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OMB Number: 3235-0416 |
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Washington, D.C. 20549 |
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FORM 10-Q |
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(Mark One)
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the quarterly period ended June 30, 2003 |
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the transition period from to |
Commission file number 0-26886
MEDICSIGHT, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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13-4148725 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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46 Berkeley Square, London, W1J 5AT, UNITED KINGDOM |
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(Address of principal executive offices, including zip code) |
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(011) 44-20-7598-4070 |
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(Registrant’s telephone number, including area code) |
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(Former name, former address and former fiscal year, if changed since last report) |
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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
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
9
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
10
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.
11
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.
(c) None.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On July 31, 2003, an amendment to the Certificate of Incorporation, reducing the number of shares the Company is authorized to issue from 100,000,000 shares to 25,000,000 shares was approved by a majority of the shareholders of the Company.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
|
|
(a) |
|
Exhibits |
|
|
|
|
|
|
|
3 |
|
Composite Certificate of Incorporation, as amended and currently in effect (incorporated by reference to Exhibit 3 to the Company’s Report on Form 8-K filed August 5, 2003). |
|
|
|
|
|
|
|
31.1 |
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer - filed herewith). |
|
|
|
|
|
|
|
31.2 |
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer - filed herewith). |
|
|
|
|
|
|
|
32.1 |
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer - filed herewith). |
|
|
|
|
|
|
|
32.2 |
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer - filed herewith). |
|
|
|
|
|
|
|
(b) |
|
Reports on Form 8-K |
There were no reports on Form 8-K filed during the period April 1, 2003 through June 30, 2003. The Company filed a Form 8-K on August 5, 2003, announcing a reduction in the number of shares the Company is authorized to issue from 100,000,000 shares to 25,000,000 shares.
12
MEDICSIGHT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AS OF AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
2003
|
Consolidated Balance Sheets as of June 30, 2003 (Unaudited) and December 31, 2002 (Audited) |
F2 |
|
|
|
|
F3 |
|
|
|
|
|
F4 |
|
|
|
|
|
F5 |
|
|
|
|
|
F6-F11 |
F-1
MEDICSIGHT, INC. AND SUBSIDIARIES
(In $ thousands)
|
|
|
June 30, 2003 |
|
December 31, 2002 |
|
||
|
|
|
(unaudited) |
|
(audited) |
|
||
|
ASSETS |
|
|
|
|
|
||
|
CURRENT ASSETS: |
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
— |
|
$ |
1,778 |
|
|
Accounts receivable |
|
13 |
|
1 |
|
||
|
Other receivables |
|
51 |
|
1 |
|
||
|
Prepaid expenses |
|
554 |
|
222 |
|
||
|
Sales tax receivable |
|
512 |
|
282 |
|
||
|
Total current assets |
|
1,130 |
|
2,284 |
|
||
|
|
|
|
|
|
|
||
|
PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation of $644 and $480, respectively |
|
1,940 |
|
1,416 |
|
||
|
|
|
|
|
|
|
||
|
OTHER ASSETS, software development costs, at cost |
|
1,249 |
|
— |
|
||
|
|
|
|
|
|
|
||
|
INVESTMENTS, at cost |
|
525 |
|
525 |
|
||
|
|
|
|
|
|
|
||
|
SECURITY DEPOSITS |
|
781 |
|
5 |
|
||
|
|
|
|
|
|
|
||
|
INTANGIBLE ASSET, at cost, net of accumulated amortization of $11,235 and $8,988, respectively |
|
11,235 |
|
13,482 |
|
||
|
|
|
|
|
|
|
||
|
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED |
|
100,119 |
|
100,119 |
|
||
|
|
|
|
|
|
|
||
|
Total assets |
|
$ |
116,979 |
|
$ |
117,831 |
|
|
|
|
|
|
|
|
||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
||
|
CURRENT LIABILITIES: |
|
|
|
|
|
||
|
Accounts payable |
|
$ |
3,465 |
|
$ |
2,468 |
|
|
Accrued expenses |
|
623 |
|
704 |
|
||
|
Accrued professional expenses |
|
196 |
|
191 |
|
||
|
Bank overdraft |
|
88 |
|
— |
|
||
|
Short-term debt |
|
6,983 |
|
5,582 |
|
||
|
Total current liabilities |
|
11,355 |
|
8,945 |
|
||
|
CAPITAL LEASE |
|
95 |
|
74 |
|
||
|
Total liabilities |
|
$ |
11,450 |
|
$ |
9,019 |
|
|
|
|
|
|
|
|
||
|
STOCKHOLDERS’ EQUITY: |
|
|
|
|
|
||
|
Common stock, $0.001 par value, 25,000,000 shares authorized, 21,155,189 and 21,154,874 shares issued and outstanding, respectively |
|
21 |
|
21 |
|
||
|
Additional paid-in capital |
|
183,931 |
|
182,897 |
|
||
|
Vendor guarantee |
|
(1,664 |
) |
(3,227 |
) |
||
|
Cumulative foreign currency translation adjustment |
|
(98 |
) |
290 |
|
||
|
Accumulated deficit |
|
(77,298 |
) |
(72,174 |
) |
||
|
Total stockholders’ equity |
|
104,892 |
|
107,807 |
|
||
|
|
|
|
|
|
|
||
|
MINORITY INTEREST |
|
637 |
|
1,005 |
|
||
|
|
|
105,529 |
|
108,812 |
|
||
|
Total liabilities and stockholders’ equity |
|
$ |
116,979 |
|
$ |
117,831 |
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-2
MEDICSIGHT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In $ thousands, except per share amounts)
|
|
|
Three Months |
|
Three Months |
|
||
|
|
|
(unaudited) |
|
(unaudited) |
|
||
|
|
|
|
|
|
|
|
|
|
REVENUES |
|
$ |
44 |
|
$ |
21 |
|
|
|
|
|
|
|
|
||
|
EXPENSES: |
|
|
|
|
|
||
|
Selling, general and administrative charges |
|
3,592 |
|
2,609 |
|
||
|
Research and development cost |
|
— |
|
355 |
|
||
|
Impairment of investment |
|
— |
|
30 |
|
||
|
Impairment of vendor guarantee |
|
(697 |
) |
6,720 |
|
||
|
|
|
2,895 |
|
9,714 |
|
||
|
|
|
|
|
|
|
||
|
Operating loss |
|
(2,851 |
) |
(9,693 |
) |
||
|
|
|
|
|
|
|
||
|
OTHER INCOME: |
|
|
|
|
|
||
|
Interest and other income |
|
— |
|
3 |
|
||
|
|
|
|
|
|
|
||
|
Net Loss before minority interest |
|
(2,851 |
) |
(9,690 |
) |
||
|
|
|
|
|
|
|
||
|
MINORITY INTEREST |
|
405 |
|
441 |
|
||
|
|
|
|
|
|
|
||
|
Net loss |
|
$ |
(2,446 |
) |
$ |
(9,249 |
) |
|
|
|
|
|
|
|
||
|
PER SHARE DATA: |
|
|
|
|
|
||
|
Basic and diluted loss per share |
|
$ |
(0.12 |
) |
$ |
(0.48 |
) |
|
|
|
|
|
|
|
||
|
Weighted average number of common shares outstanding |
|
21,155,189 |
|
19,289,361 |
|
||
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
MEDICSIGHT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In $ thousands, except per share amounts)
|
|
|
Six Months |
|
Six Months |
|
||
|
|
|
(unaudited) |
|
(unaudited) |
|
||
|
|
|
|
|
|
|
|
|
|
REVENUES |
|
$ |
54 |
|
$ |
37 |
|
|
|
|
|
|
|
|
||
|
EXPENSES: |
|
|
|
|
|
||
|
Selling, general and administrative charges |
|
6,569 |
|
4,977 |
|
||
|
Research and development cost |
|
— |
|
554 |
|
||
|
Impairment of investment |
|
— |
|
30 |
|
||
|
Impairment of vendor guarantee |
|
(697 |
) |
6,720 |
|
||
|
|
|
5,872 |
|
12,281 |
|
||
|
|
|
|
|
|
|
||
|
Operating loss |
|
(5,818 |
) |
(12,244 |
) |
||
|
|
|
|
|
|
|
||
|
OTHER INCOME: |
|
|
|
|
|
||
|
Interest and other income |
|
— |
|
3 |
|
||
|
|
|
|
|
|
|
||
|
Net Loss before minority interest |
|
(5,818 |
) |
(12,241 |
) |
||
|
|
|
|
|
|
|
||
|
MINORITY INTEREST |
|
694 |
|
692 |
|
||
|
|
|
|
|
|
|
||
|
Net loss |
|
$ |
(5,124 |
) |
$ |
(11,549 |
) |
|
|
|
|
|
|
|
||
|
PER SHARE DATA: |
|
|
|
|
|
||
|
Basic and diluted loss per share |
|
$ |
(0.24 |
) |
$ |
(0.60 |
) |
|
|
|
|
|
|
|
||
|
Weighted average number of common shares outstanding |
|
21,155,032 |
|
19,289,361 |
|
||
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
MEDICSIGHT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In $ thousands)
|
|
|
Six Months |
|
Six Months |
|
||
|
|
|
(unaudited) |
|
(unaudited) |
|
||
|
|
|
|
|
|
|
||
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
||
|
Net loss |
|
$ |
(5,124 |
) |
$ |
(11,549 |
) |
|
Adjustments to reconcile net loss to net cash used in operating activities |
|
|
|
|
|
||
|
Depreciation |
|
164 |
|
115 |
|
||
|
Amortization of intangible assets |
|
2,247 |
|
2,247 |
|
||
|
Impairment of investment |
|
— |
|
30 |
|
||
|
(Write back)/Impairment of vendor guarantee |
|
(697 |
) |
6,720 |
|
||
|
Minority interest in net earnings of subsidiary |
|
(694 |
) |
(693 |
) |
||
|
Changes in operating assets and liabilities |
|
|
|
|
|
||
|
(Increase)/decrease in accounts receivable |
|
(12 |
) |
3 |
|
||
|
(Increase)/decrease in prepaid expenses and other current assets |
|
(382 |
) |
144 |
|
||
|
(Increase)/decrease in sales tax receivable |
|
(230 |
) |
23 |
|
||
|
(Increase) in security deposits |
|
(743 |
) |
(1 |
) |
||
|
Increase/(decrease) in accounts payable |
|
970 |
|
(300 |
) |
||
|
(Decrease)/increase in accrued expenses |
|
(81 |
) |
379 |
|
||
|
Increase in accrued professional expenses |
|
6 |
|
10 |
|
||
|
Net cash used in operating activities |
|
$ |
(4,576 |
) |
$ |
(2,872 |
) |
|
|
|
|
|
|
|
||
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
||
|
Purchase of fixed assets |
|
(526 |
) |
(29 |
) |
||
|
Software development costs |
|
(1,249 |
) |
— |
|
||
|
Net cash used in investing activities |
|
$ |
(1,775 |
) |
$ |
(29 |
) |
|
|
|
|
|
|
|
||
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
||
|
Repayments on capitalized lease |
|
(34 |
) |
(19 |
) |
||
|
Increase of bank overdraft |
|
88 |
|
— |
|
||
|
Increase of debt |
|
1,401 |
|
644 |
|
||
|
Shares in Medicsight issued for cash |
|
919 |
|
5,232 |
|
||
|
Funds received under vendor guarantee |
|
2,259 |
|
— |
|
||
|
Net cash provided by financing activities |
|
$ |
4,633 |
|
$ |
5,857 |
|
|
|
|
|
|
|
|
||
|
Effects of exchange rates on cash and cash equivalent |
|
(60 |
) |
2 |
|
||
|
|
|
|
|
|
|
||
|
NET (DECREASE)/INCREASE IN CASH |
|
(1,778 |
) |
2,959 |
|
||
|
|
|
|
|
|
|
||
|
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
1,778 |
|
203 |
|
||
|
|
|
|
|
|
|
||
|
CASH & CASH EQUIVALENTS, END OF PERIOD |
|
$ |
— |
|
$ |
3,161 |
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-5
MEDICSIGHT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Formation and Business of the Company
Medicsight, Inc. (formerly HTTP Technology, Inc.) and its subsidiaries are collectively referred to in this Report as the “Company”. Our business objective is to conceive, develop and commercialize innovative medical applications 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 reincorporation 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, 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. As of July 31, 2003 we are authorized to issue 25,000,000 shares of Common Stock.
In April 2000, we acquired Radical Technology PLC, now known as HTTP Software PLC (“Software”), which provided us with a business dedicated to systems integration and software development. In December 2000, we acquired Nightingale Technologies Ltd, now known as HTTP Insights Ltd (“Insights”), which provided us with proprietary technology called a Stochastic Perception Engine. A Stochastic Perception Engine processes and classifies unstructured data into meaningful outputs, enabling it to be viewed, interpreted or further manipulated by the user of the application. Similar technologies sit at the core of many of today’s major software applications. Our Stochastic Perception Engine is comprised of four principal modules: cluster analysis, statistical modeling, classification and prediction. This technology has the ability to offer unprecedented processing speed, accuracy and comprehensiveness of results when compared to existing data classification technologies. We believe that our Stochastic Perception Engine has significant potential uses in a wide variety of fields, including medical image analysis, the design of pharmaceuticals, environmental mapping, handwriting recognition, robotics and surveillance.
We have restructured our business to focus more closely on the medical imaging applications derived from our core technology. We have concluded the process of incorporating all 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 MedicsightTM system (our state-of-the-art digital disease detection software system) 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.
F-6
(2) Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared pursuant to the rules of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed on April 14, 2003. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the periods presented. All significant inter-company transactions have been eliminated in consolidation.
The results of operations presented for the six months ended June 30, 2003, are not necessarily indicative of the results to be expected for any other interim period or any future fiscal year.
(3) 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 would be reduced 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, MS-PLC entered into a £10,000,000 ($16,000,000) credit facility with Asia IT. 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.
F-7
(4) Short-term Debt
The Company acquired Insights in December 2000. At the time of such acquisition, Insights had outstanding $6,006,000 of long-term debt. This debt was part of the original loan of $10,000,000 that Insights owed to its parent company relating to the acquisition of patent applications for its Stochastic Perception Engine technology. The loan did bear interest at 2% above US LIBOR and is unsecured. All interest on the loan was forgiven prior to the principal being transferred to Medicsight Finance Ltd (“Finance”) on December 6, 2002. The principal of the loan does not mature until December 6, 2004 and is interest free. As of June 30, 2003 and December 31, 2002, the balance of this loan was $3,250,000. The terms of the loan note include a provision whereby the lender can require repayment of the principal by giving two months notice of demand. No notice has been given as of June 30, 2003 and management does not expect the notice to be given.
(5) Stockholders’ Equity
On December 30, 2002, the Company effected a 1-for-3 reverse split (the “Split”) of its Common Stock. As such, all share and per share information in the accompanying financial statements have been restated to reflect the Split. On July 31, 2003 the Company reduced its authorized share capital from 100,000,000 shares to 25,000,000 shares.
(6) Accounting for Stock Based Compensation
On March 20, 2003, the Board of Directors of MS-PLC approved a stock option plan for its employees and reserved 4,000,000 shares of its common stock for issuance upon exercise of options granted under this plan. On April 19, 2003, the Remuneration Committee of MS-PLC also approved the stock option plan and implemented it on April 30, 2003 by issuing options over 2,828,600 shares to employees of MS-PLC. At June 30, 2003 only 20% of the options issued were exercisable under the plan.
The Company has elected to adopt the disclosure only provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123”, and measures the cost for MS-PLC’s employee stock compensation plan by using the accounting methods prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees”, which allows that no compensation cost be recognized unless the exercise price of the options granted is greater than the fair market value of the Company’s stock at date of grant. Accordingly, no stock-based employee compensation cost is reflected in net income, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. SFAS No. 123, as amended by SFAS No. 148, requires disclosure of pro forma income and pro forma income per share as if the fair value based method had been applied in measuring compensation expense.
|
|
|
Three Months |
|
Six Months |
|
|
|
|
(unaudited) |
|
(unaudited) |
|
|
Net income as reported: |
|
(2,446 |
) |
(5,124 |
) |
|
|
|
|
|
|
|
|
Fair value method of stock based compensation |
|
(25 |
) |
(25 |
) |
|
|
|
|
|
|
|
|
Proforma net income |
|
(2,471 |
) |
(5,149 |
) |
|
|
|
|
|
|
|
|
Reported earnings per common share |
|
|
|
|
|
|
Basic and diluted |
|
(0.12 |
) |
(0.24 |
) |
|
|
|
|
|
|
|
|
Proforma earnings per common share |
|
(0.12 |
) |
(0.24 |
) |
|
Basic and diluted |
|
|
|
|
|
F-8
The fair values of options granted were estimated on the date of their grant using the Black-Scholes option pricing model based on the following assumptions:
|
Expected life, in years |
|
2 |
|
|
Risk-free interest rate |
|
3.5 |
% |
|
Volatility |
|
60 |
% |
|
Dividend yield |
|
0 |
% |
(7) Goodwill and Other Intangible Assets
Goodwill
The Company adopted SFAS No. 142 effective 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. The Company completed its impairment tests as of January 1, 2003 and no impairment was recorded. Prior to January 1, 2002, goodwill was amortized on a straight-line basis over 5 years.
Other Intangible Assets
The Company acquired an intangible asset from Insights consisting of technology valued at $22,470,000 during Fiscal 2000. Under SFAS No.142, this is considered an intangible asset with a definite life of 5 years. Therefore the value of the asset will be amortized on a straight-line basis over this period.
The carrying amount and accumulated amortization of acquired intangible assets follows:
|
|
|
Jan 1, 2003 |
|
June 30, 2003 |
|
||
|
|
|
|
|
|
|
||
|
Technology |
|
$ |
22,470,000 |
|
$ |
22,470,000 |
|
|
|
|
|
|
|
|
||
|
Accumulated amortization |
|
$ |
(8,988,000 |
) |
$ |
(11,235,000 |
) |
|
|
|
|
|
|
|
||
|
Total intangible assets, net |
|
$ |
13,482,000 |
|
$ |
11,235,000 |
|
The table below shows expected amortization expense for acquired intangible assets recorded as of January 1, 2002.
|
|
|
2003 |
|
2004 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Amortization expense ($ thousands) |
|
4,494 |
|
4,494 |
|
4,494 |
|
The above amortization expense forecast is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, impairment of intangible assets, accelerated amortization of intangible assets, and other events.
F-9
(8) Other Assets – Software Development Costs
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 has 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 capitalized comprise staff, consultants, regulatory and clinical trial costs specific to the three products.
Amortization will be provided based on the greater of the ratios that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or the straight line method over the estimated useful life of the product. Amortization will commence 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.
(9) Security Deposits
As MS-PLC occupies approximately 95% of 46 Berkeley Square it acquired the security deposit on the offices for cash from International Cellulose Company Ltd in February 2003. The value of the security deposit is £470,000 ($781,000) and is interest-bearing.
(10) Lease Commitments
The Company has entered into an operating lease for a scanner. Future minimum obligations under these lease arrangements are as follows:
|
For the year ending |
|
Operating |
|
Total |
|
|
|
|
$’000 |
|
$’000 |
|
|
2003 |
|
131 |
|
131 |
|
|
2004 |
|
131 |
|
131 |
|
|
2005 |
|
131 |
|
131 |
|
|
2006 |
|
131 |
|
131 |
|
|
2007 and thereafter |
|
215 |
|
215 |
|
(11) Major Customers
The Company’s revenue in the six months ended June 30, 2003 was derived from the Company’s Lifesyne™ scanning operations. During the six months June 30, 2002, the Company had two customers who represented a significant proportion of its revenues. The customers were Commonwealth Secretariat, which accounted for approximately 43% and Texaco Ltd., which accounted for approximately 57%. These revenues were derived from Software’s consulting and support services.
(12) Comprehensive Income
As of June 30, 2003 and for the six months and quarter then ended, comprehensive income is comprised of a net loss from operations and the net effect of foreign currency translation adjustments. This comprised a net loss of $5,124,000 and $2,446,000 and foreign currency translation adjustments of $388,000 and $375,000, resulting in comprehensive loss of $5,512,000 and $2,821,000, respectively.
F-10
(13) Contingent Liability
As discussed in the notes to the financial statements of our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (filed April 14, 2003), during 2001 and 2002 the Company transferred assets of two previously acquired UK subsidiaries, Insights and Software to other wholly owned UK subsidiaries in order to simplify the Company’s organizational structure.
As a result of the above, potential tax liabilities in both the US and UK arise. The Company is pursuing the necessary elections to mitigate any potential liability. Based on the current facts and circumstances the Company does not believe it probable that a significant tax liability will be incurred as a result of these past transactions.
F-11
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
MEDICSIGHT, INC. |
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|
|
|
||
|
|
|
||
|
|
By: |
/s/ SIMON ZUANIC |
|
|
|
Simon Zuanic |
||
|
|
Chief Executive Officer |
||
|
|
|
||
|
|
|
||
|
|
By: |
/s/ PAUL GOTHARD |
|
|
|
Paul Gothard |
||
|
|
Chief Financial Officer |
||
|
|
|
||
|
|
|
||
|
Date: August 13, 2003 |
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