UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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 March 31, 2004
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

 

 

 

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 May 10, 2004: 30,855,758 shares of Common Stock, par value $0.001 per share.

 

 

NOTE REGARDING AMENDMENT AND RESTATEMENT

 

During Fiscal 2003, the Company identified certain errors in its previously issued quarterly financial statements relating to the impairment of an intangible assets and the Company also revised its treatment of software development costs in the third quarter of Fiscal 2003.

 

As a result, the Company has restated its previously issued financial statements for the quarter ended March 31, 2003.  A summary of the significant effects of the restatements is set forth below.

 

 

MEDICSIGHT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Three months ended March 31, 2003			Three months ended March 31, 2003
		(as previously reported)			(as restated)
		$000’s			$000’s
REVENUES		$	9		$	9
EXPENSES:
Selling, general and administrative charges		2,976			1,929
Research and development cost		—			469
		2,976			2,398
Net loss before minority interest		(2,967		)	(2,389		)
MINORITY INTEREST		289			289
Net loss		$	(2,678	)	$	(2,100	)
PER SHARE DATA:
Basic and diluted loss per share		$	(0.13	)	$	(0.10	)
Weighted average number of common shares outstanding		21,154,874			21,154,874

 

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MEDICSIGHT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

 

		Three months ended March 31, 2003			Three months ended March 31, 2003
		(as previously reported)			(as restated)
		$000’s			$000’s
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(2,678	)	$	(2,100	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation		113			113
Amortization of intangibles		1,123			—
Minority interest in net loss of subsidiary		(289		)	(289		)
(Increase)/decrease in assets
Accounts receivable		(3		)	(3		)
Prepayments		(79		)	(79		)
VAT receivable		(33		)	(33		)
Security deposits		(743		)	(743		)
Increase/(decrease) in liabilities
Accounts payable		(166		)	(166		)
Accrued expenses		(9		)	(9		)
Accrued professional expenses		—			—
Net cash used in operating activities		(2,764		)	(3,309		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets		(576		)	(576		)
Software development costs		(545		)	—
Net cash used in investing activities		(1,121		)	(576		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations		(9		)	(9		)
Proceeds from MS-PLC sale of common stock		78			78
Increase in short term debt - related party		2,122			2,122
Net cash provided by financing activities		2,191			2,191
Effects of exchange rates on cash and cash equivalents		59			59
NET CHANGE IN CASH & CASH EQUIVALENTS		$	(1,635	)	$	(1,635	)
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD		1,778			1,778
CASH & CASH EQUIVALENTS, END OF PERIOD		$	143		$	143

 

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March 31, 2003

 

Research and Development.

 

During the first six months of 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 $545,000 in the three months ended March 31, 2003 under FAS 86. These costs capitalized comprised staff, consultants, regulatory and clinical trial costs specific to the three products.

 

Subsequently the Company decided that this accounting treatment was inappropriate because of the difficulty in assigning costs accurately to the various software products and versions being developed as technical and development staff are moved from product to product and version to version on a regular basis. The Company has decided to expend all research and development costs in Fiscal 2003. The Company’s research and development costs of $469,000 are comprised of staff and consultancy costs expensed on the Medicsight™ system. The regulatory and clinical trial charges of $76,000 are expensed in “Selling, general and administrative charges”.

 

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 was amortized on a straight-line basis over this period.

 

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.  During the third quarter of 2003 the Company reviewed the carrying value of the core technology acquired from Insights and decided that the core technology should be fully impaired.  This was based on the view that there were no further software applications apart from the medical imaging applications currently being developed that could be derived from the core technology. The Company further decided that the impairment should be recorded as at December 31, 2002. In the three months ended March 31, 2003 the Company had an amortization charge of $1,123,000 expensed in “Selling, general and administrative charges” relating to the fully impaired technology which is no longer applicable.

 

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NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of Medicsight, Inc and its consolidated subsidiaries (the “Company”) to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of revenue, gross margin, expenses, earnings or losses from operations, synergies or other financial items; any statements of the plans, strategies and objectives of management for future operations, including the execution of restructuring plans; any statement concerning developments, performance or industry rankings relating to products or services; any statements regarding future economic conditions or performance; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include the performance of contracts by suppliers, customers and partners; employee management issues; the difficulty of aligning expense levels with revenue changes; and other risks that are described herein, including but not limited to the specific risks areas discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of this report, and that are otherwise described from time to time in the Company’s Securities and Exchange Commission reports filed after this report. The Company assumes no obligation and does not intend to update these forward-looking statements.

 

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

 

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PART 1

 

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 March 31, 2004 are attached to this Report, commencing at page F-1.

 

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

 

BACKGROUND

 

Our business objective is to conceive, develop and commercialize innovative medical applications, such as computer-aided detection (“CAD”) of disease, derived from our core technology through our majority-owned subsidiary, Medicsight PLC (“MS-PLC”).

 

We were originally incorporated as a Utah corporation in 1977. On December 19, 2000, we entered into an Agreement and Plan of Merger with our 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 Annual Report to  “the Company”, “we” or “us” refer to Medicsight, Inc., the Delaware corporation and subsidiaries, if the event occurred on or after December 19, 2000 or to HTTP Technology, Inc., the Utah corporation and subsidiaries, if the event occurred prior to December 19, 2000.  On July 31, 2003 the Company reduced its authorized share capital from 100,000,000 shares to 25,000,000 shares. On January 27, 2004 the Company increased its authorized share capital from 25,000,000 shares to 40,000,000 shares.

 

During the quarter ended March 31, 2004 the Company issued approximately 5,126,000 restricted shares of stock raising $13.89m as part of a private placement. Subsequent to March 31, 2004 the Company has further issued approximately 1,241,000 restricted shares of stock raising $3.35m.

 

Our business is focused solely on the medical imaging applications derived from our core technology.  We have concluded the process of incorporating all research, software development, and 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^TM system (our state-of-the-art digital disease detection software system comprising MedicColon^TM, MedicHeart^TM, and MedicLung^TM) 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.

 

On October 28, 2002, the Company’s name was changed from HTTP Technology, Inc. to Medicsight, Inc.

 

The Company maintains its corporate offices at 46 Berkeley Square, London, W1J 5AT, United Kingdom, telephone +44-20-7598-4070, facsimile: +44-20-7598-4071, Internet address: www.medicsight.com.

 

BUSINESS STRATEGY

 

We are developers of software technology for medical diagnostic applications and provide medical diagnostic services (Computer Aided Detection - “CAD” applications) 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 Medicsight US, Inc (“MS-US”) (previously Lifesyne US).

 

6

 

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 March 31, 2004, the Company owned 68,677,300 ordinary shares in MS-PLC, constituting 81.4% of the outstanding shares.

 

Lifesyne.  Lifesyne is a wholly owned subsidiary of MS-PLC that was established in September 2002 for the purpose of providing a branded operating entity for the United Kingdom and Ireland markets. Lifesyne is the entity that operates the scanning centers located in the United Kingdom. As the Company has decided to focus on the delivery of the software no further development of the Lifesyne strategy is envisaged beyond the Company’s current scanning requirements.

 

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.

 

MS-US. MS-US (previously Lifesyne US) is also a wholly owned subsidiary of MS-PLC was established to co-ordinate operations in the United States of America and is based in Nashville, Tennessee.

 

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 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 opened Lifesyne™’s flagship center in Westminster, London in 2003. Due to the Company concentrating on the development of the software products it has concluded that its development of the Lifesyne™ Scanning Center concept cannot be rolled out further. It represents one potential model, which will be available for licensees who see a commercial opportunity to package the concept together with our Medicsight^TM software.  We are now prioritizing Lifesyne™ on the rapid acquisition of patient scan data necessary to enable our expert software to hone its characterization skills.  In this role, we have reappraised our capacity requirements and have decided to focus product development activity on the flagship center in Westminster, which will act more as a research institution.  This means the center at Ravenscourt is currently surplus to our core requirements and we are seeking a partner to operate the center as a commercial CT scanning business.

 

7

 

Refining our business strategy

 

Our aim is to become a leading developer of CAD software in medical imaging.  The Company’s strategy is based upon the following priorities:

 

•                  Focusing our resources on developing industry leading pattern recognition software in the medical imaging market.