4.3 The development of AccuMap 2
119 There is a factual dispute between the parties as to how far the development of the AccuMap 2 device progressed. ObjectiVision contends in closing submissions that by June 2005 the first AccuMap 2 prototype was complete. The University disputes that the prototype was functional and contends that the development of the device was beset by problems and that it was never completed. This is explored below.
120 The first prototype for AccuMap 2 involved the redesign and re-development of AccuMap 1 with better componentry. Minutes of an ObjectiVision board meeting on 14 April 2005 record Mr Cheng's recommendation, that appears to have been adopted, that the new prototype reflect a reduced footprint, a disposable headset, ERG function, and include "sparse stimulus" technology (a type of stimulus developed by the Australian National University). The budget for the development was estimated to be $3.851m per annum with an estimate for completion by 30 June 2005.
121 In early July 2005 something approximating the first prototype was put on display at the World Glaucoma Congress in Vienna. In his evidence Mr Cheng says that this was a "functioning product" that was able to be demonstrated to the public. However, this assertion is not supported by the evidence as a whole and I reject it. Mr Cheng's CEO report of 16 August 2005 describes the prototype as "exhibited" which accords more precisely with the evidence of Professor Graham and Associate Professor Klistorner, who each attended the conference and give evidence that the device displayed was a mock-up that was not demonstrated.
122 There were problems with the software and the electrodes on the disposable headset cross. Plans to take the first prototype to the American Academy of Ophthalmology conference in Chicago in October 2005 were abandoned. In November 2005 the prototype was put on display at the World Neurology Congress in Sydney. At that point a live demonstration was attempted by Associate Professor Klistorner, but he gives evidence that it embarrassingly failed to work in front of an audience of neurologists and instead a pre-recorded demonstration version was run. Mr Cheng gives evidence that the live demonstration succeeded, however, no objective evidence supports this proposition and I consider that the recollection of Associate Professor Klistorner, who conducted the attempted trial, is more likely to be correct. It also accords with the subsequent abandonment of the first prototype.
123 After the November conference, the first prototype was abandoned. The CEO reports provided by Mr Cheng to the board of ObjectiVision in November and December 2005 record that there were "issues" with the development of the AccuMap 2. The November report notes the problem of inconsistent conductivity of new printed circuit electrode sets, which held back finalisation of the product. There was also a need to finalise drawings of components, to source materials and electronic componentry, and to document the hardware and software specifications. Without these, and a pre-manufacturing model, regulatory testing "could not begin". Furthermore, at this time ObjectiVision was having difficulties securing sufficiently skilled staff on a full-time basis. Dr Osmakoff was assisting with IT on a part-time basis only, and engineering support was not able to be found. ObjectiVision relocated its operations to smaller premises to save money. Mr Cheng's December 2005 report notes that the industrial designers engaged by ObjectiVision, Tiller + Tiller, were not able to finalise the headset cross and electrode placement and Mr Cheng decided to use a different designer. A plan on the part of ObjectiVision to attend an ophthalmology conference in February 2006 with the first prototype was abandoned and Mr Cheng reported to the board that he would have to "stretch our resources" beyond April 2006.
124 On 1 April 2006 Mr Cheng was appointed a director of ObjectiVision.
125 After the first prototype had been abandoned, work on the second prototype proceeded. It used generic hardware components, including an off-the-shelf laptop, articulated arm for the patient monitors and a transformer. The headset, called the "Headset2", remained a specialised element. There were issues with the headset, and in early 2006 it was proposed that it needed to be re-designed. KWA Design was engaged on 3 March 2006 to do the design work. In his report to the board of March 2006, Mr Cheng estimated that the production of the prototype would be achieved by 7 July 2006.
126 On 1 June 2006 ObjectiVision applied for the stepped stimulus patent developed by Professor Graham and Associate Professor Klistorner. This invention allowed ObjectiVision to overcome the issue of not being licensed to commercially use the "sparse stimulus" technology patented by ANU.
127 At around this time ObjectiVision moved its servers, computers and AccuMap 2 prototypes to Associate Professor Klistorner's offices at the SSI.
128 On 22 June 2006 Mr Cheng provided a CEO report to the ObjectiVision board which referred to an anticipated delay in the delivery of the Headset2 prototype, from April 26 to 9 June 2006. It referred to milestones in the development timeline being re-adjusted to account for the delay.
129 In the CEO report on 25 August 2006, Mr Cheng notes that KWA's head designer, Jonathan Dyer, had been engaged to complete the prototyping and production data work on a freelance basis.
130 In late August 2006 it was planned to take the second prototype overseas for demonstrations in China and Europe. Prior to that, a synchronisation problem was discovered in the software by a software engineer engaged by ObjectiVision, Mr Alvarez. Synchronisation is important in the context of the testing done by the AccuMap. As Associate Professor Klistorner explains, in order to record a proper reading, any change to the stimulus shown on the patient monitor must be synchronised with the acquisition of the data, and this must be very precise. Even a shift of one frame of the monitor, which is 15 milliseconds, will produce an incorrect result. Associate Professor Klistorner considered that there were many problems in synchronising the video stimulus output with data acquisition from the patient.
131 These observations are relevant in the context of an email exchange between Mr Alvarez and Mr Cheng on 22 August 2006, shortly before the trip to Europe and China. In it Mr Cheng asked Mr Alvarez for an update on matters for which he was responsible, including the LCD monitor, OPERA documentation review, OPERA GUI (graphical user interface), and testing and debugging of the system. One aspect of Mr Alvarez's response was to report that his main concern was with a synchronisation issue that he and Associate Professor Klistorner were attempting to resolve. Mr Cheng replied by saying that it was important to ensure that if doing a demonstration overseas "we do not embarrass ourselves with the system going haywire". He then said: "If the synchronisation problem is a more deep-rooted nature, work on it when we are away but mask it for the trip" (emphasis added). The University draws two points from this exchange. The first is that in cross-examination Mr Cheng failed frankly and honestly to acknowledge that by encouraging Mr Alvarez to "mask" the problem he was instructing him to conceal the fault. In my view that criticism is warranted. In a passage of cross-examination that extended over several pages the following exchange took place:
Mr Darke: You're saying to Mr Alvarez that if he couldn't fix the synchronisation problem before you departed, he should conceal it for the trip; correct?
Mr Cheng: I'm not sure what I meant at that stage.
Mr Darke: Well, you meant, Mr Cheng, that he should hide it, didn't you?
Mr Cheng: Well, there are different ways of - of eliminating the synchronisation. Mask it - one way of masking it would be to reduce the number of runs. Synchronisation is not ongoing and it happens once in every quite a number of runs.
132 This wordplay on the part of Mr Cheng is, in my view, indicative of an unwillingness on his part to accept the effect of his own words and instead to provide a convenient reconstruction of events to suit what he perceived to be the benefit of ObjectiVision in the litigation. There could be no real doubt from the text of his message that he intended Mr Alvarez to somehow conceal (mask) the inconvenient failure to synchronise. Secondly, it shows a tendency on his part to downplay the difficulties encountered by ObjectiVision in solving problems with the AccuMap 2 second prototype, one of which was the problem of synchronisation, a point to which I return below.
133 In September 2006 Mr Cheng and Associate Professor Klistorner attended the third Global Chinese Ophthalmic Conference in Beijing. The second prototype was not exhibited, but a demonstration was provided to a potential Chinese distributor. During that demonstration Associate Professor Klistorner gave evidence that the arm of the computer screens broke and the screen fell off. There is again a conflict of evidence between Associate Professor Klistorner and Mr Cheng as to whether or not a live demonstration took place. Associate Professor Klistorner contends that none did, and gives his recollection that a demonstration version of the OPERA was used, taking a reading from pre-recorded results. Mr Cheng denies that the arm fell off the device and gives evidence that a live demonstration, taking readings from a subject, took place in China. In his oral evidence he asserts that this was reported to the board and in correspondence. No corroborating report or correspondence was drawn to my attention. The CEO report for the board meeting on 12 October 2006 says that "the morning of the first day was spent demonstrating the AccuMap2 to Global Vision technicians and staff", but does not indicate whether this was a live or recorded demonstration. I prefer the account of Associate Professor Klistorner, whom I consider to be likely to have recalled the event, and to have known of the status of the second prototype, over the evidence of Mr Cheng. My view that the second prototype had not advanced to the stage of live demonstration is supported by contemporaneous board reports identifying problems with the development, such as those mentioned by Mr Alvarez, and also by the fact that plans to attend a November 2006 conference to promote the product were cancelled to "finish off certain aspects of the AccuMap2". In fact, ObjectiVision then moved to a different prototype.
134 Work on the third prototype, called the white prototype, was commenced in late 2006. It used a medical touchscreen personal computer rather than a laptop and was a "higher-end" version of the AccuMap 2 targeted at ophthalmologists rather than optometrists. According to the December 2006 CEO report to the board by Mr Cheng, ObjectiVision planned to use a "panel PC solution" using industrial components, instead of using a generic laptop. This approach involved creating a bespoke computer that could be used as the hardware. As Mr Cheng explained in cross-examination, the advantage of such a system is to avoid the problem, apparently endemic in the use of generic computers, of the components being changed by the manufacturer with various upgrades and additions. Such changes can have a material effect on the operation of the testing done for the prototype application. The decision to adopt a panel solution led, as Mr Cheng said, to ObjectiVision having to "reinvent the wheel" in doing its own embedded systems. The white prototype was intended to be the first version of the AccuMap 2 launched.
135 In his December 2006 CEO report to the board, Mr Cheng proposed that the clinical launch of the white prototype would take place at an exhibition stand at a conference in Fort Lauderdale in May 2007. In his report he says that a three man product development team made up of industrial designer Minh Lee, electronics engineer Lee Glanzmann and software engineer Nik Von Huben had been recruited to work on the product. However, Mr Von Huben never started because he had reservations about the financial viability of ObjectiVision, and the services of Messrs Lee and Glanzmann were subsequently terminated for unsatisfactory performance.
136 In the minutes for the board meeting of ObjectiVision on 19 December 2006, record is made of the December CEO report, noting that the budget and draft business plan proposed by Mr Cheng were addressed, including a draft business plan and a 5 year cash flow projection. The minutes note that the budget presented a "cash shortfall of approximately $200,000. There was discussion regarding various capital raising options".
137 On 16 January 2007 Mr Alkhimov commenced working with ObjectiVision. Mr Alkhimov's role in working for ObjectiVision and later the University is important to the claim for copyright infringement advanced by ObjectiVision.
138 By February 2007 Medcorp and the University were not prepared to fund ObjectiVision any further. ObjectiVision unsuccessfully attempted to raise $500,000 from a third party funder which could be matched by a Commercial Ready Grant (CRG) from the Commonwealth Government for which ObjectiVision applied. As a result of the funding issues, Mr Cheng decided that ObjectiVision should "slow down its work" to avoid running out of funds by June 2007.
139 On 19 February 2007 Professor Graham resigned as a consultant for ObjectiVision, citing conflicts with his workload as an ophthalmologist and a desire to preserve his status as an independent researcher, rather than a "company man". In his resignation letter he advised that he would continue to support ObjectiVision, including through possible informal consultancy work.
140 Mr Cheng looked for external funding but ultimately was unable to find any source during the course of 2007. The closest that he came was an executed Memorandum of Understanding between Professor Frank Billson of the SSI and ObjectiVision that was prepared in 2007. In it, the parties agree that in return for an injection of equity of $500,000, ObjectiVision will issue a controlling interest of 50.01% of its shares to Professor Billson. The agreed valuation of the company was $1,000,000. However, ultimately Professor Billson did not elect to proceed because ObjectiVision failed to provide him with sufficient information in his due diligence of ObjectiVision or with an updated business plan that he had sought.
141 In his CEO report for the 18 April 2007 board meeting Mr Cheng said that assembly of the white prototype would begin in the week of 30 April 2007, and that as a result of the dismissal of the product development personnel recruited in December 2006, Mr Alkhimov had been engaged to address both the software and the electrical engineering issues remaining. Earlier plans for the launch of the product were deferred from May 2007 to the World Glaucoma Congress in Singapore on 18 July 2007. The retention of regulatory consultants was put on hold until testing and final design and technical specifications of the white prototype were confirmed.
142 In his 9 August 2007 report to the board of ObjectiVision, Mr Cheng noted that it had been decided at the April meeting to "slow the company down to conserve resources" whilst assessing funding options. He stated that ObjectiVision's cash position as at 3 August was $112,304, with forward commitments being such that it was "currently $36,122 in deficit... with the anticipated impact of the R&D tax offset in September, the net cash position is brought back up to $132,288 positive". The report also indicates that two further components were to be included in the white prototype before testing and documentation could commence: an infra-red distance measuring device which had been designed and developed from scratch, and a multifocal ERG module. Both, Mr Cheng thought, were expected to be incorporated into the white prototype in the next 2 weeks.
143 In the 9 August 2007 report Mr Cheng also states that an important prerequisite to the successful launch of the white prototype is the repetition of the clinical studies from Australia in key overseas markets, in particular in Europe and the US. This would require multiple production models and funding beyond the ability of local research grants to support. Furthermore, in his report Mr Cheng states that the appointment of regulatory consultants was further deferred until the AccuMap 2 has been tested and final design and technical specifications confirmed. Under the heading "Personnel", Mr Cheng states that the company is in "desperate need" of a full time senior engineer and project manager but also notes that financial expediency dictates that the undesirable practice of using part-time consultants will have to continue. Mike Kroon of Custom Circuits had been retained as an electrical engineering consultant on a part time basis. The report concludes that an action plan for the present is "inappropriate at this stage and will be re-presented on resolution of the capital raising issue".
144 In his written evidence Mr Cheng contends that the white prototype was "completed" subject to "small tweaks" by May 2007. For the reasons earlier given, I prefer to have regard to the contemporaneous documents to ascertain the position. In this regard I note the matters set out below.
145 In an email of 14 August 2007 Mr Dyer, the industrial designer, records that the materials for the electrode cross are still being investigated and the amplifier box for the headset amplifier is not finalised. In an email to Mr Cheng on 1 September 2007, Mr Dyer says that as a rough estimate the prototype is "approximately 30 - 40% representative of the final production unit". He identifies design issues which need to be resolved, and estimates that once this is achieved there will be standard production times of 8 - 12 weeks. In response, Mr Cheng expressed concern about the fact that another prototype might be needed before finalising production data and ramping up production, "not to mention meeting regulatory requirements". Other issues with the white prototype mentioned in the email are the distance sensor, cables, cooling fan, connectors, mounts, brackets and others.
146 In mid-2007 Associate Professor Klistorner ceased to be paid by ObjectiVision, but nonetheless continued to advise and assist in the redevelopment of the AccuMap 2.
147 In September 2007 Mr Cheng prepared a confidential information memorandum for potential investors in which he sought mezzanine financing funding for ObjectiVision of a minimum of $1.5 million to match a CRG from the Commonwealth for up to $1 million, and to provide working capital. By this time, Medcorp was not prepared to supply any further finance. In the information memorandum, Mr Cheng provides a five year cash flow projection which sets out the costs that he anticipated that ObjectiVision would incur in the 10 months or so before it commenced selling a production model of the AccuMap (that is, the white prototype version) commercially. The projected costs are for: personnel, marketing, regulatory, production, clinical trials, medical reimbursement, research and development, and other overheads, and come to $895,950. No sales of the AccuMap are projected for the year 2008. It will later be seen that when Mr Cheng sent a budget to the University in mid-2008, he estimated $150,000 required for the 6 months until the mezzanine financing round, which in my view is incredible. In cross-examination it was put to Mr Cheng that he deliberately omitted a large part of the $895,000 from the budget submitted to the University, in order to produce a budget which was in line with the amount of funding available from the University at that time. The estimate in the confidential information memorandum was provided at a time when Mr Cheng anticipated the continued assistance of Associate Professor Klistorner and Professor Graham.
148 The events following September 2007 show steps forward and setbacks.
149 On 20 September 2007 Mr Fernance resigned as a director.
150 On 7 October 2007 an email indicates a need for the amplifier used to be redesigned.
151 On 29 October 2007 Professor Graham provided Mr Cheng with a draft application for a government funding grant that says that "the AccuMap 2 prototype is close to completion".
152 By early November 2007 Mr Cheng was pushing the development of the device hard. In an email of 5 November 2007 to the development team of Associate Professor Klistorner, Mr Kroon and Mr Alkhimov, he proposes a project schedule that involves the integration of the e-distance sensor unit and ERG into the existing prototype by the next day, the submission of concept drawings for the monitor stand and ophthalmic table by 12 November, and fixing the heating problem of the technical monitor and finalising all external cabling connectors by 12 November 2007. He proposes that by 23 November 2007 all aspects of the prototype be tested and that the team will "start collecting [the] normals database".
153 On 6 November 2007 Associate Professor Klistorner responded to an email from Mr Cheng indicating that there were five "main issues" that were unresolved: (1) cabling between two monitors, (2) interference on the patient monitor, (3) ERG adaptor, (4) heating and ventilation and (5) headband. Associate Professor Klistorner says in his email that he cannot estimate when these will be resolved. In oral evidence in chief he explained that cabling issues normally related to noise, which interfered with the signal readings that were to be taken. He indicated orally, and I accept, that there was also a synchronisation issue in November and December 2007, which was that in order to record a proper response to a change in visual stimulus the data acquisition and the stimulus needed to be co-ordinated. The shift of one frame on the monitor is 15 milliseconds, and so the data acquisition must be finely synchronised with the video output. This problem was present in testing conducted in 2010.
154 On 8 November 2007 a frustrated Mr Cheng sent an email saying that they were unlikely to be able to assemble and test 5 or 6 sets of preproduction prototypes "any time soon", if the time they were taking to assemble the current prototype was any guide. On the same day Mr Alkhimov reported that Mr Kroon had a new version of an ERG amplifier that worked well with the optical sensor, but not well with a "real patient". On 14 November 2007 Associate Professor Klistorner sent an email to Mr Cheng indicating that he needed to finish the cables and that he was "ready to start testing". The email is unclear as to what sort of testing was required. In cross examination Associate Professor Klistorner said that he thought he meant testing to see if the machine worked. It was put to him that he meant testing for a normative database. On 30 November 2007, Mr Alkhimov sent an email to Mr Cheng saying that Mr Kroon had provided a new main interface cable that had reduced the noise level on the patient screen dramatically. He says "Now Sasha can start real tests on a [sic] real patients on the AccuMap 2. I have finished all the scaling issues today and Sasha [Associate Professor Klistorner] tested it and said it works fine". This indicates that the testing that could commence was indeed on real people, for the preparation of a normative database.
155 On 4 December 2007 Associate Professor Klistorner sent an email to Mr Cheng where he reported doing some recordings and stated that he could do the "whole test regardless of stimulus under 15 min". He also says "system is working fine". On the same day Mr Alkhimov sent an email to Mr Cheng reporting, amongst other things, that he and Mr Kroon had worked on the overheating problem and lowered the temperature to 52 degrees celsius, which he says is "still high enough" but that the system is operating in a more stable manner. Mr Alkhimov reports that the system has been tested with Associate Professor Klistorner for 4 hours and the processing time remained the same, but notes that there are issues with a new ERG amplifier as there is still too much noise in the signal.
156 On 5 December 2007 Associate Professor Klistorner sent an email to Mr Cheng reporting that "I did few recording[s] today - we can do whole test regardless of stimulus under 15 min. And system is working fine". In cross-examination Associate Professor Klistorner briefly suggested that the testing to which he referred was using the old AccuMap 1 device or another device at the SSI, although he accepted that he could not remember the event itself. It appears from the context that it is more likely to have been using the white prototype.
157 By December 2007 the financial position of ObjectiVision was dire. Medcorp had been providing ObjectiVision with funding but had been reluctant to do so since February 2007. In March 2007 Medcorp had declined to provide a letter of guarantee matching funds for ObjectiVision's CRG application. In December 2006, Medcorp advised Mr Cheng of its intention to exit as a majority shareholder of ObjectiVision. In his report to the ObjectiVision Board dated 7 December 2007 Mr Cheng states that Medcorp's decision not to underwrite ObjectiVision's CRG application was a setback that "proved debilitating" to the completion of the AccuMap 2. Despite this, Mr Cheng states that "significant progress" has been made with the AccuMap 2. He reports that the hardware aspects of AccuMap 2, without the ERG, were completed that week and that Associate Professor Klistorner was able to begin systematic testing of the system on a targeted 50 patients. He estimated that testing would be completed by mid-January 2008 and that the AccuMap 2 should be "ready for demonstration to investors after that", with an estimate of 3 to 6 months to begin the process of FDA clearance. The report refers to the difficulties faced in raising capital in the current economic environment and says:
Therefore, before approaching any VC [venture capitalist], the AccuMap2 prototype needs to be seen as fully developed, tested on patients and be in a demonstrable state. Because of the significant changes that has [sic] taken place in the venture capital market, OV also needs to remove as much of the risk as possible of investing in the company by getting the AccuMap2 to production-ready stage with full regulatory approvals and independent clinical validation. OV itself needs to assemble a proper management team, maintain its IP portfolio and technology pipeline and present a credible business case.
158 The report then says that funding is required swiftly, and gives as an example that if the company does not find a way of retaining Mr Alkhimov after December, it will stall the software development side of the company and set it back by 6 to 9 months. Other problems caused by delays are also identified.
159 Mr Cheng provided two alternative budgets to the board. The first is based on the company progressing to completion of prototypes and then regulatory approvals and production units (Plan A), the second based on the halting of all expenditure to focus on capital raising (Plan B). The board notes that taking into account an R&D Tax Concession received of $154,000, ObjectiVision had a cash deficit of $22,000 on 5 December 2007. It resolved to defer passing a resolution on the options until there had been a discussion with the company's ultimate holding company, Medcorp. The Plan A budget proposes an injection of capital of $325,000 to fund the retention of key staff (Mr Alkhimov and Associate Professor Klistorner) and Mr Cheng, building of prototypes for clinical trials, clinical trials, regulatory clearance and various other steps.
160 Notice was given to Mr Cheng (via Capital City Group Pty Ltd, the entity through which he was engaged) that effective 14 December 2007 his services had been terminated and he was directed to cease all further expenditure by ObjectiVision.
161 On 18 December 2007 Mr Cheng wrote to Associate Professor Klistorner confirming his understanding that Mr Alkhimov's engagement with ObjectiVision would cease on 14 January 2008 and from then until 17 March 2008 he would work for the SSI. The email expresses a hope that from then, ObjectiVision may be in a position to re-engage Mr Alkhimov. Mr Cheng says that "there are important priorities with respect to the completion of the AccuMap 2 prototype" that Mr Alkhimov should be permitted to work on while he is engaged by the SSI. This email is significant in the context of the copyright claim, and I return to it later. Mr Cheng also wrote to Mr Alkhimov, confirming that his consultancy contract would terminate on 15 January 2008.