**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
|       | **(Mark One)**                                                                                     |
|------------|----------------------------------------------------------------------------------------------------|
|       |                                                                                               |
| **ý** | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |

 

**For the quarterly period ended September 30, 2004**

 
| **o** | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |
|-------|-----------------------------------------------------------------------------------------------------|

 

**For the transition period from                to                **

 

**Commission file number   0-26886**

 

**MEDICSIGHT, INC.**

(Exact name of registrant asspecified in its charter)

 
| **Delaware**                                                                        | ** ** | **13-4148725**                         |
|-------------------------------------------------------------------------------------|------------|----------------------------------------|
| (State or  other jurisdiction of  incorporation or organization)                    |       | (I.R.S.  Employer  Identification No.) |
|                                                                                |       |                                   |
| **46 Berkeley Square, London, W1J 5AT, UNITED KINGDOM**                             |
| (Address of  principal executive offices, including zip code)                       |
|                                                                                |
| **011- 44-20-7598-4070**                                                            |
| (Registrant’s  telephone number, including area code)                          |
|                                                                                |
|                                                                                |
| (Former  name, former address and former fiscal year, if changed since last report) |

 

Indicate bycheck whether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days Yes  ý     No  o

 

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

 

**APPLICABLEONLY TO ISSUERS INVOLVED IN BANKRUPTCYPROCEEDINGS DURING THE PRECEDING FIVE YEARS**

 

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

 

**APPLICABLEONLY TO CORPORATE ISSUERS**

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date:  **As of November 9, 2004: 33,066,797 shares of Common Stock, parvalue $0.001 per share**.

 

 

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**NOTE REGARDING FORWARD LOOKING STATEMENTS**

** **

This Quarterly Report onForm 10-Q, including “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in Item 2, contains forward-lookingstatements that involve risks and uncertainties, as well as assumptions that,if they never materialize or prove incorrect, could cause the results ofMedicsight, Inc and its consolidated subsidiaries (the “Company”) to differmaterially from those expressed or implied by such forward-looking statements.All statements other than statements of historical fact are statements thatcould be deemed forward-looking statements, including any projections ofrevenue, gross margin, expenses, earnings or losses from operations, synergiesor other financial items; any statements of the plans, strategies andobjectives of management for future operations, including the execution ofrestructuring plans; any statement concerning developments, performance orindustry rankings relating to products or services; any statements regardingfuture economic conditions or performance; any statements of expectation orbelief; and any statements of assumptions underlying any of the foregoing. Therisks, uncertainties and assumptions referred to above include the performanceof contracts by suppliers, customers and partners; employee management issues;the difficulty of aligning expense levels with revenue changes; and other risksthat are described herein, including but not limited to the specific risksareas discussed in “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” in Item 2 of this report, and that areotherwise described from time to time in the Company’s Securities and ExchangeCommission reports filed after this report. The Company assumes no obligationand does not intend to update these forward-looking statements.

 

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

 

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**PART 1**

 

**FINANCIALINFORMATION**

 

## **Item 1.**                       FinancialStatements

## ** **

Medicsight, Inc. and itssubsidiaries are collectively referred to in this Report as the “Company”.  For purposes of the discussion containedherein, all financial information is reported on a consolidated basis. Thefinancial statements for the Company’s fiscal quarter ended September 30,2004 are attached to this Report, commencing at page F-1.

 

## **Item 2.**                       Management’sDiscussion and Analysis of Financial Condition and Results of Operations

## ** **

**BACKGROUND**

 

We are a softwaredevelopment business, focused on the medical imaging market. Our coretechnology is about developing automatic detection and analytical tools forclinicians to improve their ability to diagnose and treat diseases.

 

We were originallyincorporated as a Utah corporation in 1977. On December 19, 2000, weentered into an Agreement and Plan of Merger with our wholly owned subsidiaryHTTP Technology, Inc., a Delaware corporation, and thereby effected are-incorporation of the Company from Utah to Delaware. All references in thisQuarterly Report to  “the Company”, “we”or “us” are to Medicsight, Inc., the Delaware corporation and subsidiaries, ifthe referenced event occurred on or after December 19, 2000 or to HTTPTechnology, Inc., the Utah corporation and subsidiaries, if the referencedevent occurred prior to December 19, 2000. On January 27, 2004 theCompany increased its authorized share capital from 25,000,000 shares to40,000,000 shares.

 

During the nine monthsended September 30, 2004 the Company issued approximately 8,578,000 sharesof restricted stock raising $22.85m (net of commissions) as part of a privateplacement.

 

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

 

**BUSINESS STRATEGY**

 

We are developers ofsoftware technology for medical diagnostic applications such as Computer AidedDetection  (“CAD”) and Computer AssistedReader (“CAR”) software products in differing business models. We have fiveprincipal operating subsidiaries: Medicsight PLC (“MS-PLC”), Medicsight AssetManagement Limited (“MAM”), Lifesyne UK Limited (“Lifesyne UK”), MedicsightUSA, Inc (“MS-US”) (previously Lifesyne US) and Medicsight InternationalLimited (“MIL”).

 

*MS-PLC.*  Our majority-owned subsidiary, MS-PLC, iscurrently developing automatic detection and analytical tools for clinicians toimprove their ability to diagnose and treat diseases. At September 30,2004, the Company owned 70,677,300 ordinary shares in MS-PLC, constituting 81.8%of the outstanding shares.

 

*Lifesyne*.  Lifesyne, a wholly owned subsidiary ofMS-PLC, was established in September 2002 for the purpose of providing abranded operating entity for the United Kingdom and Ireland markets. Lifesyneis the entity that operates the scanning centers located in the United Kingdom.As the Company has decided to focus on the delivery of the software no furtherdevelopment of the Lifesyne strategy is envisaged beyond the Company’s currentscanning requirements.

 

*MAM*.  MAM, a wholly owned subsidiary of MS-PLC, wasestablished in September 2002 for the purpose of acquiring fixed assets onbehalf of the operating entities in the group. MAM will negotiate and acquire

 

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equipment and fundleasehold improvements and development, which in turn will be leased to therelevant operating entity.

 

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

 

*MIL.*MIL (incorporated in Gibralter), a wholly owned subsidiary of MS-PLC, wasestablished to co-ordinate operations outside the United States of America andEurope and is based in Geneva, Switzerland. It is currently establishing afurther office in China.

 

It is now widely acceptedthat the most effective way to achieve early detection of the principal deadlydiseases is through radiological scanning. The MedicsightTM system analyzesdigital data from the new generation of multi-slice computed tomography (“MSCT”)scanners and then provides information to enable the clinician to identify andcharacterize possible areas of abnormality. We believe that in the future theMedicsightTM system will be capable of reliably detecting isolated pulmonarynodules in the lung, calcification of the coronary arteries, polyps in thecolon and other abnormalities indicative of disease. The potential advantage ofthe MedicsightTM system is that it increases precision and reliability whilealso providing scalability that will be cost-effective. The system uses itstechnology to provide tools to radiologists for the identification of possibleabnormalities. The clinician will then apply his/her experience to determinethe next steps in medical diagnosis and treatment. We believe that theMedicsightTM system will:

 

•                  enable accurateand reliable scan analysis;

•                  provide aservice that will be significantly cheaper than other systems as it reduces theburden on radiologists who in current practice account for a significantproportion of the scan cost; and

•                  allowsignificant patient volume to be achieved because the analysis is semi automatedand scanning volumes are not then constrained by the finite number ofradiologists.

 

The step change intechnology that increases the potential of the MedicsightTM system is the 16detector CT scanner. This allows sub-millimeter cross-sectional slices to becaptured with increased speed and reduced radiological dose when compared withtraditional single slice machines. This can provide over 600 images of thechest instead of 30-60 for single slice scanners. The amount of detail nowavailable, while enabling early detection of smaller nodules and areas ofcalcification, increases the time required for analysis by radiologists.Therefore the automation of scan analysis is essential. Our technology isequally applicable to Magnetic Resonance Imaging (“MRI”) scanners and we havebegun research into brain diseases with a leading global institution.

 

MS-PLC opened LifesyneTM’sflagship center in Westminster, London in 2003. Due to the Companyconcentrating on the development of the software products it has concluded thatits development of the LifesyneTM Scanning Center concept will not be rolled outfurther. It represents one potential model, which will be available forlicensees who see a commercial opportunity to package the concept together withour MedicsightTM software.  Weare now prioritizing LifesyneTM on the rapid acquisition of patient scan datanecessary to enable our expert software to hone its characterizationskills.  In this role, we havereappraised our capacity requirements and have decided to focus productdevelopment activity on the flagship center in Westminster, which will act moreas a research institution.  This meansthe center at Ravenscourt is currently surplus to our core requirements and weare seeking a partner to operate the center as a commercial CT scanningbusiness.

 

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*Refiningour business strategy*

 

Our aim is to become aleading developer of medical imaging and disease detection software. The key toreliable detection and to accurate measurement is accurate boundaryidentification of the region of interest. If the software does not distinguishthe lesion from the wall tissue, it will not be able to reliably detect ormeasure abnormalities; this is where we have focused much of our development.

 

As data is crucial to thedevelopment, training and testing of our products; the more data we have thebetter the product development and therefore the final product. We have accessto the world’s largest lung and colon scan databases. However, it’s not justquantity of data that counts, our databases include proven outcomes (cancers)and patient management histories so analyzing these will allow us to go beyondbasic nodule or polyp detection.

 

The Company’s strategy isbased upon the following priorities:

 

•                  Focusing ourresources on developing industry leading pattern recognition software in themedical imaging market.

•                  Targetingcommercially valuable applications where the accurate identification andmeasurement of abnormalities will lead to improved diagnosis and treatment oflife threatening diseases.

•                  Developing aninternational network of medical specialists, to support product development,data acquisition and commercial delivery.

 

*MedicsightProduct Portfolio*

 

Our products currentlytarget 3 therapeutic areas, Colon, Lung and Heart. As well as developing theCAD software we are looking at developing and marketing CAR applications in thecolon and lung arenas.

 

CARis a “joint-read” software product that is being developed for reviewing CTlung and colon scans.  These products areimage analysis software tools that assist radiologists in evaluatinglesions or nodules found during CT scans of the lung or colon.  Unlikecurrent “second-read” software, in which software is employed afterradiologists have completed their reviews, joint-read software enables theradiologist to review “unfiltered” images side-by-side and simultaneously withsoftware-enhanced regions of interest. For a radiologist reviewing up to 600images from a single CT scan, the joint-read capability saves time and aids inthe evaluation of nodules.

 

There is increasingevidence in all three areas that early detection may lead to improved lifeexpectancy and this has been a core focus of our product development. However,our technology is applicable to many other diseases and we are already startingto plan for this.

 

In terms of clinicalpractice and therefore market segmentation, the products can be split betweendiagnostic treatment and screening;

 

*Diagnosticor “Disease tracking” products*; these are products designedfor symptomatic patients to track disease progress and monitor treatmenteffectiveness. The primary applications in this area are Lung nodule trackingand Heart calcium scoring though the Company believes there will be a growingrequirement for polyp tracking in the colon as CT colonography becomes moreestablished

 

“*Screening” products*; for populationscreening of asymptomatic patients. There is much evidence to demonstrate thatthe early detection of colon, lung and heart disease leads to improved lifeexpectancy.  CAD CT will provide a costeffective solution in identifying these diseases early enough to significantlyalter the economics of population screening programs in these areas.

 

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*BusinessDevelopment*

 

In October 2004,MS-PLC received clearance from the U.S. Food and Drug Administration (“FDA”)for its Colon CARTM product, an image analysis software tooldesigned to be used with CT colonography (“virtual colonoscopy”) to assistradiologists in searching for and measuring potential colorectal polyps.Virtual colonoscopy uses a CT scanner to generate both two-dimensional andthree-dimensional views of inside of the colon, as opposed to traditionalcolonoscopy, in which a viewing instrument is inserted into the bowel.  Colon cancers most often start when malignantcells form within polyps attached to the inner surface of the large bowel.Detection and removal of these polyps can prevent them from becoming cancerous.

 

Medicsight Colon CARTMworks by using MS-PLC’s CAR technology to deploy a series of filters againstimage data derived from CT colonographies. These filters highlight sphericalareas of the image as small as 5 mm or the size of a small pea, which could bepotential polyps. The radiologist is also able to manually highlight anyirregularities for closer inspection. Once suspect polyps are found, the software can precisely identify theboundaries and features and show them in 3D with a volume measurement,diameter, shape and location. This allows the radiologist to accurately reviewand track any growth in the polyps.

 

In July 2004, MS-PLCreceived clearance from the FDA and European CE certification for its Lung CARTMsoftware product, animage analysis software tool that assists radiologists in evaluating lesions ornodules found during CT scans of the lung. MS-PLC’s Lung CARTM isthe first “joint-read” software available for CT lung scans.

 

Lung CARTMworks by deploying a series of filters against the image data derived from CTscans. The software has a number of automatic and manual measurement tools toaid diagnosis, including 3D volume measurement and the ability to review followup scans and doubling times.

 

The Company’s heartproduct, MedicHeart received FDA approval in November 2003. MedicHeart isa software application for annotating MSCT scans of the heart used byRadiologists to identify coronary artery calcium (“CAC”). The reason that thissoftware product is superior to other products in its category is due to itsextensive segmentation capabilities, which enable the radiologist to accuratelyextract the CAC boundary and therefore accurately characterise (measure) it.This means that the Radiologist can accurately track CAC growth/regression.

 

Operationally, we aim tokeep expanding our databases to keep enhancing our current product areas andincreasingly refine our diagnostic and treatment capabilities.

 

Commercially, we aim tosign up one or more distribution partners. We commenced building relationshipswith third party distributors at the end of 2003 and already we have establishedstrong levels of interest amongst both picture archivers (“PACS”) softwarecompanies and CT hardware manufacturers. We will not go down the route of adirect sales force as we wish to work with the major players in the medicalmarket who share our vision of an integrated range of “intelligent” softwareproducts. MS-PLC is also reviewing other potential distribution channelsincluding the internet.

 

We are actively talkingto a number of these companies at the moment. As we finalize development of a numberof products over the coming months and complete their validation studies, weaim to be in closing discussions by end of the year.

 

*International Advisory Board*

 

As the Company’s strategyevolved, in particular, following the decision to concentrate our efforts onsoftware development and international product distribution, we have acted toalign our medical advisory mechanisms to the new circumstances.  The Company has therefore set up threeInternational Advisory Boards (“IAB”). The IABs have recruited and will continue to recruit individuals withthe relevant

 

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expertise to becomemembers and encourage the involvement of the radiologists undertaking betatesting of our products, providing data for software development andparticipating in our scientific program.

 

Some members of theoriginal Medical Board have accepted appointments to the new IABs. New memberswill include persons with relevant expertise from the United States, Germany,France, Italy, and Japan.  The IABs areco-chaired by Dr. Costello, who reports back to the MS-PLC Board; however, muchof the scientific advice and leadership will be provided through a co-chairman,chosen from the IAB members.

 

*Termsof Reference of the International Advisory Board*

 

The IABs will meet twicea year and fulfill the following roles:

 

•                  Advise on thedevelopment and application of Medicsight CT image analysis software in theterritories represented.

•                  Provide links tousers of CT image analysis systems in their respective territories.

•                  Assist ininvestor relations on an international basis.

•                  Advise on, andparticipate in, clinical development programs for the Company’s software.

•                  Act as advisorsin relation to regulatory submissions for the Company’s products.

•                  Advise onsources of library data (CT scans) to support training and development of theCompany’s software.

 

*Objectives of the InternationalAdvisory Board*

 

The objectives of themeetings may be varied from time-to-time, as agreed with MS-PLC, but willinclude the following:

 

•                  Ensure thatmembers have a full understanding of the Medicsight technology and are enthusedto participate in its development and application, both locally andinternationally.

•                  Ensure that theclinical development program is compatible with local clinical practice.

•                  Ensure that theclinical development program is compatible with local regulatory guidelines.

•                  Obtain insightinto local issues with respect to marketing of the Company’s products.

 

*RiskFactors*

 

We cannot assure you thatthe Company will be successful in commercializing the MedicsightTM system, or ifsuch system is commercialized, that its use will be profitable to the Company.We face obstacles in commercializing our core technology and in generatingoperating revenues such as, but not limited to, successful development, testingof and gaining regulatory approval for the technology.

 

The Company does notbelieve that there is currently any comparable system that is competitive withthe MedicsightTM system. There are computer-aided diagnostic systems that workin the field, but, in our view, such existing systems are overly dependent onhuman resources to carry out the analysis, as none have the capability of theMedicsightTM system.

 

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

 

The Company hasidentified a number of other specific risk areas that may affect the Company’soperations and results in the future:

 

*Technical Risks.*  The MedicsightTM system may not deliver thelevels of accuracy and reliability needed, or the development of such accuracyand reliability may be delayed.

 

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*Market Risks.*  The market for the MedicsightTM system may beslower to develop or smaller than estimated or it may be more difficult tobuild the market than anticipated. The medical community may resist theMedicsightTM system or be slower to accept it than we expect. Revenues from theLifesyneTM scanning centers and the licensing of the MedicsightTM system may bedelayed or costs may be higher than expected which may result in the Companyrequiring additional funding.

 

*Regulatory Risks.*  The MedicsightTM system is subject toregulatory requirements in both the United States and Europe. Approval may bedelayed or incur additional cost to the MedicsightTM system.

 

*Competitive Risks.*Thereare a number of groups and organizations, such as software companies in themedical imaging field, scanner manufacturers, screening companies and otherhealthcare providers, that have an interest in developing a competitiveoffering to the MedicsightTM system. In addition these competitors may have significantly greater resourcesthan the Company. We cannot make any assurance that they will not attempt todevelop such offerings, that they will not be successful in developing suchofferings or that any offerings they do develop will not have a competitiveedge versus the MedicsightTM system.

 

*OtherRisks.*The Company’s ability to deliver the software could behindered by such risks as the loss of key personnel, the patents beingsuccessfully challenged or credit facilities reduced or called in.

 

**RESULTS OF OPERATIONS**

 

*Revenues.* Forthe nine months ended September 30, 2004 and the nine months ended September 30,2003, the Company’s gross revenues from operations were $399,000 and $142,000,respectively. For the quarter ended September 30, 2004 and the quarterended September 30, 2003, the Company’s gross revenues from operations were$111,000 and $88,000, respectively. The Company’s revenue in the nine monthsended September 30, 2004 and 2003 were derived from the Company’sLifesyneTM scanning operations.

 

*Selling, General andAdministrative Expenses.* The Company’s selling, general and administrative expenses for the ninemonths and quarter ended September 30, 2004, were $9,027,000 and$2,917,000 respectively as compared to $7,192,000 and $2,353,000 respectivelyfor the nine months and quarter ended September 30, 2003.

 

Professional fees,including consulting services, were $1,643,000 and $841,000 for the nine monthsand quarter ended September 30, 2004 as compared to $877,000 and $309,000respectively for the nine months and quarter ended September 30, 2003. Inthe nine months and quarter ended September 30, 2004 salaries anddirectors’ compensation was $4,516,000 and $1,759,000 respectively, servicecharges and rates for property leasing were $391,000 and $120,000 respectively,and rent was $819,000 and $281,000 respectively. In the nine months and quarterended September 30, 2003, salaries and directors’ compensation was$3,940,000 and $1,110,000 respectively, service charges and rates for propertyleasing was $373,000 and $106,000 respectively, and rent was $460,000 and$144,000 respectively.

 

The primary components ofthe increased selling, general and administrative expenses for the nine monthsand quarter ended September 30, 2004 were increases in staff costs,professional fees, marketing and regulatory costs as the Company initiated itsvarious marketing strategies.

 

*Research and Development cost.*TheCompany’s research and development cost for the nine months and quarter ended September 30,2004, was $2,221,000 and $701,000 respectively as compared to $1,500,000 and$516,000 for the nine months and quarter ended September 30, 2003respectively. The Company’s research and development costs are comprised ofstaff and consultancy costs expensed on the MedicsightTM system.

 

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*Impairment Loss of Investment.*Forthe nine months and quarter ended September 30, 2004, the Company incurredan impairment loss on investments of $70,000 relating to the impairment in thecarrying value of Eurindia PLC (“Eurindia”) based on Eurindia’s management’s assessmentof the value of its portfolio at $0.61 per share.

 

For the nine months andquarter ended September 30, 2003, the Company incurred an impairment losson investments of $95,000 relating to the impairments in the carrying value ofEurindia and Strategic Intelligence PLC (“SI-PLC”). Eurindia was impaired by$59,000 based on Eurindia’s management’s assessment of the value of itsportfolio at $0.72 per share. Additionally the Company fully impaired itsinvestment in SI-PLC, $36,000, as the Company was unable to obtain anyinformation on or representations from SI-PLC as to the fair value.

 

*Net Loss and Net Loss per Share.*  Net loss was $10,232,000 and $3,495,000 forthe nine months and quarter ended September 30, 2004 compared to a netloss of $7,139,000 and $2,015,000 for the nine months and quarter ended September 30,2003.  Net loss per share for the ninemonths and quarter ended September 30, 2004 was $0.34 and $0.10respectively, based on weighted average shares outstanding of 30,157,023 and33,104,194 respectively, compared to a net loss per share of $0.33 and $0.09for the nine months and quarter ended September 30, 2003, based onweighted average shares outstanding of 21,680,820 and 22,709,538 respectively.

 

The increase in netlosses for the quarter and nine months to September 30, 2004 as comparedto the quarter and nine months to September 30, 2003 are due to increasesin selling, general and administrative expenses and research and developmentcosts.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

*Working Capital.*  At September 30, 2004, the Company had$10,167,000 in current assets. Cash and cash equivalents amounted to$8,814,000. Current liabilities were $2,067,000 at September 30,2004.  At December 31, 2003, theCompany had $2,144,000 in current assets and cash and cash equivalents amountedto $845,000.  Current liabilities were$6,540,000 at December 31, 2003. Working capital surplus/(deficit) at September 30,2004 was  $8,100,000, as compared to$(4,396,000) at December 31, 2003. The ratio of current assets to current liabilities was 4.92 to 1.0 at September 30,2004 as compared to 0.33 to 1.0 at December 31, 2003. The increase isprimarily due to the increase in cash and cash equivalents resulting from fundsreceived in the Company’s private offering and repayment of the Company’s lineof credit with Asia IT.

 

*Net Increase in Cash and CashEquivalents.*  Duringthe nine months ended September 30, 2004, the Company’s cash and cashequivalents increased by $7,969,000. This increase was primarily the result ofcash flows received from shares issued by the Company in excess of the net cashused in operating and investing activities and repayments of debt. The Companyused net cash of $11,506,000 in operations. The Company received net cash of$19,728,000 in financing activities and used $234,000 in investing activities.

 

*Net Cash Used in Operations.*  The use of cash in operations of  $11,506,000 in the nine months ended September 30,2004, was attributable to the Company’s relatively minimal revenues at the sametime that the Company incurred significant operating and software research anddevelopment costs. These significant costs included professional fees, salariesand director compensation, marketing, regulatory costs and property servicecharges and rent. The Company used cash in operations in the nine months ended September 30,2003 of  $9,122,000.

 

*Net Cash Used in InvestingActivities.*  In thenine months ended September 30, 2004, the Company had a net cash outflowfrom investing activities of $234,000. The Company used these funds to purchaseadditional fixed assets. In the nine months ended September 30, 2003 theCompany had a net cash outflow from investing activities of $1,230,000. TheCompany used the funds to purchase additional fixed assets.

 

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*Net Cash Provided by FinancingActivities.*  In thenine months ended September 30, 2004, the Company had a net cash inflowfrom financing activities of $19,728,000. The funds received in the nine monthsended September 30, 2004, consisted of $22,851,000 from the Company’sprivate offerings of which $2,880,000 was used to repay our debt facilitieswith Asia IT and the bank overdraft of $196,000 was also repaid. For the ninemonths ended September 30, 2003, the Company had a net cash inflow fromfinancing activities of $11,744,000. The funds received consisted of $7,100,000received from the private offering of the Company’s stock, $2,696,000 receivedfrom the private offering of MS-PLC stock and $2,827,000 received under avendor guarantee. The Vendor Guarantee arose from the acquisition of CoreVentures Limited (“Core”) in September 2000 and relates to an oralagreement between the Company and Dr Nill, that the proceeds of the sale of DrNill’s 1,195,000 shares in the Company would be remitted to the Company underthe terms of the Vendor Guarantee.

 

*Stockholders’ Equity.*The Company’s stockholders’ equity at September 30, 2004 was $23,054,000,including an accumulated deficit of $(173,700,000), as compared to $10,489,000at December 31, 2003, including an accumulated deficit of $(163,468,000).Additional paid-in capital was $196,652,000 and $173,810,000, at September 30,2004 and December 31, 2003 respectively. The increase in stockholders’equity was a result of an increase in additional paid-in capital of $22,842,000resulting from the placement of the Company’s stock offset by an increase inaccumulated deficit of $10,232,000.

 

*Additional Capital.*  The Company may require additional capitalduring its fiscal years ending December 31, 2004 and 2005 to implement itsbusiness strategies, including cash for payment of increased operating expensessuch as salaries for additional employees. Such additional capital may beraised through additional public or private equity offerings, as well asborrowings and other resources. Currently, the Company has two available linesof credit.

 

On December 15,2000, the Company entered into an unsecured credit facility with Asia IT thatprovides a $20,000,000 line of credit. Such line of credit originally expiredon December 31, 2001, but has been extended until December 31, 2005.Interest on advances under the credit facility accrues at 2% above US LIBOR.The Company can draw down on this credit facility for its financingrequirements, upon approval by the Company’s Board of Directors and subject toapproval by Asia IT (such approval not to be unreasonably withheld). TheCompany is restricted from borrowing funds, directly or indirectly, other thanthrough the credit facility with Asia IT, without the consent of Asia IT. Theavailability of the credit facility reduces upon the Company’s sale of any ofits investment assets. The amounts drawn and interest charged under thisfacility are repayable on demand or at the maturity of the facility.

 

On November 20,2001, Asia IT entered into a £10,000,000 ($18,000,000) credit facility withMS-PLC.  Such facility matures in November 2005and is secured by a lien on all assets of Medicsight.  Interest on outstanding amounts accrues at 2%above GBP LIBOR.  Pursuant to such creditfacility, MS-PLC had covenanted to undertake a public offering of its ordinaryshares in an amount not less than £25,000,000 ($45,000,000) not later than March 2002.  MS-PLC did not complete such an offering butthe facility nevertheless remains in place. The loan is convertible intoordinary shares in MS-PLC on announcement of an Offer to Subscribe, Placing orother public offering of its ordinary shares, at the same price per share asthe offering price. Due to the private offering being undertaken by MS-PLC, theloan is currently convertible.

 

At September 30,2004, the Company had not drawn down any funds under the $20,000,000 facilitywith Asia IT, and MS-PLC had not drawn down any funds under its £10,000,000($18,000,000) facility with Asia IT.

 

To the extent thatadditional capital is raised through the sale of equity or equity-relatedsecurities of the Company or its subsidiaries, the issuance of such securitiescould result in dilution to the Company’s stockholders. No assurance can begiven, however, that the Company will have access to the capital markets in thefuture, or that financing will be available on acceptable terms to satisfy theCompany’s cash requirements to implement its business strategies. If we are unableto access the capital markets or obtain acceptable financing, our results ofoperations and financial conditions could be materially and adverselyaffected.  We may be required to raisesubstantial additional funds through other means.   The products

 

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derived from ourproprietary software, including the MedicsightTM system, are expected to accountfor substantially all of our revenues from operations in the foreseeablefuture.  Our technology has not yet beenfully commercialized and we have not begun to receive any significant revenuesfrom commercial operations.  We cannotassure our stockholders that our technology and products will be commercializedsuccessfully, or that if so commercialized, that revenues will be sufficient tofund our operations.  If adequate fundsare not available to us, we may be required to curtail operations significantlyor to obtain funds through entering into arrangements with collaborativepartners or others that may require us to relinquish rights to certain of ourtechnologies or products that we would not otherwise relinquish.

 

*Critical Accounting Policies*

 

The Securities andExchange Commission requested that all registrants list their three to fivemost “critical accounting policies” in the Management’s Discussion and Analysesof Financial Condition and Results of Operations. The Securities and ExchangeCommission indicated a “critical accounting policy” is one which is bothimportant to the portrayal of the company’s financial condition and results andrequires management’s most difficult, subjective or complex judgments, often asa result of the need to make estimates about the effect of matters that areinherently uncertain. We believe that the following accounting policies fit thedefinition of critical accounting policies.

 

*RevenueRecognition.*We expect to earn our revenue primarily fromsoftware licenses and related services. Our revenue is recognized in accordancewith Statement of Position 97-2 (SOP 97-2), as amended by Statementof Position 98-9. Currently the Company’s revenues derive from itsscanning services operated by LifesyneTM. Scan revenue is recognizedwhen the service is delivered.

 

The recognition ofrevenues from software licenses and related services will require moredifficult and complex judgments. The terms of the license contract, long-term(over 12 months), short-term, cancelable, non-cancelable or per scan forexample will affect the recognition of revenues from services such as up-frontfees (for example installation, activation and up-front license fees), on-goinglicense fees, upgrade fees, termination fees and maintenance fees. Where feesare received prior to any service being delivered the fees are deferred untilthe related service has been delivered successfully and the revenue can then berecognized. Again if there are fees that relate to any “milestone” agreementsthese are deferred until the “milestone” has passed and then the revenue can berecognized.

 

The Company believes thatthe accounting estimates related to the recognition of revenue andestablishment of reserves for uncollectable amounts in the results ofoperations is a “critical accounting estimate” because: (1) it requiresmanagement to make assumptions about future collections, and (2) theimpact of changes in actual performance versus these estimates on the accountsreceivable balance reported on our consolidated balance sheets and the resultsreported in our consolidated statements of operations could be material.Further the Company has no history of uncollectable amounts and therefore mustinitially look to the estimates for the industry or particular companies thatthe management feels operate in a similar environment in addition to anycurrent market indicators about general economic conditions that might impactthe collectability of accounts.

 

*Researchand Development.***Costs incurredin connection with the development of software products that are intended forsale are accounted for in accordance with Statement of Financial AccountingStandards No. 86, “Accounting for the Costs of Computer Software to be Sold,Leased, or Otherwise Marketed”. Costs incurred prior to technologicalfeasibility being established for the product are expensed as incurred.Technological feasibility is established upon completion of a detail programdesign or, in its absence, completion of a working model. Thereafter, allsoftware production costs are capitalized and subsequently reported at thelower of unamortized cost or net realizable value. Capitalized costs areamortized based on current and future revenue for each product with an annualminimum equal to the straight-line amortization over the remaining estimatedeconomic life of the product. Amortization commences when the product isavailable for general release to customers.

 

The Company decided thatcapitalizing such expenditure was inappropriate because of the difficulty inassigning costs accurately to the various software products and versions beingdeveloped as technical and

 

11

----

 

development staff aremoved from product to product and version to version on a regular basis.Therefore the Company has decided to expense all research and developmentcosts. The Company’s research and development costs are comprised of staff andconsultancy costs expensed on the MedicsightTM system.

 

*Impairmentof Long-lived Assets and Long-lived Assets To Be Disposed of*.The Company evaluates the carrying value of long-lived assets for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. The Company’s assessment for impairment ofan asset involves estimating the undiscounted cash flows expected to resultfrom use of the asset and its eventual disposition. An impairment lossrecognized is measured as the amount by which the carrying amount of the assetexceeds the fair value of the asset.

 

Calculating the estimatedfair value of the asset involves significant judgments and a variety ofassumptions. Judgments that the Company makes concerning the intangibleacquired include assessing time and cost involved for development, time tomarket, risks of regulatory failure or obsolescence (due to market,environmental or technological advances for example). For calculating fairvalue based on discounted cash flows, we forecast future operating results and futurecash flows, which includes long-term forecasts of revenue growth, gross marginsand capital expenditures.

 

*Impairmentof Excess of Purchase Price Over Net Assets Acquired.***The Company adopted SFAS No. 142 on January 1,2002.  Under this standard, goodwill willno longer be amortized over its estimated useful life, but will be tested forimpairment on an annual basis and whenever indicators of impairment arise.  Under the provisions of SFAS No. 142, anyimpairment loss identified upon adoption of this standard is recognized as acumulative effect of a change in accounting principle. Any impairment lossincurred subsequent to the initial adoption of SFAS No 142 is recorded as acharge to current period earnings.

 

In connection with theadoption of SFAS No. 142, we performed our initial impairment analysis ofgoodwill and indefinite-lived intangible assets as of January 1, 2002. Theimplementation involved the determination of the fair value of each reportingunit, where a reporting unit is defined as an operating segment or one levelbelow.

 

 We determined thefair value of each significant reporting unit based on discounted forecasts offuture cash flows. Judgments and assumptions are required in the preparation ofthe estimated future cash flows, including long-term forecasts of revenuegrowth, gross margins and capital expenditures.

 

*RecentAccounting Pronouncements*

 

In January 2003, theFASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”(FIN No. 46), which addresses consolidation by business enterprises of variableinterest entities (“VIEs”).   FIN No.46is applicable immediately for VIEs created after January 31, 2003 and areeffective for reporting periods ending after December 15, 2003, for VIEscreated prior to February 1, 2003. In December 2003, the FASBpublished a revision to FIN 46 (“FIN 46R”) to clarify some of the provisions ofthe interpretation and to defer the effective date of implementation forcertain entities. Under the guidance of FIN 46R, public companies that haveinterests in VIE’s that are commonly referred to as special purpose entitiesare required to applythe provisions of FIN 46R for periods ending after December 15*,*2003. A public company that does not have any interests inspecial purpose entities but does have a variable interest in a VIE createdbefore February 1, 2003, must apply the provisions of FIN 46R by the endof the first interim or annual reporting period ending after March 14,2004. The adoption of FIN No. 46 did not have an effect on the consolidatedfinancial statements.

 

12

----

 

*ContractualObligations*

 

The Company has the following contractualobligations:

 
| ** **                                | ** ** | ** ** | ** ** | **Payments Due By Period** | ** ** |
|-------------------------------------------|------------|------------|------------|----------------------------|------------|
| **Contractual Obligations ($000’s)** | ** ** | **Total**  | ** ** | **Less than 1 year**       | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5 years** | ** ** |
|                                      |       |       |       |                       |       |   |   |   |   |   |   |
| Capital  Lease Obligations                |       | $          | 334        |                       | $          | 99 |   | $ | 179 |   | $ | 56 |   | $ | — |   |
| Operating  Lease Obligations              |       | 1,841      |       | 500                        |       | 1,249 |   | 92 |   | — |   |
| Total                                     |       | $          | 2,175      |                       | $          | 599 |   | $ | 1,428 |   | $ | 148 |   | $ | — |   |

 

## **Item 3.**                       Quantitativeand Qualitative Disclosures About Market Risk

## ** **

**Interest Rate Risk**

 

The Company’s exposure tomarket risk associated with changes in interest rates relates to its debtobligations. The Company has the following debt facilities, which are all repayableon demand:

 
| **Debt Holder**                  | ** ** | **Facility** | ** ** | **Draw Down** | ** ** | **Interest rate** | ** ** | **At September 30** | ** ** |
|----------------------------------|------------|--------------|------------|---------------|------------|-------------------|------------|--------------------------|------------|
|                             |       |         |       |          |       |              |       |                     |       |
| Asia IT  Capital Investments Ltd |       | $            | 20,000,000 |          | $          | nil               |       | US Libor + 2%            |       | 4.45 | % |
|                             |       |         |       |          |       |              |       |                     |       |
| Asia IT  Capital Investments Ltd |       | $            | 18,000,000 |          | $          | nil               |       | GBP Libor + 2%           |       | 7.10 | % |

 

A hypothetical 100 basispoint increase in interest rates would increase interest cost by approximately$nil per annum assuming no further draw downs or repayments are made.

 

**Foreign Exchange Risk**

 

The Company holds limitedcash balances in British Pounds so any adverse movements in the exchange ratesare considered immaterial.

 

13

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## **Item 4.**                       Controlsand Procedures

 

*Evaluation of Disclosure Controls andProcedures*

 

We maintain controls andprocedures designed to ensure that information required to be disclosed in thisreport is recorded, processed, accumulated and communicated to our management,including our chief executive officer and our chief financial officer, to allowtimely decisions regarding the required disclosure. Management necessarilyapplied its judgment in assessing the costs and benefits of such controls andprocedures, which, by their nature, can provide only reasonable assuranceregarding management’s control objectives. At June 30, 2004, ourmanagement, with the participation of our chief executive officer and chieffinancial officer, carried out an evaluation of the effectiveness of the designand operation of these disclosure controls and procedures. Our chief executiveofficer and chief financial officer concluded that these disclosure controlsand procedures are effective.

 

*Changes in Internal Controls*

 

During the quarter ended September 30,2004 the Company made no significant changes in our internal controls or inother factors that could significantly affect these controls, nor did we takeany corrective action, as the evaluation revealed no significant deficienciesor material weaknesses.

 

14

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# **PARTII**

# ** **

## **Item 1.**                       LegalProceedings

## ** **

### There are currently nopending legal proceedings.

###  

## **Item 2.**                       UnregisteredSales of Equity Securities and Use of Proceeds

## ** **

### Between July 1, 2004and September 30, 2004 the Company issued 579,498 shares of common stockat $3.00 per share to a number of institutional investors and privateindividuals as part of a private placement raising approximately $1,565,000 netof commissions payable to Asia IT. The shares of common stock were issuedwithout registration in reliance upon the exemption provided by   Section 4(2) of the Securities Act of1933.

###  

### On July 12, 2004 theCompany issued 250,000 shares of common stock at $3.00 per share to Asia IT aspart settlement of outstanding commissions due to Asia IT. The shares of commonstock were issued without registration in reliance upon the exemption providedby Section 4(2) of the Securities Act of 1933.

###  

### On July 21, 2004 theCompany issued 125,000 shares of common stock at $3.00 per share to Asia IT aspart settlement of the line of credit with Asia IT. The shares of common stockwere issued without registration in reliance upon the exemption provided by Section 4(2)of the Securities Act of 1933.

###  

## **Item 3.**                       DefaultsUpon Senior Securities

## ** **

### None.

###  

## **Item 4.**                       Submissionof Matters to a Vote of Security Holders

## ** **

### None.

###  

## **Item 5.**                       OtherInformation

## ** **

### None.

 

15

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## **Item 6.**                       Exhibitsand Reports on Form 8-K

## ** **

### (a)                                  Exhibits

###  

### 31.1                          Certificationpursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief ExecutiveOfficer - filed herewith).

###  

### 31.2                         Certificationpursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief FinancialOfficer - filed herewith).

###  

### 32.1                         Certificationpursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief ExecutiveOfficer - filed herewith).

###  

32.2                         Certificationpursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief FinancialOfficer - filed herewith).

 

(b)                                  Reportson Form 8-K

 

On August 16,2004 the Company filed a Current Report on Form 8-K announcing the Company’sLung CAR software had received U.S. FDA market clearance and European CEapproval.

 

On September 21,2004 the Company filed a Current Report on Form 8-K announcing that Mr StephenForsyth was standing down as the Company’s Chief Executive Officer immediatelyand was being replaced by Mr Timothy Paterson-Brown.

 

On October 28, 2004 the Company filed aCurrent Report on Form 8-K announcing the Company’s Colon CAR software hadreceived U.S. FDA market clearance.

 

16

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**MEDICSIGHT, INC. AND SUBSIDIARIES**

**INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004**

 
| Condensed  Consolidated Balance Sheets as of September 30, 2004 (Unaudited) and December  31, 2003 (Audited)                                                           | F-2        |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                                                                   |       |
| Condensed  Consolidated Statements of Operations for the Three Months Ended September  30, 2004 (Unaudited) and the Three Months Ended September 30, 2003  (Unaudited) | F-3        |
|                                                                                                                                                                   |       |
| Condensed Consolidated  Statements of Operations for the Nine months Ended September 30, 2004  (Unaudited) and the Nine months Ended September 30, 2003 (Unaudited)    | F-4        |
|                                                                                                                                                                   |       |
| Condensed  Consolidated Statement of Cash Flows for the Nine months Ended September 30,  2004 (Unaudited) and the Nine months Ended September 30, 2003 (Unaudited)     | F-5        |
|                                                                                                                                                                   |       |
| Notes to  Condensed Consolidated Financial Statements                                                                                                                  | F-6 to F-9 |

** **

F-1

 

----

**MEDICSIGHT, INC. AND SUBSIDIARIES**

** **

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In $ thousands)**

** **
| ** **                                                                                                                            | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                                                                            | ** ** | **(unaudited)**         | ** ** | **(audited)**          | ** ** |
| ASSETS                                                                                                                                | ** ** | ** **              | ** ** | ** **             | ** ** |
| CURRENT  ASSETS:                                                                                                                      |       |                    |       |                   |       |
| Cash and cash  equivalents                                                                                                            |       | $                       | 8,814      |                   | $          | 845 |   |
| Accounts  receivable                                                                                                                  |       | 32                      |       | 33                     |       |
| Other  receivables                                                                                                                    |       | 61                      |       | 123                    |       |
| Prepaid  expenses                                                                                                                     |       | 478                     |       | 539                    |       |
| Sales tax  receivable                                                                                                                 |       | 782                     |       | 604                    |       |
| Total current  assets                                                                                                                 |       | 10,167                  |       | 2,144                  |       |
|                                                                                                                                  |       |                    |       |                   |       |
| PROPERTY AND  EQUIPMENT, at cost, net of accumulated depreciation of $2,062 and $1,480,  respectively                                 |       | 2,784                   |       | 3,033                  |       |
|                                                                                                                                  |       |                    |       |                   |       |
| INVESTMENTS,  at cost                                                                                                                 |       | 359                     |       | 429                    |       |
|                                                                                                                                  |       |                    |       |                   |       |
| SECURITY  DEPOSITS                                                                                                                    |       | 846                     |       | 843                    |       |
|                                                                                                                                  |       |                    |       |                   |       |
| EXCESS OF  PURCHASE PRICE OVER NET ASSETS ACQUIRED                                                                                    |       | 11,200                  |       | 11,200                 |       |
|                                                                                                                                  |       |                    |       |                   |       |
| Total assets                                                                                                                          |       | $                       | 25,356     |                   | $          | 17,649 |   |
|                                                                                                                                  |       |                    |       |                   |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                             |       |                    |       |                   |       |
| CURRENT  LIABILITIES:                                                                                                                 |       |                    |       |                   |       |
| Accounts  payable                                                                                                                     |       | $                       | 1,103      |                   | $          | 2,342 |   |
| Accrued  expenses                                                                                                                     |       | 521                     |       | 700                    |       |
| Accrued  professional expenses                                                                                                        |       | 344                     |       | 326                    |       |
| Bank overdraft                                                                                                                        |       | —                  |       | 196                    |       |
| Line of credit  – related party                                                                                                  |       | —                  |       | 2,880                  |       |
| Current  portion of obligations under capital leases                                                                                  |       | 99                      |       | 96                     |       |
| Total current  liabilities                                                                                                            |       | 2,067                   |       | 6,540                  |       |
| CAPITAL LEASE                                                                                                                         |       | 235                     |       | 306                    |       |
| Total  liabilities                                                                                                                    |       | $                       | 2,302      |                   | $          | 6,846 |   |
|                                                                                                                                  |       |                    |       |                   |       |
| STOCKHOLDERS’  EQUITY:                                                                                                           |       |                    |       |                   |       |
| Common stock,  $0.001 par value, 40,000,000 shares authorized, 33,066,679 and 24,488,858  shares issued and outstanding, respectively |       | 33                      |       | 24                     |       |
| Additional  paid-in capital                                                                                                           |       | 196,652                 |       | 173,810                |       |
| Cumulative  foreign currency translation adjustment                                                                                   |       | 69                      |       | 123                    |       |
| Accumulated  deficit                                                                                                                  |       | (173,700                | )          | (163,468               | )          |
| TOTAL  STOCKHOLDERS’ EQUITY                                                                                                      |       | 23,054                  |       | 10,489                 |       |
| Minority  interest                                                                                                                    |       | —                  |       | 314                    |       |
|                                                                                                                                  |       | 23,054                  |       | 10,803                 |       |
| Total  liabilities and stockholders’ equity                                                                                      |       | $                       | 25,356     |                   | $          | 17,649 |   |

 

The accompanying notes are an integral partof these condensed statements.

 

F-2

 

----

**MEDICSIGHT, INC. AND SUBSIDIARIES**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**(In $ thousands, except per share amounts)

 
| ** **                                            | ** ** | **Three Months  Ended  September 30,  2004** | ** ** | **Three Months  Ended  September 30,  2003** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                            | ** ** | **(unaudited)**                              | ** ** | **(unaudited)**                              | ** ** |
| ** **                                            | ** ** | ** **                                   | ** ** | ** **                                   | ** ** |
| REVENUES                                              |       | $                                            | 111        |                                         | $          | 88 |   |
|                                                  |       |                                         |       |                                         |       |
| EXPENSES:                                             |       |                                         |       |                                         |       |
| Selling,  general and administrative charges          |       | 2,917                                        |       | 2,353                                        |       |
| Research and  development cost                        |       | 701                                          |       | 516                                          |       |
| Impairment of  investment                             |       | 70                                           |       | 95                                           |       |
|                                                  |       |                                         |       |                                         |       |
|                                                  |       | 3,688                                        |       | 2,964                                        |       |
|                                                  |       |                                         |       |                                         |       |
| Operating loss                                        |       | (3,577                                       | )          | (2,876                                       | )          |
|                                                  |       |                                         |       |                                         |       |
| OTHER INCOME:                                         |       |                                         |       |                                         |       |
| Interest and  other income                            |       | 82                                           |       | 8                                            |       |
|                                                  |       |                                         |       |                                         |       |
| Net Loss  before minority interest                    |       | (3,495                                       | )          | (2,868                                       | )          |
|                                                  |       |                                         |       |                                         |       |
| MINORITY  INTEREST                                    |       | —                                       |       | 853                                          |       |
|                                                  |       |                                         |       |                                         |       |
| Net loss                                              |       | $                                            | (3,495     | )                                            | $          | (2,015 | ) |
|                                                  |       |                                         |       |                                         |       |
| PER SHARE  DATA:                                      |       |                                         |       |                                         |       |
| Basic and  diluted loss per share                     |       | $                                            | (0.10      | )                                            | $          | (0.09 | ) |
|                                                  |       |                                         |       |                                         |       |
| Weighted  average number of common shares outstanding |       | 33,104,194                                   |       | 22,709,538                                   |       |

 

The accompanying notes are an integral partof these condensed statements.

 

F-3

 

----

**MEDICSIGHT, INC. AND SUBSIDIARIES**

** **

**CONDENSEDCONSOLIDATED** STATEMENTSOF OPERATIONS(In $ thousands, except per share amounts)

 
| ** **                                            | ** ** | **Nine months  Ended  September 30,  2004** | ** ** | **Nine months  Ended  September 30,  2003** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                            | ** ** | **(unaudited)**                             | ** ** | **(unaudited)**                             | ** ** |
| ** **                                            | ** ** | ** **                                  | ** ** | ** **                                  | ** ** |
| REVENUES                                              |       | $                                           | 399        |                                        | $          | 142 |   |
|                                                  |       |                                        |       |                                        |       |
| EXPENSES:                                             |       |                                        |       |                                        |       |
| Selling,  general and administrative charges          |       | 9,027                                       |       | 7,192                                       |       |
| Research and  development cost                        |       | 2,221                                       |       | 1,500                                       |       |
| Impairment of  investment                             |       | 70                                          |       | 95                                          |       |
|                                                  |       |                                        |       |                                        |       |
|                                                  |       | 11,318                                      |       | 8,787                                       |       |
|                                                  |       |                                        |       |                                        |       |
| Operating loss                                        |       | (10,919                                     | )          | (8,645                                      | )          |
|                                                  |       |                                        |       |                                        |       |
| OTHER INCOME:                                         |       |                                        |       |                                        |       |
| Interest and  other income                            |       | 82                                          |       | 8                                           |       |
|                                                  |       |                                        |       |                                        |       |
| Net Loss  before minority interest                    |       | (10,837                                     | )          | (8,637                                      | )          |
|                                                  |       |                                        |       |                                        |       |
| MINORITY  INTEREST                                    |       | 605                                         |       | 1,498                                       |       |
|                                                  |       |                                        |       |                                        |       |
| Net loss                                              |       | $                                           | (10,232    | )                                           | $          | (7,139 | ) |
|                                                  |       |                                        |       |                                        |       |
| PER SHARE  DATA:                                      |       |                                        |       |                                        |       |
| Basic and  diluted loss per share                     |       | $                                           | (0.34      | )                                           | $          | (0.33 | ) |
|                                                  |       |                                        |       |                                        |       |
| Weighted  average number of common shares outstanding |       | 30,157,023                                  |       | 21,680,820                                  |       |
|                                                       |            |                                             |            |                                             |            |  |  |  |

 

The accompanying notes are an integral partof these condensed statements.

 

F-4

 

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW**(In $ thousands)

 
| ** **                                                                  | ** ** | **Nine months****Ended  September 30,  2004** | ** ** | **Nine months****Ended  September 30,  2003** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                  | ** ** | **(unaudited)**                               | ** ** | **(unaudited)**                               | ** ** |
| ** **                                                                  | ** ** | ** **                                    | ** ** | ** **                                    | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                      |       |                                          |       |                                          |       |
| Net  loss                                                                   |       | $                                             | (10,232)   |                                          | $          | (7,139) |   |
| Adjustments to reconcile net  loss to net cash used in operating activities |       |                                          |       |                                          |       |
| Depreciation                                                                |       | 570                                           |       | 420                                           |       |
| Impairment of investment                                                    |       | 70                                            |       | 96                                            |       |
| Minority interest in net loss  of subsidiary                                |       | (605                                          | )          | (1,498                                        | )          |
| (Increase)/decrease in assets                                               |       |                                          |       |                                          |       |
| Accounts receivable                                                         |       | 1                                             |       | (105                                          | )          |
| Prepaid expenses and other  current assets                                  |       | 61                                            |       | (157                                          | )          |
| Sales tax receivable                                                        |       | (117                                          | )          | (319                                          | )          |
| Security deposits                                                           |       | —                                        |       | (743                                          | )          |
| Increase/(decrease) in liabilities                                          |       |                                          |       |                                          |       |
| Accounts payable                                                            |       | (1,185                                        | )          | 252                                           |       |
| Accrued expenses                                                            |       | (132                                          | )          | 140                                           |       |
| Accrued professional expenses                                               |       | 63                                            |       | (69                                           | )          |
| Net cash used in operating  activities                                      |       | (11,506                                       | )          | (9,122                                        | )          |
|                                                                        |       |                                          |       |                                          |       |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                      |       |                                          |       |                                          |       |
| Purchase of fixed assets                                                    |       | (234                                          | )          | (1,230                                        | )          |
| Net cash used in investing  activities                                      |       | (234                                          | )          | (1,230                                        | )          |
|                                                                        |       |                                          |       |                                          |       |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                      |       |                                          |       |                                          |       |
| Principal payments under  capital lease obligations                         |       | (47                                           | )          | (427                                          | )          |
| Decrease of bank overdraft                                                  |       | (196                                          | )          | 29                                            |       |
| Proceeds from sale of common  stock                                         |       | 22,851                                        |       | 7,100                                         |       |
| Proceeds from MS-PLC sale of  common stock                                  |       | —                                        |       | 2,696                                         |       |
| Funds received under vendor  guarantee                                      |       | —                                        |       | 2,827                                         |       |
| (Decrease)/increase in short  term debt – related party                |       | (2,880                                        | )          | (481                                          | )          |
| Net cash provided by financing  activities                                  |       | 19,728                                        |       | 11,744                                        |       |
|                                                                        |       |                                          |       |                                          |       |
| Effects of exchange rates on  cash and cash equivalent                      |       | (19                                           | )          | (261                                          | )          |
|                                                                        |       |                                          |       |                                          |       |
| NET CHANGE IN CASH & CASH  EQUIVALENTS                                  |       | 7,969                                         |       | 1,131                                         |       |
|                                                                        |       |                                          |       |                                          |       |
| CASH & CASH EQUIVALENTS,  BEGINNING OF PERIOD                           |       | 845                                           |       | 1,778                                         |       |
|                                                                        |       |                                          |       |                                          |       |
| CASH & CASH EQUIVALENTS,  END OF PERIOD                                 |       | $                                             | 8,814      |                                          | $          | 2,909 |   |
|                                                                        |       |                                          |       |                                          |       |
| NON CASH FINANCING ACTIVITIES                                               |       |                                          |       |                                          |       |
| Capital lease obligations for equipment                                     |       | —                                        |       | 841                                           |       |

** **

**The accompanying notes are an integralpart of these**condensed statements.

 

F-5

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL** STATEMENTS

** **

*(1)*                               Formationand Business of the Company

* *

Medicsight, Inc. (formerly HTTP Technology, Inc.) andits subsidiaries are collectively referred to in this Report as the “Company”.  Our business objective is to conceive,develop and commercialize the MedicsightTM system (ourstate-of-the-art digital disease detection software system comprisingMedicColon, MedicHeart, and MedicLung) through our majority-owned subsidiary,Medicsight PLC (“MS-PLC”).

 

We were originally incorporated as a Utah corporationin 1977. OnDecember 19, 2000, we entered into an Agreement and Plan of Merger with ourwholly owned subsidiary HTTP Technology, Inc., a Delaware corporation, andthereby effected a re-incorporation of the company from Utah to Delaware. Allreferences in this Annual Report to  “theCompany”, “we” or “us” refer to Medicsight, Inc., the Delaware corporation andsubsidiaries, if the event occurred on or after December 19, 2000 or to HTTPTechnology, Inc., the Utah corporation and subsidiaries, if the event occurredprior to December 19, 2000.

 

*(2)*                               Basisof Presentation

* *

The accompanying unaudited consolidated financialstatements of the Company have been prepared pursuant to the rules of theSecurities and Exchange Commission (the “SEC”). Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles in the United Stateshave been condensed or omitted pursuant to such rules and regulations. Theseunaudited consolidated financial statements should be read in conjunction withthe audited consolidated financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the Fiscal years ended December 31,2003, 2002 (restated), 2001 (restated) filed on April 8, 2004. In the opinionof management, the accompanying unaudited consolidated financial statementsreflect all adjustments, which are of a normal recurring nature, necessary fora fair presentation of the results for the periods presented. All significantinter-company transactions have been eliminated in consolidation.

 

The results of operations presented for the ninemonths and quarter ended September 30, 2004, are not necessarily indicative ofthe results to be expected for any other interim period or any future fiscalyear.

 

The Company has incurred significant operating lossessince inception.  As a result, theCompany has generated negative cash flows from operations, and has anaccumulated deficit at September 30, 2004. The Company is operating in a developing industry based on newtechnology and its primary source of funds to date has been through theissuance of securities and borrowed funds. The Company is currently seeking additional funding and are activelydeveloping the technology in order to bring it to market.  While the Company is optimistic and believesappropriate actions are being taken, there can be no assurance, however, thatthe management’s efforts will be successful or that the products it marketswill be accepted by consumers.

 

*(3)*                               Linesof Credit

* *

On December 15, 2000, the Company entered into anunsecured credit facility with Asia IT, which provides a $20,000,000 line ofcredit. Such line of credit originally expired on December 31, 2001, but hasbeen extended until December 31, 2005. Interest on advances under the creditfacility accrues at 2% above US LIBOR. The Company can draw down on this creditfacility for its financing requirements, upon approval by the Company’s Boardof Directors and subject to approval by Asia IT (such approval not to beunreasonably 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 

 

F-6

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would be reduced upon the Company’s sale of any of itsinvestment assets. The amounts drawn and interest charged under this facilityare repayable on demand or at the maturity of the facility.

 

On November 20, 2001, MS-PLC entered into a£10,000,000 ($18,000,000) credit facility with Asia IT.  Such facility matures in November 2005 and issecured 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 hadcovenanted to undertake a public offering of its ordinary shares in an amountnot less than £25,000,000 ($45,000,000) not later than March 2002.  MS-PLC did not complete such an offering butthe facility nevertheless remains in place. The loan is convertible intoordinary shares in MS-PLC on announcement of an Offer to Subscribe, Placing orother public offering of its ordinary shares, at the same price per share asthe offering price. Due to the private offering being undertaken by MS-PLC, theloan is currently convertible.

 

At September 30, 2004, the Company had not drawn downany funds under the $20,000,000 facility with Asia IT, and MS-PLC had not drawndown any funds under its £10,000,000 ($18,000,000) facility with Asia IT.

 

*(4)*                               Stockholders’Equity

* *

On December 30, 2002, the Company effected a 1-for-3reverse split (the “Split”) of its Common Stock.  As such, all share and per share informationin the accompanying financial statements has been restated to reflect theSplit. On January 27, 2004 the Company increased its authorized share capitalfrom 25,000,000 shares to 40,000,000 shares.

 

During the nine months ended September 30, 2004 theCompany issued approximately 8,578,000 shares of restricted stock raising$22.85m (net of commissions) as part of a private placement.

 

*(5)*                               Accountingfor Stock Based Compensation

* *

On March 20, 2003, the Board of Directors of MS-PLCapproved a stock option plan for its employees and reserved 4,000,000 shares ofits 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 stockoption plan and implemented it on April 30, 2003 by issuing options over2,828,600 shares to employees of MS-PLC. At September 30, 2004, 50% of theoptions issued were exercisable under the plan.

 

The Company has elected to adopt the disclosure onlyprovisions of Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” as amended by SFAS No. 148, “Accounting forStock-Based Compensation - Transition and Disclosure - an amendment of FASBStatement No. 123”, and measures the cost for MS-PLC’s employee stockcompensation plan by using the accounting methods prescribed by APB Opinion No.25, “Accounting for Stock Issued to Employees”, which allows that no compensationcost be recognized unless the exercise price of the options granted is lowerthan the fair market value of the Company’s stock at date of grant.Accordingly, no stock-based employee compensation cost is reflected in netloss, as all options granted had an exercise price equal to the market value ofthe underlying common stock on the date of grant. SFAS No. 123, as amendedby SFAS No. 148, requires disclosure of pro forma income and pro formaincome per share as if the fair value based method had been applied inmeasuring compensation expense.

 

F-7

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| ** **                                     | ** ** | **Nine months  Ended  September 30,  2004** | ** ** | **Nine months  Ended  September 30,  2003** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                     | ** ** | **(unaudited)  $’000**                 | ** ** | **(unaudited)  $’000**                 | ** ** |
| Net  loss as reported:                         |       | (10,232                                     | )          | (7,139                                      | )          |
|                                           |       |                                        |       |                                        |       |
| Fair value method of stock  based compensation |       | (165                                        | )          | (44                                         | )          |
|                                           |       |                                        |       |                                        |       |
| Proforma net loss                              |       | (10,397                                     | )          | (7,183                                      | )          |
|                                           |       |                                        |       |                                        |       |
| Reported earnings per common  share            |       |                                        |       |                                        |       |
| Basic and diluted                              |       | (0.34                                       | )          | (0.33                                       | )          |
| Proforma earnings per common  share            |       |                                        |       |                                        |       |
| Basic and diluted                              |       | (0.34                                       | )          | (0.33                                       | )          |

 

The fair values of options granted were determinedunder the intrinsic value method for expense determined under the fair valuebased method, net of related tax effects.

 

*(6)*                               Goodwilland Other Intangible Assets

* *

Goodwill

 

The Company adopted SFAS No. 142 effective January 1,2002. Under this standard, goodwill will no longer be amortized over itsestimated useful life, but will be tested for impairment on an annual basis andwhenever indicators of impairment arise.

 

The Goodwill of $11,200,000 arose from the fair valueattributable to the share swap with General Nominees and Asia IT Nomineeswhereby the Company issued 1,866,666 shares to General Nominees (1,674,894shares) and Asia IT Nominees (191,772 shares) in return for 7,000,000 MS-PLCshares held by General Nominees (6,280,852 shares) and Asia IT Nominees(719,148 shares) respectively.

 

Prior to January 1, 2002, goodwill was amortized on astraight-line basis over 5 years.

 

*(7)*                               SecurityDeposits

* *

As MS-PLC occupies approximately 95% of 46 BerkeleySquare it acquired the security deposit on the offices for cash fromInternational Cellulose Company Ltd in February 2003. The value of the securitydeposit is £470,000 ($781,000) and is interest-bearing.

 

F-8

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*(8)*                               LeaseCommitments

* *

The Company has entered into property leases for theWestminster and Ravenscourt centers. Future minimum obligations under theselease arrangements are as follows:

 

| **For the 12 months ending   September 30,** | ** ** | **Property   Leases** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **($’000)**      | ** ** |
| 2005                                         |       | 500                   |       |
| 2006                                         |       | 508                   |       |
| 2007                                         |       | 509                   |       |
| 2008                                         |       | 232                   |       |
| 2009 and thereafter                          |       | 92                    |       |

 

The Company’s corporate offices at 46 Berkeley Squareare leased to International Cellulose Company Limited (ICCL), a companyregistered in England and Wales. STG Holdings PLC, a significant stockholder ofthe Company, acquired 100% of the issued share capital of ICCL in November2001. There is no formal lease agreement between ICCL and the Company for itsoffices at 46 Berkeley Square but the Company is charged by ICCL on the basisof space occupied. The approximate charge is $140,000 per quarter.

 

*(9)*                               MajorCustomers

* *

The Company’s revenue in the nine months endedSeptember 30, 2004 and 2003 was derived from the Company’s LifesyneTM scanningoperations.

 

*(10)*                        ComprehensiveIncome

* *

As of September 30, 2004 and the nine months andquarter then ended, comprehensive income is comprised of a net loss fromoperations and the net effect of foreign currency translation adjustments. Thiscomprised a net loss of $10,232,000 and $3,494,000 and foreign currencytranslation adjustments of $54,000 and $33,000, resulting in comprehensive lossof  $10,286,000 and $3,527,000,respectively.

 

*(12)        RecentAccounting Pronouncements*

 

**In January 2003,the FASB issued Interpretation No. 4**6, “Consolidationof Variable Interest Entities” (FIN No. 46), which addressesconsolidation by business enterprises of variable interest entities (“VIEs”).   FIN No.46 is applicable immediately for VIEscreated after January 31, 2003 and are effective for reporting periods endingafter December 15, 2003, for VIEs created prior to February 1, 2003. In December2003, the FASB published a revision to FIN 46 (“FIN  46R”) to clarify some of theprovisions of the interpretation and to defer the effective date ofimplementation for certain entities. Under the guidance of FIN 46R, publiccompanies that have interests in VIE’s that are commonly referred toas special purpose entities are required to applythe provisions of FIN 46R forperiods ending after December 15, 2003. A public company that doesnot have any interests in special purpose entities but does have a variableinterest in a VIE created before February 1, 2003, must apply the provisions ofFIN 46R by the end of the first interim or annual reporting period ending afterMarch 14, 2004. The adoption of FIN  No.46 did not have an effect on the consolidated financial statements.

 

F-9

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** **

**SIGNATURE**

** **

In accordance with the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 

 
|              | MEDICSIGHT, INC. |
|-------------------|------------------|
|              |             |
|              |             |
|              | By:              | /s/TIM PATERSON-BROWN |   |
|              |             | Tim Paterson-Brown |
|              |             | Chief Executive Officer |
|              |             |
|              |             |
|              | By:              | /s/PAUL GOTHARD |   |
|              |             | Paul Gothard |
|              |             | Chief Financial Officer |
|              |             |   |
|              |             |   |
| November 10, 2004 |             |   |

 

F-10

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