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 September 30, 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
MEDICSIGHT, INC.
(Exact name of registrant as specified in its charter)
|
Delaware |
|
13-4148725 |
|
(State or
other jurisdiction of |
|
(I.R.S.
Employer |
|
|
|
|
|
46 Berkeley Square, London, W1J 5AT, UNITED KINGDOM |
||
|
(Address of principal executive offices, including zip code) |
||
|
|
||
|
011- 44-20-7598-4070 |
||
|
(Registrant’s telephone number, including area code) |
||
|
|
||
|
|
||
|
(Former name, former address and former fiscal year, if changed since last report) |
||
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 November 9, 2004: 33,066,797 shares of Common Stock, par value $0.001 per share.
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 (£).
2
PART 1
FINANCIAL INFORMATION
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 September 30, 2004 are attached to this Report, commencing at page F-1.
BACKGROUND
We are a software development business, focused on the medical imaging market. Our core technology is about developing automatic detection and analytical tools for clinicians to improve their ability to diagnose and treat diseases.
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 Quarterly Report to “the Company”, “we” or “us” are to Medicsight, Inc., the Delaware corporation and subsidiaries, if the referenced event occurred on or after December 19, 2000 or to HTTP Technology, Inc., the Utah corporation and subsidiaries, if the referenced event occurred prior to December 19, 2000. On January 27, 2004 the Company increased its authorized share capital from 25,000,000 shares to 40,000,000 shares.
During the nine months ended September 30, 2004 the Company issued approximately 8,578,000 shares of restricted stock raising $22.85m (net of commissions) as part of a private placement.
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: http://www.medicsight.com/.
BUSINESS STRATEGY
We are developers of software technology for medical diagnostic applications such as Computer Aided Detection (“CAD”) and Computer Assisted Reader (“CAR”) software products in differing business models. We have five principal operating subsidiaries: Medicsight PLC (“MS-PLC”), Medicsight Asset Management Limited (“MAM”), Lifesyne UK Limited (“Lifesyne UK”), Medicsight USA, Inc (“MS-US”) (previously Lifesyne US) and Medicsight International Limited (“MIL”).
MS-PLC. Our majority-owned subsidiary, MS-PLC, is currently developing automatic detection and analytical tools for clinicians to improve their ability to diagnose and treat diseases. At September 30, 2004, the Company owned 70,677,300 ordinary shares in MS-PLC, constituting 81.8% of the outstanding shares.
Lifesyne. Lifesyne, a wholly owned subsidiary of MS-PLC, 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, a wholly owned subsidiary of MS-PLC, 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
3
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), 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.
MIL. MIL (incorporated in Gibralter), a wholly owned subsidiary of MS-PLC, was established to co-ordinate operations outside the United States of America and Europe and is based in Geneva, Switzerland. It is currently establishing a further office in China.
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 other systems 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. Our technology is equally applicable to Magnetic Resonance Imaging (“MRI”) scanners and we have begun research into brain diseases with a leading global institution.
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 will not 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 MedicsightTM 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.
4
Refining our business strategy
Our aim is to become a leading developer of medical imaging and disease detection software. The key to reliable detection and to accurate measurement is accurate boundary identification of the region of interest. If the software does not distinguish the lesion from the wall tissue, it will not be able to reliably detect or measure abnormalities; this is where we have focused much of our development.
As data is crucial to the development, training and testing of our products; the more data we have the better the product development and therefore the final product. We have access to the world’s largest lung and colon scan databases. However, it’s not just quantity of data that counts, our databases include proven outcomes (cancers) and patient management histories so analyzing these will allow us to go beyond basic nodule or polyp detection.
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.
• Targeting commercially valuable applications where the accurate identification and measurement of abnormalities will lead to improved diagnosis and treatment of life threatening diseases.
• Developing an international network of medical specialists, to support product development, data acquisition and commercial delivery.
Medicsight Product Portfolio
Our products currently target 3 therapeutic areas, Colon, Lung and Heart. As well as developing the CAD software we are looking at developing and marketing CAR applications in the colon and lung arenas.
CAR is a “joint-read” software product that is being developed for reviewing CT lung and colon scans. These products are image analysis software tools that assist radiologists in evaluating lesions or nodules found during CT scans of the lung or colon. Unlike current “second-read” software, in which software is employed after radiologists have completed their reviews, joint-read software enables the radiologist to review “unfiltered” images side-by-side and simultaneously with software-enhanced regions of interest. For a radiologist reviewing up to 600 images from a single CT scan, the joint-read capability saves time and aids in the evaluation of nodules.
There is increasing evidence in all three areas that early detection may lead to improved life expectancy and this has been a core focus of our product development. However, our technology is applicable to many other diseases and we are already starting to plan for this.
In terms of clinical practice and therefore market segmentation, the products can be split between diagnostic treatment and screening;
Diagnostic or “Disease tracking” products; these are products designed for symptomatic patients to track disease progress and monitor treatment effectiveness. The primary applications in this area are Lung nodule tracking and Heart calcium scoring though the Company believes there will be a growing requirement for polyp tracking in the colon as CT colonography becomes more established
“Screening” products; for population screening of asymptomatic patients. There is much evidence to demonstrate that the early detection of colon, lung and heart disease leads to improved life expectancy. CAD CT will provide a cost effective solution in identifying these diseases early enough to significantly alter the economics of population screening programs in these areas.
5
Business Development
In October 2004, MS-PLC received clearance from the U.S. Food and Drug Administration (“FDA”) for its Colon CARTM product, an image analysis software tool designed to be used with CT colonography (“virtual colonoscopy”) to assist radiologists in searching for and measuring potential colorectal polyps. Virtual colonoscopy uses a CT scanner to generate both two-dimensional and three-dimensional views of inside of the colon, as opposed to traditional colonoscopy, in which a viewing instrument is inserted into the bowel. Colon cancers most often start when malignant cells form within polyps attached to the inner surface of the large bowel. Detection and removal of these polyps can prevent them from becoming cancerous.
Medicsight Colon CARTM works by using MS-PLC’s CAR technology to deploy a series of filters against image data derived from CT colonographies. These filters highlight spherical areas of the image as small as 5 mm or the size of a small pea, which could be potential polyps. The radiologist is also able to manually highlight any irregularities for closer inspection. Once suspect polyps are found, the software can precisely identify the boundaries and features and show them in 3D with a volume measurement, diameter, shape and location. This allows the radiologist to accurately review and track any growth in the polyps.
In July 2004, MS-PLC received clearance from the FDA and European CE certification for its Lung CARTM software product, an image analysis software tool that assists radiologists in evaluating lesions or nodules found during CT scans of the lung. MS-PLC’s Lung CARTM is the first “joint-read” software available for CT lung scans.
Lung CARTM works by deploying a series of filters against the image data derived from CT scans. The software has a number of automatic and manual measurement tools to aid diagnosis, including 3D volume measurement and the ability to review follow up scans and doubling times.
The Company’s heart product, MedicHeart received FDA approval in November 2003. MedicHeart is a software application for annotating MSCT scans of the heart used by Radiologists to identify coronary artery calcium (“CAC”). The reason that this software product is superior to other products in its category is due to its extensive segmentation capabilities, which enable the radiologist to accurately extract the CAC boundary and therefore accurately characterise (measure) it. This means that the Radiologist can accurately track CAC growth/regression.
Operationally, we aim to keep expanding our databases to keep enhancing our current product areas and increasingly refine our diagnostic and treatment capabilities.
Commercially, we aim to sign up one or more distribution partners. We commenced building relationships with third party distributors at the end of 2003 and already we have established strong levels of interest amongst both picture archivers (“PACS”) software companies and CT hardware manufacturers. We will not go down the route of a direct sales force as we wish to work with the major players in the medical market who share our vision of an integrated range of “intelligent” software products. MS-PLC is also reviewing other potential distribution channels including the internet.
We are actively talking to a number of these companies at the moment. As we finalize development of a number of products over the coming months and complete their validation studies, we aim to be in closing discussions by end of the year.
International Advisory Board
As the Company’s strategy evolved, in particular, following the decision to concentrate our efforts on software development and international product distribution, we have acted to align our medical advisory mechanisms to the new circumstances. The Company has therefore set up three International Advisory Boards (“IAB”). The IABs have recruited and will continue to recruit individuals with the relevant
6
expertise to become members and encourage the involvement of the radiologists undertaking beta testing of our products, providing data for software development and participating in our scientific program.
Some members of the original Medical Board have accepted appointments to the new IABs. New members will include persons with relevant expertise from the United States, Germany, France, Italy, and Japan. The IABs are co-chaired by Dr. Costello, who reports back to the MS-PLC Board; however, much of the scientific advice and leadership will be provided through a co-chairman, chosen from the IAB members.
Terms of Reference of the International Advisory Board
The IABs will meet twice a year and fulfill the following roles:
• Advise on the development and application of Medicsight CT image analysis software in the territories represented.
• Provide links to users of CT image analysis systems in their respective territories.
• Assist in investor relations on an international basis.
• Advise on, and participate in, clinical development programs for the Company’s software.
• Act as advisors in relation to regulatory submissions for the Company’s products.
• Advise on sources of library data (CT scans) to support training and development of the Company’s software.
Objectives of the International Advisory Board
The objectives of the meetings may be varied from time-to-time, as agreed with MS-PLC, but will include the following:
• Ensure that members have a full understanding of the Medicsight technology and are enthused to participate in its development and application, both locally and internationally.
• Ensure that the clinical development program is compatible with local clinical practice.
• Ensure that the clinical development program is compatible with local regulatory guidelines.
• Obtain insight into local issues with respect to marketing of the Company’s products.
Risk Factors
We cannot assure you that the Company will be successful in commercializing the Medicsight™ system, or if such system is commercialized, that its use will be profitable to the Company. 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.
The Company does not believe that there is currently any comparable system that is competitive with 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.
7
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 groups and organizations, such as software companies in the medical imaging field, scanner manufacturers, screening companies and other healthcare providers, that have an interest in developing a competitive offering to the MedicsightTM system. In addition these competitors may have significantly greater resources than the Company. 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 develop will not have a competitive edge versus the MedicsightTM system.
Other Risks. The Company’s ability to deliver the software could be hindered by such risks as the loss of key personnel, the patents being successfully challenged or credit facilities reduced or called in.
RESULTS OF OPERATIONS
Revenues. For the nine months ended September 30, 2004 and the nine months ended September 30, 2003, the Company’s gross revenues from operations were $399,000 and $142,000, respectively. For the quarter ended September 30, 2004 and the quarter ended September 30, 2003, the Company’s gross revenues from operations were $111,000 and $88,000, respectively. The Company’s revenue in the nine months ended September 30, 2004 and 2003 were derived from the Company’s Lifesyne™ scanning operations.
Selling, General and Administrative Expenses. The Company’s selling, general and administrative expenses for the nine months and quarter ended September 30, 2004, were $9,027,000 and $2,917,000 respectively as compared to $7,192,000 and $2,353,000 respectively for the nine months and quarter ended September 30, 2003.
Professional fees, including consulting services, were $1,643,000 and $841,000 for the nine months and quarter ended September 30, 2004 as compared to $877,000 and $309,000 respectively for the nine months and quarter ended September 30, 2003. In the nine months and quarter ended September 30, 2004 salaries and directors’ compensation was $4,516,000 and $1,759,000 respectively, service charges and rates for property leasing were $391,000 and $120,000 respectively, and rent was $819,000 and $281,000 respectively. In the nine months and quarter ended September 30, 2003, salaries and directors’ compensation was $3,940,000 and $1,110,000 respectively, service charges and rates for property leasing was $373,000 and $106,000 respectively, and rent was $460,000 and $144,000 respectively.
The primary components of the increased selling, general and administrative expenses for the nine months and quarter ended September 30, 2004 were increases in staff costs, professional fees, marketing and regulatory costs as the Company initiated its various marketing strategies.
Research and Development cost. The Company’s research and development cost for the nine months and quarter ended September 30, 2004, was $2,221,000 and $701,000 respectively as compared to $1,500,000 and $516,000 for the nine months and quarter ended September 30, 2003 respectively. The Company’s research and development costs are comprised of staff and consultancy costs expensed on the Medicsight™ system.
8
Impairment Loss of Investment. For the nine months and quarter ended September 30, 2004, the Company incurred an impairment loss on investments of $70,000 relating to the impairment in the carrying value of Eurindia PLC (“Eurindia”) based on Eurindia’s management’s assessment of the value of its portfolio at $0.61 per share.
For the nine months and quarter ended September 30, 2003, the Company incurred an impairment loss on investments of $95,000 relating to the impairments in the carrying value of Eurindia and Strategic Intelligence PLC (“SI-PLC”). Eurindia was impaired by $59,000 based on Eurindia’s management’s assessment of the value of its portfolio at $0.72 per share. Additionally the Company fully impaired its investment in SI-PLC, $36,000, as the Company was unable to obtain any information on or representations from SI-PLC as to the fair value.
Net Loss and Net Loss per Share. Net loss was $10,232,000 and $3,495,000 for the nine months and quarter ended September 30, 2004 compared to a net loss of $7,139,000 and $2,015,000 for the nine months and quarter ended September 30, 2003. Net loss per share for the nine months and quarter ended September 30, 2004 was $0.34 and $0.10 respectively, based on weighted average shares outstanding of 30,157,023 and 33,104,194 respectively, compared to a net loss per share of $0.33 and $0.09 for the nine months and quarter ended September 30, 2003, based on weighted average shares outstanding of 21,680,820 and 22,709,538 respectively.
The increase in net losses for the quarter and nine months to September 30, 2004 as compared to the quarter and nine months to September 30, 2003 are due to increases in selling, general and administrative expenses and research and development costs.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital. At September 30, 2004, the Company had $10,167,000 in current assets. Cash and cash equivalents amounted to $8,814,000. Current liabilities were $2,067,000 at September 30, 2004. At December 31, 2003, the Company had $2,144,000 in current assets and cash and cash equivalents amounted to $845,000. Current liabilities were $6,540,000 at December 31, 2003. Working capital surplus/(deficit) at September 30, 2004 was $8,100,000, as compared to $(4,396,000) at December 31, 2003. The ratio of current assets to current liabilities was 4.92 to 1.0 at September 30, 2004 as compared to 0.33 to 1.0 at December 31, 2003. The increase is primarily due to the increase in cash and cash equivalents resulting from funds received in the Company’s private offering and repayment of the Company’s line of credit with Asia IT.
Net Increase in Cash and Cash Equivalents. During the nine months ended September 30, 2004, the Company’s cash and cash equivalents increased by $7,969,000. This increase was primarily the result of cash flows received from shares issued by the Company in excess of the net cash used in operating and investing activities and repayments of debt. The Company used net cash of $11,506,000 in operations. The Company received net cash of $19,728,000 in financing activities and used $234,000 in investing activities.
Net Cash Used in Operations. The use of cash in operations of $11,506,000 in the nine months ended September 30, 2004, was attributable to the Company’s relatively minimal revenues at the same time that the Company incurred significant operating and software research and development costs. These significant costs included professional fees, salaries and director compensation, marketing, regulatory costs and property service charges and rent. The Company used cash in operations in the nine months ended September 30, 2003 of $9,122,000.
Net Cash Used in Investing Activities. In the nine months ended September 30, 2004, the Company had a net cash outflow from investing activities of $234,000. The Company used these funds to purchase additional fixed assets. In the nine months ended September 30, 2003 the Company had a net cash outflow from investing activities of $1,230,000. The Company used the funds to purchase additional fixed assets.
9
Net Cash Provided by Financing Activities. In the nine months ended September 30, 2004, the Company had a net cash inflow from financing activities of $19,728,000. The funds received in the nine months ended September 30, 2004, consisted of $22,851,000 from the Company’s private offerings of which $2,880,000 was used to repay our debt facilities with Asia IT and the bank overdraft of $196,000 was also repaid. For the nine months ended September 30, 2003, the Company had a net cash inflow from financing activities of $11,744,000. The funds received consisted of $7,100,000 received from the private offering of the Company’s stock, $2,696,000 received from the private offering of MS-PLC stock and $2,827,000 received under a vendor guarantee. The Vendor Guarantee arose from the acquisition of Core Ventures Limited (“Core”) in September 2000 and relates to an oral agreement between the Company and Dr Nill, that the proceeds of the sale of Dr Nill’s 1,195,000 shares in the Company would be remitted to the Company under the terms of the Vendor Guarantee.
Stockholders’ Equity. The Company’s stockholders’ equity at September 30, 2004 was $23,054,000, including an accumulated deficit of $(173,700,000), as compared to $10,489,000 at December 31, 2003, including an accumulated deficit of $(163,468,000). Additional paid-in capital was $196,652,000 and $173,810,000, at September 30, 2004 and December 31, 2003 respectively. The increase in stockholders’ equity was a result of an increase in additional paid-in capital of $22,842,000 resulting from the placement of the Company’s stock offset by an increase in accumulated deficit of $10,232,000.
Additional Capital. The Company may require additional capital during its fiscal years ending December 31, 2004 and 2005 to implement its business strategies, including cash for payment of increased operating expenses such as salaries for additional employees. Such additional capital may be raised through additional public or private equity offerings, 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 that provides a $20,000,000 line of credit. Such line of credit originally expired on December 31, 2001, but has been extended until December 31, 2005. 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.
On November 20, 2001, Asia IT entered into a £10,000,000 ($18,000,000) credit facility with MS-PLC. Such facility matures in November 2005 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 ($45,000,000) 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 September 30, 2004, the Company had not drawn down any funds under the $20,000,000 facility with Asia IT, and MS-PLC had not drawn down any funds under its £10,000,000 ($18,000,000) 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
10
derived from our proprietary software, including the Medicsight™ system, are expected to account for 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
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.
Revenue Recognition. We expect to earn our revenue primarily from software licenses and related services. Our revenue is recognized in accordance with Statement of Position 97-2 (SOP 97-2), as amended by Statement of Position 98-9. Currently the Company’s revenues derive from its scanning services operated by LifesyneTM. Scan revenue is recognized when the service is delivered.
The recognition of revenues from software licenses and related services will require more difficult and complex judgments. The terms of the license contract, long-term (over 12 months), short-term, cancelable, non-cancelable or per scan for example will affect the recognition of revenues from services such as up-front fees (for example installation, activation and up-front license fees), on-going license fees, upgrade fees, termination fees and maintenance fees. Where fees are received prior to any service being delivered the fees are deferred until the related service has been delivered successfully and the revenue can then be recognized. Again if there are fees that relate to any “milestone” agreements these are deferred until the “milestone” has passed and then the revenue can be recognized.
The Company believes that the accounting estimates related to the recognition of revenue and establishment of reserves for uncollectable amounts in the results of operations is a “critical accounting estimate” because: (1) it requires management to make assumptions about future collections, and (2) the impact of changes in actual performance versus these estimates on the accounts receivable balance reported on our consolidated balance sheets and the results reported in our consolidated statements of operations could be material. Further the Company has no history of uncollectable amounts and therefore must initially look to the estimates for the industry or particular companies that the management feels operate in a similar environment in addition to any current market indicators about general economic conditions that might impact the collectability of accounts.
Research and Development. 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. Technological feasibility is established upon completion of a detail program design or, in its absence, completion of a working model. 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.
The Company decided that capitalizing such expenditure was inappropriate because of the difficulty in assigning costs accurately to the various software products and versions being developed as technical and
11
development staff are moved from product to product and version to version on a regular basis. Therefore the Company has decided to expense all research and development costs. The Company’s research and development costs are comprised of staff and consultancy costs expensed on the Medicsight™ system.
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.
Calculating the estimated fair value of the asset involves significant judgments and a variety of assumptions. Judgments that the Company makes concerning the intangible acquired include assessing time and cost involved for development, time to market, risks of regulatory failure or obsolescence (due to market, environmental or technological advances for example). For calculating fair value based on discounted cash flows, we forecast future operating results and future cash flows, which includes long-term forecasts of revenue growth, gross margins and capital expenditures.
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.
In connection with the adoption of SFAS No. 142, we performed our initial impairment analysis of goodwill and indefinite-lived intangible assets as of January 1, 2002. The implementation involved the determination of the fair value of each reporting unit, where a reporting unit is defined as an operating segment or one level below.
We determined the fair value of each significant reporting unit based on discounted forecasts of future cash flows. Judgments and assumptions are required in the preparation of the estimated future cash flows, including long-term forecasts of revenue growth, gross margins and capital expenditures.
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN No. 46), which addresses consolidation by business enterprises of variable interest entities (“VIEs”). FIN No.46 is applicable immediately for VIEs created after January 31, 2003 and are effective for reporting periods ending after December 15, 2003, for VIEs created prior to February 1, 2003. In December 2003, the FASB published a revision to FIN 46 (“FIN 46R”) to clarify some of the provisions of the interpretation and to defer the effective date of implementation for certain entities. Under the guidance of FIN 46R, public companies that have interests in VIE’s that are commonly referred to as special purpose entities are required to applythe provisions of FIN 46R for periods ending after December 15, 2003. A public company that does not have any interests in special purpose entities but does have a variable interest in a VIE created before February 1, 2003, must apply the provisions of FIN 46R by the end of the first interim or annual reporting period ending after March 14, 2004. The adoption of FIN No. 46 did not have an effect on the consolidated financial statements.
12
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 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Capital Lease Obligations |
|
$ |
334 |
|
$ |
99 |
|
$ |
179 |
|
$ |
56 |
|
$ |
— |
|
|
Operating Lease Obligations |
|
1,841 |
|
500 |
|
1,249 |
|
92 |
|
— |
|
|||||
|
Total |
|
$ |
2,175 |
|
$ |
599 |
|
$ |
1,428 |
|
$ |
148 |
|
$ |
— |
|
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, which are all repayable on demand:
|
Debt Holder |
|
Facility |
|
Draw Down |
|
Interest rate |
|
At September 30 |
|
||
|
|
|
|
|
|
|
|
|
||||