 30, 2003 the Company made no significant changes in our internal controls or in other factors that could significantly affect these controls, nor did we take any corrective action, as the evaluation revealed no significant deficiencies or material weaknesses.

 

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PART II

 

Item 1.                       Legal Proceedings

 

There are currently no pending legal proceedings.

 

Item 2.                       Changes in Securities and Use of Proceeds

 

(a)                                  None.

 

(b)                                 None.