UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes       ý         No       o

 

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

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  As of August 6, 2004: 33,037,298 shares of Common Stock, par value $0.001 per share.

 

 

NOTE REGARDING AMENDMENT AND RESTATEMENT

 

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

 

As a result, the Company has restated its previously issued financial statements for the six months and quarter ended June 30, 2003.  A summary of the significant effects of the restatements is set forth below.

 

MEDICSIGHT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Three months ended June 30, 2003			Three months ended June 30, 2003
		(as previously reported) $000’s			(as restated) $000’s
REVENUES		44			44
EXPENSES:
Selling, general and administrative charges		3,592			2,657
Research and development cost		—			515
Impairment of vendor guarantee		(697		)	—
		2,895			3,172
Net loss before minority loss		(2,851		)	(3,128		)
MINORITY INTEREST		405			405
Net loss		(2,446		)	(2,723		)
PER SHARE DATA:
Basic and diluted loss per share		$	(0.12	)	$	(0.13	)
Weighted average number of common shares outstanding		21,155,189			21,155,189

 

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		Six months ended June 30, 2003			Six months ended June 30, 2003
		(as previously reported) $000’s			(as restated) $000’s
REVENUES		$	54		$	54
EXPENSES:
Selling, general and administrative charges		6,569			4,587
Research and development cost		—			984
Impairment of vendor guarantee		(697		)	—
		5,872			5,571
Net loss before minority loss		(5,818		)	(5,517		)
MINORITY INTEREST		694			694
Net loss		$	(5,124	)	$	(4,823	)
PER SHARE DATA:
Basic and diluted loss per share		$	(0.24	)	$	(0.23	)
Weighted average number of common shares outstanding		21,155,032			21,155,032

 

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MEDICSIGHT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

 

		Six months ended June 30, 2003			Six months ended June 30, 2003
		(as previously reported) $000’s			(as restated) $000’s
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(5,124	)	$	(4,823	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation		164			164
Amortization of intangibles		2,247			—
Impairment of vendor guarantee		(697		)	—
Minority interest in net earnings of subsidiary		(694		)	(694		)
(Increase)/decrease in assets
Accounts receivable		(12		)	(12		)
Prepayments		(382		)	(382		)
VAT receivable		(230		)	(230		)
Security deposits		(743		)	(743		)
Increase/(decrease) in assets
Accounts payable		970			970
Accrued expenses		(81		)	(81		)
Accrued professional expenses		6			6
Net cash used in operating activities		(4,576		)	(5,825		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets		(526		)	(526		)
Software development costs		(1,249		)	—
Net cash used in investing activities		(1,775		)	(526		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations		(34		)	(34		)
Increase in bank overdraft		88			88
Proceeds sale of common stock		919			919
Increase in short term debt - related party		1,401			1,401
Funds received under vendor guarantee		2,259			2,259
Net cash provided by financing activities		4,633			4,633
Effects of exchange rates on cash and cash equivalents		(60		)	(60		)
NET CHANGE IN CASH & CASH EQUIVALENTS		$	(1,778	)	$	(1,778	)
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD		1,778			1,778
CASH & CASH EQUIVALENTS, END OF PERIOD		$	—		$	—

 

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June 30, 2003

 

Research and Development.

 

During the first six months of Fiscal 2003, in accordance with Statement of Financial Accounting Standards (FAS) 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, the Company capitalized certain computer software development costs. Technical feasibility was established on completion of working models for MedicHeart, MedicLung and MedicColon software products in January 2003. Subsequently, the Company capitalized costs of $1,249,000 in the six months ended June 30, 2003 under FAS 86. These costs capitalized comprised staff, consultants, regulatory and clinical trial costs specific to the three products.

 

Subsequently the Company decided that this accounting treatment was inappropriate because of the difficulty in assigning costs accurately to the various software products and versions being developed as technical and development staff are moved from product to product and version to version on a regular basis. The Company has decided to expend all research and development costs in Fiscal 2003. The Company’s research and development costs for the six months and quarter ended June 30, 2003 of $984,000 and $515,000 respectively are comprised of staff and consultancy costs expensed on the Medicsight™ system. The regulatory and clinical trial charges for the six months and quarter ended June 30, 2003 of $265,000 and $189,000 respectively are expensed in “Selling, general
and administrative charges”.

 

Depreciation and Amortization Expense.

 

During Fiscal 2000, the Company acquired an intangible asset from the former parent of Insights consisting of technology valued at $22,470,000. Under SFAS No.142, this is considered an intangible asset with a definite life of 5 years. Therefore the value of the asset was amortized on a straight-line basis over this period.

 

The Company evaluates the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company’s assessment for impairment of an asset involves estimating the undiscounted cash flows expected to result from use of the asset and its eventual disposition. An impairment loss recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.  During the third quarter of 2003 the Company reviewed the carrying value of the core technology acquired from Insights and decided that the core technology should be fully impaired.  This was based on the view that there were no further software applications apart from the medical imaging applications currently being developed that could be derived from the core technology. The Company further decided that the impairment should be recorded as at December 31, 2002. In the six months and quarter ended June 30, 2003 the Company had an amortization charges of $2,247,000 and $1,124,000 respectively expensed in “Selling, general and administrative charges” relating to the fully impaired technology which is no longer applicable.

 

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Impairment of vendor guarantee.

 

The Vendor Guarantee arose from the acquisition of Core Ventures Limited (“Core”) and relates to an oral agreement between the Company and Dr Nill, that the proceeds of the sale of Dr Nill’s 1,195,000 shares in the Company would be remitted to the Company under the terms of the Vendor Guarantee. These shares were sold in 2003 and the Company received $3,689,000 net of commissions. At December 31, 2001 and December 31, 2002, the fair value attributed to the Vendor Guarantee was based on the weighted average share price. The Company reviewed the fair value at December 31, 2002 and concluded that it would be more appropriate and better understood if the fair value at December 31, 2002 reflected the funds actually received in 2003. Therefore in the six months and quarter ended June 30, 2003 the reduction in impairment charge of $697,000 is restated as nil.

 

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NOTE REGARDING FORWARD LOOKING STATEMENTS

 

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

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

 

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PART 1

 

FINANCIAL INFORMATION

Item 1.                     Financial Statements

 

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

 

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

 

BACKGROUND

 

We are a software development business, focused on the medical imaging market. Our core technology is about developing automatic detection and analytical tools for clinicians to improve their ability to diagnose and treat diseases.

 

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

 

During the six months ended June 30, 2004 the Company issued approximately 7,873,000 restricted shares of stock raising $20.93m as part of a private placement.

 

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

 

BUSINESS STRATEGY

 

We are developers of software technology for medical diagnostic applications such as Computer Aided Detection  (“CAD”) and Computer Assisted Reader (“CAR”) software products in differing business models. We have four principal operating subsidiaries: Medicsight PLC (“MS-PLC”), Medicsight Asset Management Limited (“MAM”), Lifesyne UK Limited (“Lifesyne UK”) and Medicsight US, Inc (“MS-US”) (previously Lifesyne US).

 

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

 

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

 

MAM.  MAM is also a wholly owned subsidiary of MS-PLC that was established in September 2002 for the purpose of acquiring fixed assets on behalf of the operating entities in the group. MAM will negotiate and

 

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acquire equipment and fund leasehold improvements and development, which in turn will be leased to the relevant operating entity.

 

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

 

It is now widely accepted that the most effective way to achieve early detection of the principal deadly diseases is through radiological scanning. The Medicsight™ system analyzes digital data from the new generation of multi-slice computed tomography (“MSCT”) scanners and then provides information to enable the clinician to identify and characterize possible areas of abnormality. We believe that in the future the Medicsight™ system will be capable of reliably detecting isolated pulmonary nodules in the lung, calcification of the coronary arteries, polyps in the colon and other abnormalities indicative of disease. The potential advantage of the Medicsight™ system is that it increases precision and reliability while also providing scalability that will be cost-effective. The system uses its technology to provide tools to radiologists for the identification of possible abnormalities. The clinician will then apply his/her experience to determine the next steps in medical diagnosis and treatment. We believe that the Medicsight™ system will:

 

•                  enable accurate and reliable scan analysis;

•                  provide a service that will be significantly cheaper than at present as it reduces the burden on radiologists who in current practice account for a significant proportion of the scan cost; and

•                  allow significant patient volume to be achieved because the analysis is semi automated and scanning volumes are not then constrained by the finite number of radiologists.

 

The step change in technology that increases the potential of the Medicsight™ system is the 16 detector CT scanner. This allows sub-millimeter cross-sectional slices to be captured with increased speed and reduced radiological dose when compared with traditional single slice machines. This can provide over 600 images of the chest instead of 30-60 for single slice scanners. The amount of detail now available, while enabling early detection of smaller nodules and areas of calcification, increases the time required for analysis by radiologists. Therefore the automation of scan analysis is essential. Our technology is equally applicable to MRI and we have begun research into brain diseases with a leading global institution.

 

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

 

Refining our business strategy

 

Our aim is to become a leading developer of CAD software in medical imaging. The key to reliable detection and to accurate measurement is accurate boundary identification of the region of interest. If your software does not distinguish the lesion from the wall tissue, it is self evident that you will not be able to reliably detect or measure abnormalities; this is where we have focused much of our development.

 

As data is crucial to the development, training and testing of our products; the more data we have the better the product development and therefore the final product. We are looking at obtaining access to the world’s largest lung and colon scan databases in addition to our own. However, it’s not just quantity of data that counts, our databases include the proven outcomes (cancers) and patient management histories so analyzing these will allow us to go beyond basic nodule or polyp detection.

 

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The Company’s strategy is based upon the following priorities:

 

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

•                  Targeting commercially valuable applications where the accurate identification and measurement of abnormalities will lead to improved diagnosis and treatment of life threatening diseases.

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

 

Medicsight Product Portfolio

 

Our products currently target 3 therapeutic areas, Colon, Lung and Heart. As well as developing the CAD software we are looking at developing and marketing CAR applications in the colon and lung arenas.

 

CAR is a “joint-read” software product that is being developed for reviewing CT lung and colon scans.  These products are image analysis software tools that assist radiologists in evaluating lesions or nodules found during CT scans of the lung or colon.  Unlike current “second-read” software, in which software is employed after radiologists have completed their reviews, joint-read software enables the radiologist to review “unfiltered” images side-by-side and simultaneously with software-enhanced regions of interest. For a radiologist reviewing up to 600 images from a single CT scan, the joint-read capability saves time and aids in the evaluation of nodules.

 

There’s increasing evidence in all three areas that early detection may lead to improved life expectancy and this has been a core focus of our product development. However, our technology is applicable to many other diseases and we are already starting to plan for this.

 

In terms of clinical practice and therefore market segmentation, the products can be split between diagnostic treatment and screening;

 

Diagnostic or “Disease tracking” products; these are products designed for symptomatic patients to track disease progress and monitor treatment effectiveness. The primary applications in this area are Lung nodule tracking and Heart calcium scoring though the company believes there will be a growing requirement for polyp tracking in the colon as CT colonography becomes more established

 

“Screening” products; for population screening of asymptomatic patients. There is much evidence to demonstrate that the early detection of colon, lung and heart disease leads to improved life expectancy.  Computer aided detection (“CAD”) CT will provide a cost effective solution in identifying these diseases early enough to significantly alter the economics of population screening programs in these areas.

 

Business Development

 

MS-PLC has received clearance from the United States Food and Drug Administration and European CE certification for its Lung CAR software product, an image analysis software tool that assists radiologists in evaluating lesions or nodules found during CT scans of the lung. MS-PLC’s Lung CAR is the first “joint-read” software available for CT lung scans.

 

Lung CAR works by deploying a series of filters against the image data derived from CT scans. The software has a number of automatic and manual measurement tools to aid diagnosis, including 3D volume measurement and the ability to review follow up scans and doubling times.

 

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

 

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Commercially, we aim to sign up one or more distribution partners. We commenced building relationships with third party distributors at the end of 2003 and already we have established strong levels of interest amongst both picture archivers (“PACS”) software companies and CT hardware manufacturers. We will not go down the route of a direct sales force as we wish to work with the major players in the medical market who share our vision of an integrated range of “intelligent” software products. MS-PLC is also reviewing other potential distribution channels including the internet.

 

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

 

Finally, we may look at partnerships and/or acquisitions that help expand our product offering, our technical capability or our distribution potential.

 

International Advisory Board

 

The Company established a Medical Board to guide the early development of the Company’s software for the pre-symptomatic detection of lung cancer, bowel cancer and coronary heart disease.  The Medical Board advised on and monitored product development, clinical targets and scanning operations and formed an important link with medical scientists and clinicians. Chaired by Dr. John Costello, the Medical Board comprised:

 

•                  Sir Christopher Paine

•                  Dr. John Karani

•                  Dr. Mary Roddie

•                  Dr. Jamshid Dehmeshki

•                  Mr. Paul Samuel

 

The Medical Board reported to MS-PLC’s Board through Dr Costello. Three specialist advisory boards supported the Medical Board with responsibility for the lung, colon and heart products.

 

As the Company’s strategy evolved, in particular, following the decision to concentrate our efforts on software development and international product distribution, we have acted to align our medical advisory mechanisms to the new circumstances.  The Company has therefore set up three International Advisory Boards (“IAB”).  The IABs will recruit individuals with the relevant expertise to become members and encourage the involvement of the radiologists undertaking beta testing of our products, providing data for software development and participating in our scientific program.

 

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

 

Terms of Reference of the International Advisory Board

 

The IABs will meet twice a year and fulfill the following roles:

 

•                  Advise on the development and application of Medicsight CT image analysis software in the territories represented.

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

•                  Assist in investor relations on an international basis.

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

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

 

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•                  Advise on sources of library data (CT scans) to support training and development of the Company’s software.

 

Objectives of the International Advisory Board

 

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

 

•                  Ensure that members have a full understanding of the Medicsight technology and are enthused to participate in its development and application, both locally and internationally.

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

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

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

 

We cannot assure you that the Company will be successful in commercializing the Medicsight™ system, or if such system is commercialized, that its use will be profitable to the Company. We face obstacles in commercializing our core technology and in generating operating revenues such as, but not limited to, successful development, testing of and gaining regulatory approval for the technology.

 

The Company does not believe that there is currently any comparable system that is competitive with the Medicsight™ system. There are computer-aided diagnostic systems that work in the field, but, in our view, such existing systems are overly dependent on human resources to carry out the analysis, as none have the capability of the Medicsight™ system.

 

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

 

The Company has identified a number of other specific risk areas that may affect the Company’s operations and results in the future:

 

Technical Risks.  The Medicsight™ system may not deliver the levels of accuracy and reliability needed, or the development of such accuracy and reliability may be delayed.

 

Market Risks.  The market for the Medicsight™ system may be slower to develop or smaller than estimated or it may be more difficult to build the market than anticipated. The medical community may resist the Medicsight™ system or be slower to accept it than we expect. Revenues from the Lifesyne™ scanning centers and the licensing of the Medicsight™ system may be delayed or costs may be higher than expected which may result in the Company requiring additional funding.

 

Regulatory Risks.  The Medicsight™ system is subject to regulatory requirements in both the United States and Europe. Approval may be delayed or incur additional cost to the Medicsight™ system.

 

Competitive Risks. There are a number of groups and organizations, such as software companies in the medical imaging field, scanner manufacturers, screening companies and other healthcare providers, that have an interest in developing a competitive offering to the MedicsightTM system.  In addition these competitors may have significantly greater resources than the Company. We cannot make any assurance that they will not attempt to develop such offerings, that they will not be successful in developing such offerings or that any offerings they do develop will not have a competitive edge versus the MedicsightTM system.

 

Other Risks. The Company’s ability to deliver the software could be hindered by such risks as the loss of key personnel, the patents being successfully challenged or credit facilities reduced or called in.

 

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RESULTS OF OPERATIONS

 

Revenues. For the six months ended June 30, 2004 and the six months ended June 30, 2003 (as restated), the Company’s gross revenues from operations were $288,000 and $54,000, respectively. For the quarter ended June 30, 2004 and the quarter ended June 30, 2003 (as restated), the Company’s gross revenues from operations were $136,000 and $44,000, respectively. The Company’s revenue in the six months ended June 30, 2004 and 2003 were derived from the Company’s Lifesyne™ scanning operations.

 

Selling, General and Administrative Expenses.  The Company’s selling, general and administrative expenses for the six months and quarter ended June 30, 2004, were $6,110,000 and $2,959,000 respectively as compared to $4,587,000 and $2,657,000 respectively for the six months and quarter ended June 30, 2003 (as restated).  Professional fees, including consulting services, were $802,000 and $365,000 for the six months and quarter ended June 30, 2004 as compared to $568,000 and $188,000 respectively for the six months and quarter ended June 30, 2003 (as restated). Also included in the six months and quarter ended June 30, 2004 were salaries and directors’ compensation of $2,757,000 and $1,394,000 respectively, service charges and rates for property leasing of $271,000 and $193,000 respectively, and rent of $538,000 and $267,000 respectively.  The primary components of the increased selling, general and administrative expenses for the six months quarter ended June 30, 2004 were increases in staff costs, professional fees, marketing and clinical trials as the Company initiated its various marketing strategies.

 

Research and Development cost. The Company’s research and development cost for the six months and quarter ended June 30, 2004, was $1,520.000 and $851,000 respectively as compared to $984,000 and $515,000 for the six months and quarter ended June 30, 2003 (as restated) respectively. The Company’s research and development costs are comprised of staff and consultancy costs expensed on the Medicsight™ system.

 

Net Loss and Net Loss per Share.  Net loss was $6,737,000 and $3,203,000 for the six months and quarter ended June 30, 2004 compared to a net loss of $4,823,000 and $2,723,000 for the six months and quarter ended June 30, 2003 (as restated).  Net loss per share for the six months and quarter ended June 30, 2004 was $0.23 and $0.10 respectively, based on weighted average shares outstanding of 28,862,025 and 31,388,185 respectively, compared to a net loss per share of $0.23 and $0.13 for the six months and quarter ended June 30, 2003 (as restated), based on weighted average shares outstanding of 21,155,032 and 21,155,189 respectively.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Working Capital.  At June 30, 2004, the Company had $12,609,000 in current assets. Cash and cash equivalents amounted to $11,234,000. Current liabilities were $3,030,000 at June 30, 2004.  At December 31, 2003, the Company had $2,144,000 in current assets and cash and cash equivalents amounted to $845,000.  Current liabilities were $6,540,000 at December 31, 2003. Working capital surplus/(deficit) at June 30, 2004 was  $9,579,000, as compared to $(4,396,000) at December 31, 2003.  The ratio of current assets to current liabilities was 4.16 to 1.0 at June 30, 2004 as compared to 0.33 to 1.0 at December 31, 2003. The increase is primarily due to the increase in cash and cash equivalents resulting from funds received in the Company’s private offering.

 

Net Increase in Cash and Cash Equivalents.  During the six months ended June 30, 2004, the Company’s cash and cash equivalents increased by $10,389,000. This increase was primarily the result of cash flows received from shares issued by the Company in excess of the net cash used in operating and investing activities and repayments of debt. The Company used net cash of $7,744,000 in operations. The Company received net cash of $18,218,000 in financing activities and used $121,000 in investing activities.

 

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Net Cash Used in Operations.  The use of cash in operations of  $7,744,000 in the six months ended June 30, 2004, was attributable to the Company’s relatively minimal revenues at the same time that the Company incurred significant operating and software research and development costs. These significant costs included professional fees, salaries and director compensation, marketing, clinical trials and service charges associated with rental property and rent. The Company used cash in operations in the six months ended June 30, 2003 (as restated) of  $5,825,000.

 

Net Cash Used in Investing Activities.  In the six months ended June 30, 2004, the Company had a net cash outflow from investing activities of $121,000. The Company used these funds to purchase additional fixed assets. In the six months ended June 30, 2003 (as restated) the Company had a net cash outflow from investing activities of $526,000. The Company used the funds to purchase additional fixed assets.

 

Net Cash Provided by Financing Activities.  In the six months ended June 30, 2004, the Company had a net cash inflow from financing activities of $18,218,000. The funds received in the six months ended June 30, 2004, comprised of $20,931,000 from the Company’s private offerings of which $2,470,000 was used to repay our debt facilities with Asia IT and the bank overdraft of $196,000 was also repaid. For the six months ended June 30, 2003 (as restated), the Company had a net cash inflow from financing activities of $4,633,000. The funds received comprised of $919,000 received from the private offering of Medicsight stock, $1,401,000 received under our debt facilities with Asia IT and $2,259,000 received under the vendor guarantee.

 

Stockholders’ Equity. The Company’s stockholders’ equity at June 30, 2004 was $24,661,000, including an accumulated deficit of $(170,205,000), as compared to $10,489,000 at December 31, 2003, including an accumulated deficit of $(163,468,000). Additional paid-in capital was $194,733,000 and $173,810,000, at June 30, 2004 and December 31, 2003 respectively. The increase in stockholders’ equity was a result of an increase in additional paid-in capital of $20,923,000 resulting from the placement of the Company’s stock offset by an increase in accumulated deficit of $6,737,000.

 

Additional Capital.  The Company may require additional capital during its fiscal year ending December 31, 2004 to implement its business strategies, including cash for (i) payment of increased operating expenses such as salaries for additional employees; and (ii) further implementation of those business strategies. Such additional capital may be raised through additional public or private financing, as well as borrowings and other resources. Currently, the Company has two available lines of credit.

 

On December 15, 2000, the Company entered into an unsecured credit facility with Asia IT which provides a $20,000,000 line of credit. Such line of credit originally expired on December 31, 2001, but has been extended until June 30, 2005. Interest on advances under the credit facility accrues at 2% above US LIBOR. The Company can draw down on this credit facility for its financing requirements, upon approval by the Company’s Board of Directors and subject to approval by Asia IT (such approval not to be unreasonably withheld). The Company is restricted from borrowing funds, directly or indirectly, other than through the credit facility with Asia IT, without the consent of Asia IT. The availability of the credit facility reduces upon the Company’s sale of any of its investment assets. The amounts drawn and interest charged under this facility are repayable on demand or at the maturity of the facility.

 

On November 20, 2001, Asia IT entered into a £10,000,000 ($16,000,000) credit facility with MS-PLC.  Such facility matures in November 2005 and is secured by a lien on all assets of Medicsight.  Interest on outstanding amounts accrues at 2% above GBP LIBOR.  Pursuant to such credit facility, MS-PLC had covenanted to undertake a public offering of its ordinary shares in an amount not less than £25,000,000 not later than March 2002.  MS-PLC did not complete such an offering but the facility nevertheless remains in place. The loan is convertible into ordinary shares in MS-PLC on announcement of an Offer to Subscribe, Placing or other public offering of its ordinary shares, at the same price per share as the offering price. Due to the private offering being undertaken by MS-PLC, the loan is currently convertible.

 

At June 30, 2004, the Company had drawn down  $410,000 under the $20,000,000 facility with Asia IT, and MS-PLC had drawn down $nil under its £10,000,000 ($16,000,000) facility with Asia IT.

 

14

 

To the extent that additional capital is raised through the sale of equity or equity-related securities of the Company or its subsidiaries, the issuance of such securities could result in dilution to the Company’s stockholders. No assurance can be given, however, that the Company will have access to the capital markets in the future, or that financing will be available on acceptable terms to satisfy the Company’s cash requirements to implement its business strategies. If we are unable to access the capital markets or obtain acceptable financing, our results of operations and financial conditions could be materially and adversely affected.  We may be required to raise substantial additional funds through other means.   The products derived from our proprietary software, including the Medicsight™ system, are expected to account for substantially all of our revenues from operations in the foreseeable future.  Our technology has not yet been fully commercialized and we have not begun to receive any significant revenues from commercial operations.  We cannot assure our stockholders that our technology and products will be commercialized successfully, or that if so commercialized, that revenues will be sufficient to fund our operations.  If adequate funds are not available to us, we may be required to curtail operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies or products that we would not otherwise relinquish.

 

Critical Accounting Policies. The Securities and Exchange Commission requested that all registrants list their three to five most “critical accounting policies” in the Management’s Discussion and Analyses of Financial Condition and Results of Operations. The Securities and Exchange Commission indicated a “critical accounting policy” is one which is both important to the portrayal of the company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe that the following accounting policies fit the definition of critical accounting policies.

 

Revenue Recognition. We expect to earn our revenue primarily from software licenses and related services. Our revenue is recognized in accordance with Statement of Position 97-2 (SOP 97-2), as amended by Statement of Position 98-9. Currently the Company’s revenues derive from its scanning services operated by Lifesyne^TM. Scan revenue is recognized when the service is delivered.

 

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

 

The Company believes that the accounting estimates related to the recognition of revenue and establishment of reserves for uncollectible amounts in the results of operations is a “critical accounting estimate” because: (1) it requires management to make assumptions about future collections, and (2) the impact of changes in actual performance versus these estimates on the accounts receivable balance reported on our consolidated balance sheets and the results reported in our consolidated statements of operations could be material. Further the Company has no history of uncollectible amounts and therefore must initially look to the estimates for the industry or particular companies that the management feels operate in a similar environment in addition to any current market indicators about general economic conditions that might impact the collectibility of accounts.

 

Research and Development. Costs incurred in connection with the development of software products that are intended for sale are accounted for in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”. Costs incurred prior to technological feasibility being established for the product are expensed as incurred. Technological feasibility is established upon completion of a detail program design or, in its absence, completion of a working model. Thereafter, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization

 

15

 

over the remaining estimated economic life of the product. Amortization commences when the product is available for general release to customers.

 

The Company decided that capitalizing such expenditure was inappropriate because of the difficulty in assigning costs accurately to the various software products and versions being developed as technical and development staff are moved from product to product and version to version on a regular basis. Therefore the Company has decided to expense all research and development costs. The Company’s research and development costs are comprised of staff and consultancy costs expensed on the Medicsight™ system.

 

Impairment of Long-lived Assets and Long-lived Assets To Be Disposed of. The Company evaluates the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company’s assessment for impairment of an asset involves estimating the undiscounted cash flows expected to result from use of the asset and its eventual disposition. An impairment loss recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.

 

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

 

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

 

In connection with the adoption of SFAS No. 142, we performed our initial impairment analysis of goodwill and indefinite-lived intangible assets as of January 1, 2002. The implementation involved the determination of the fair value of each reporting unit, where a reporting unit is defined as an operating segment or one level below.

 

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

 

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

 

16

 

Contractual Obligations

 

The Company has the following contractual obligations:

 

					Payments Due By Period
Contractual Obligations ($000’s)		Total			Less than 1 year			1-3 years			3-5 years			More than 5 years
Capital Lease Obligations		$	358		$	99		$	189		$	70		$	—
Operating Lease Obligations		1,963			496			1,340			127			—
Total		$	2,321		$	595		$	1,529		$	197		$	—

 

Item 3.                     Quantitative and Qualitative Disclosures About Market Risk

 

Interest Rate Risk

 

The Company’s exposure to market risk associated with changes in interest rates relates to its debt obligations. The Company has the following debt facilities, which are all repayable on demand:

 

Debt Holder		Facility			Draw Down			Interest rate		At June 30
Asia IT Capital Investments Ltd		$	20,000,000		$	410,000		US Libor + 2%		4.47	%
Asia IT Capital Investments Ltd		$	16,000,000		$	nil		GBP Libor + 2%		7.28	%

 

A hypothetical 100 basis point increase in interest rates would increase interest cost by approximately $4,000 per annum assuming no further draw downs or repayments are made.

 

Foreign Exchange Risk

 

The Company holds limited cash balances in British Pounds so any adverse movements in the exchange rates are considered immaterial.

 

Item 4.                     Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain controls and procedures designed to ensure that information required to be disclosed in this report is recorded, processed, accumulated and communicated to our management, including our chief executive officer and our chief financial officer, to allow timely decisions regarding the required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives. At June 30, 2004, our management, with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of the design and operation of these disclosure controls and procedures. Our chief executive officer and chief financial officer concluded that these disclosure controls and procedures are effective.

 

Changes in Internal Controls

 

During the quarter ended June 30, 2004 the Company made no significant changes in our internal controls or in other factors that could significantly affect these controls, nor did we take any corrective action, as the evaluation revealed no significant deficiencies or material weaknesses.

 

17

 

PART II

 

Item 1.                     Legal Proceedings

 

There are currently no pending legal proceedings.

 

Item 2.                     Changes in Securities and Use of Proceeds

 

(a)                                  None.

 

(b)                                 None.

 

(c)                                  None.

 

(d)                                 Not applicable.

 

Item 3.                       Defaults Upon Senior Securities

 

None.

 

Item 4.                       Submission of Matters to a Vote of Security Holders

 

None.

 

Item 5.                       Other Information

 

None.

 

Item 6.                       Exhibits and Reports on Form 8-K

 

(a)                                  Exhibits

 

31.1                           Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer - filed herewith).

 

31.2                           Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer - filed herewith).

 

32.1                           Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer - filed herewith).

 

32.2                           Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer - filed herewith).

 

Reports on Form 8-K

 

None.

 

18

 

MEDICSIGHT, INC. AND SUBSIDIARIES

 

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

 

Condensed Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and December 31, 2003 (Audited)	F-2
Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2004 (Unaudited) and the Three Months Ended June 30, 2003 (As restated and unaudited)	F-3
Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2004 (Unaudited) and the Six Months Ended June 30, 2003 (As restated and unaudited)	F-4
Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2004 (Unaudited) and the Six Months Ended June 30, 2003 (As restated and unaudited)	F-5
Notes to Condensed Consolidated Financial Statements	F-6 to F-13

 

F-1

 

MEDICSIGHT, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In $ thousands)

 

		June 30, 2004			December 31, 2003
		(unaudited)			(audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	11,234		$	845
Accounts receivable		22			33
Other receivables		65			123
Prepaid expenses		606			539
Sales tax receivable		682			604
Total current assets		12,609			2,144
PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation of $1,856 and $1,480, respectively		2,865			3,033
INVESTMENTS, at cost		429			429
SECURITY DEPOSITS		847			843
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED		11,200			11,200
Total assets		$	27,950		$	17,649
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	1,936		$	2,342
Accrued expenses		410			700
Accrued professional expenses		175			326
Bank overdraft		—			196
Line of credit – related party		410			2,880
Current portion of obligations under capital leases		99			96
Total current liabilities		3,030			6,540
CAPITAL LEASE		259			306
Total liabilities		$	3,289		$	6,846
STOCKHOLDERS’ EQUITY:
Common stock, $0.001 par value, 40,000,000 shares authorized, 32,362,297 and 24,488,858 shares issued and outstanding, respectively		32			24
Additional paid-in capital		194,733			173,810
Cumulative foreign currency translation adjustment		101			123
Accumulated deficit		(170,205		)	(163,468		)
TOTAL STOCKHOLDERS’ EQUITY		24,661			10,489
Minority interest		—			314
		24,661			10,803
Total liabilities and stockholders’ equity		$	27,950		$	17,649

 

The accompanying notes are an integral part of these condensed statements.

 

F-2

 

MEDICSIGHT, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In $ thousands, except per share amounts)

 

		Three Months Ended June 30, 2004			Three Months Ended June 30,2003
		(unaudited)			(as restated and unaudited) Note 3
REVENUES		$	136		$	44
EXPENSES:
Selling, general and administrative charges		2,959			2,657
Research and development cost		851			515
		3,810			3,172
Net Loss before minority interest		(3,675		)	(3,128		)
MINORITY INTEREST		471			405
Net loss		$	(3,203	)	$	(2,723	)
PER SHARE DATA:
Basic and diluted loss per share		$	(0.10	)	$	(0.13	)
Weighted average number of common shares outstanding		31,388,185			21,155,189

 

The accompanying notes are an integral part of these condensed statements.

 

F-3

 

		Six Months Ended June 30, 2004			Six Months Ended June 30, 2003
		(unaudited)			(as restated and unaudited) Note 3
REVENUES		$	288		$	54
EXPENSES:
Selling, general and administrative charges		6,110			4,587
Research and development cost		1,520			984
		7,630			5,571
Net Loss before minority interest		(7,342		)	(5,517		)
MINORITY INTEREST		605			694
Net loss		$	(6,737	)	$	(4,823	)
PER SHARE DATA:
Basic and diluted loss per share		$	(0.23	)	$	(0.23	)
Weighted average number of common shares outstanding		28,762,025			21,155,032

 

The accompanying notes are an integral part of these condensed statements.

 

F-4

 

MEDICSIGHT, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(In $ thousands)

 

		Six Months Ended June 30, 2004			Six Months Ended June 30, 2003
		(unaudited)			(as restated and unaudited) Note 3
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(6,737	)	$	(4,823	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation		376			164
Minority interest in net loss of subsidiary		(605		)	(694		)
(Increase)/decrease in assets
Accounts receivable		11			(12		)
Prepaid expenses and other current assets		(67		)	(382		)
Sales tax receivable		(21		)	(230		)
Security deposits		—			(743		)
Increase/(decrease) in liabilities
Accounts payable		(352		)	970
Accrued expenses		(243		)	(81		)
Accrued professional expenses		(106		)	6
Net cash used in operating activities		(7,744		)	(5,825		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets		(121		)	(526		)
Net cash used in investing activities		(121		)	(526		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations		(47		)	(34		)
Decrease of bank overdraft		(196		)	88
Proceeds from sale of common stock		20,931			919
Funds received under vendor guarantee		—			2,259
(Decrease)/increase in short term debt – related party		(2,470		)	1,401
Net cash provided by financing activities		18,218			4,633
Effects of exchange rates on cash and cash equivalent		36			(60		)
NET CHANGE IN CASH & CASH EQUIVALENTS		10,389			(1,778		)
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD		845			1,778
CASH & CASH EQUIVALENTS, END OF PERIOD		$	11,234		$	—
NON CASH FINANCING ACTIVITIES
Capital lease obligations for equipment		—			—

 

The accompanying notes are an integral part of these condensed statements.

 

F-5

 

MEDICSIGHT, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

 

(1)                               Formation and Business of the Company

 

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

 

We were originally incorporated as a Utah corporation in 1977. On December 19, 2000, we entered into an Agreement and Plan of Merger with our wholly-owned subsidiary HTTP Technology, Inc., a Delaware corporation, and thereby effected a re-incorporation of the company from Utah to Delaware. All references in this Annual Report to  “the Company”, “we” or “us” refer to Medicsight, Inc., the Delaware corporation and subsidiaries, if the event occurred on or after December 19, 2000 or to HTTP Technology, Inc., the Utah corporation and subsidiaries, if the event occurred prior to December 19, 2000.

 

(2)                               Basis of Presentation

 

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

 

The results of operations presented for the six months and quarter ended June 30, 2004, are not necessarily indicative of the results to be expected for any other interim period or any future fiscal year.

 

The Company has incurred significant operating losses since inception.  As a result, the Company has generated negative cash flows from operations, and has an accumulated deficit at June 30, 2004.  The Company is operating in a developing industry based on new technology and its primary source of funds to date has been through the issuance of securities and borrowed funds.  The Company is currently seeking additional funding and are actively developing the technology in order to bring it to market.  While the Company is optimistic and believes appropriate actions are being taken, there can be no assurance, however, that the management’s efforts will be successful or that the products it markets will be accepted by consumers.

 

F-6

 

(3)                                  Restatement of financial statements

 

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

 

As a result, the Company has restated its previously issued financial statements for the six months and quarter ended June 30, 2003.  A summary of the significant effects of the restatements is set forth below.

 

MEDICSIGHT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Three months ended June 30, 2003			Three months ended June 30, 2003
		(as previously reported) $000’s			(as restated) $000’s
REVENUES		44			44
EXPENSES:
Selling, general and administrative charges		3,592			2,657
Research and development cost		—			515
Impairment of vendor guarantee		(697		)	—
		2,895			3,172
Net loss before minority loss		(2,851		)	(3,128		)
MINORITY INTEREST		405			405
Net loss		(2,446		)	(2,723		)
PER SHARE DATA:
Basic and diluted loss per share		$	(0.12	)	$	(0.13	)
Weighted average number of common shares outstanding		21,155,189			21,155,189

 

F-7

 

MEDICSIGHT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Six months ended June 30, 2003			Six months ended June 30, 2003
		(as previously reported) $000’s			(as restated) $000’s
REVENUES		$	54		$	54
EXPENSES:
Selling, general and administrative charges		6,569			4,587
Research and development cost		—			984
Impairment of vendor guarantee		(697		)	—
		5,872			5,571
Net loss before minority loss		(5,818		)	(5,517		)
MINORITY INTEREST		694			694
Net loss		$	(5,124	)	$	(4,823	)
PER SHARE DATA:
Basic and diluted loss per share		$	(0.24	)	$	(0.23	)
Weighted average number of common shares outstanding		21,155,032			21,155,032

 

F-8

 

MEDICSIGHT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

 

		Six months ended June 30, 2003			Six months ended June 30, 2003
		(as previously reported) $000’s			(as restated) $000’s
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(5,124	)	$	(4,823	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation		164			164
Amortization of intangibles		2,247			—
Impairment of vendor guarantee		(697		)	—
Minority interest in net earnings of subsidiary		(694		)	(694		)
(Increase)/decrease in assets
Accounts receivable		(12		)	(12		)
Prepayments		(382		)	(382		)
VAT receivable		(230		)	(230		)
Security deposits		(743		)	(743		)
Increase/(decrease) in assets
Accounts payable		970			970
Accrued expenses		(81		)	(81		)
Accrued professional expenses		6			6
Net cash used in operating activities		(4,576		)	(5,825		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets		(526		)	(526		)
Software development costs		(1,249		)	—
Net cash used in investing activities		(1,775		)	(526		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations		(34		)	(34		)
Increase in bank overdraft		88			88
Proceeds sale of common stock		919			919
Increase in short term debt - related party		1,401			1,401
Funds received under vendor guarantee		2,259			2,259
Net cash provided by financing activities		4,633			4,633
Effects of exchange rates on cash and cash equivalents		(60		)	(60		)
NET CHANGE IN CASH & CASH EQUIVALENTS		$	(1,778	)	$	(1,778	)
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD		1,778			1,778
CASH & CASH EQUIVALENTS, END OF PERIOD		$	—		$	—

 

F-9

 

June 30, 2003

 

Research and Development.

 

During the first six months of Fiscal 2003, in accordance with Statement of Financial Accounting Standards (FAS) 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, the Company capitalized certain computer software development costs. Technical feasibility was established on completion of working models for MedicHeart, MedicLung and MedicColon software products in January 2003. Subsequently, the Company capitalized costs of $1,249,000 in the six months ended June 30, 2003 under FAS 86. These costs capitalized comprised staff, consultants, regulatory and clinical trial costs specific to the three products.

 

Subsequently the Company decided that this accounting treatment was inappropriate because of the difficulty in assigning costs accurately to the various software products and versions being developed as technical and development staff are moved from product to product and version to version on a regular basis. The Company has decided to expend all research and development costs in Fiscal 2003. The Company’s research and development costs for the six months and quarter ended June 30, 2003 of $984,000 and $515,000 respectively are comprised of staff and consultancy costs expensed on the Medicsight™ system. The regulatory and clinical trial charges for the six months and quarter ended June 30, 2003 of $265,000 and $189,000 respectively are expensed in “Selling, general and administrative charges”.

 

Depreciation and Amortization Expense.

 

During Fiscal 2000, the Company acquired an intangible asset from the former parent of Insights consisting of technology valued at $22,470,000. Under SFAS No.142, this is considered an intangible asset with a definite life of 5 years. Therefore the value of the asset was amortized on a straight-line basis over this period.

 

The Company evaluates the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company’s assessment for impairment of an asset involves estimating the undiscounted cash flows expected to result from use of the asset and its eventual disposition. An impairment loss recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.  During the third quarter of 2003 the Company reviewed the carrying value of the core technology acquired from Insights and decided that the core technology should be fully impaired.  This was based on the view that there were no further software applications apart from the medical imaging applications currently being developed that could be derived from the core technology. The Company further decided that the impairment should be recorded as at December 31, 2002. In the six months and quarter ended June 30, 2003 the Company had an amortization charges of $2,247,000 and $1,124,000 respectively expensed in “Selling, general and administrative charges” relating to the fully impaired technology which is no longer applicable.

 

F-10

 

Impairment of vendor guarantee.

 

The Vendor Guarantee arose from the acquisition of Core Ventures Limited (“Core”) and relates to an oral agreement between the Company and Dr Nill, that the proceeds of the sale of Dr Nill’s 1,195,000 shares in the Company would be remitted to the Company under the terms of the Vendor Guarantee. These shares were sold in 2003 and the Company received $3,689,000 net of commissions. At December 31, 2001 and December 31, 2002, the fair value attributed to the Vendor Guarantee was based on the weighted average share price. The Company reviewed the fair value at December 31, 2002 and concluded that it would be more appropriate and better understood if the fair value at December 31, 2002 reflected the funds actually received in 2003. Therefore in the six months and quarter ended June 30, 2003 the reduction in impairment charge of $697,000 is restated as nil.

 

(4)                               Lines of Credit

 

On December 15, 2000, the Company entered into an unsecured credit facility with Asia IT, which provides a $20,000,000 line of credit. Such line of credit originally expired on December 31, 2001, but has been extended until June 30, 2005. Interest on advances under the credit facility accrues at 2% above US LIBOR. The Company can draw down on this credit facility for its financing requirements, upon approval by the Company’s Board of Directors and subject to approval by Asia IT (such approval not to be unreasonably withheld). The Company is restricted from borrowing funds, directly or indirectly, other than through the credit facility with Asia IT, without the consent of Asia IT. The availability of the credit facility would be reduced upon the Company’s sale of any of its investment assets. The amounts drawn and interest charged under this facility are repayable on demand or at the maturity of the facility.

 

On November 20, 2001, MS-PLC entered into a £10,000,000 ($16,000,000) credit facility with Asia IT.  Such facility matures in November 2005 and is secured by a lien on all assets of Medicsight.  Interest on outstanding amounts accrues at 2% above GBP LIBOR.  Pursuant to such credit facility, MS-PLC had covenanted to undertake a public offering of its ordinary shares in an amount not less than £25,000,000 not later than March 2002.  MS-PLC did not complete such an offering but the facility nevertheless remains in place. The loan is convertible into ordinary shares in MS-PLC on announcement of an Offer to Subscribe, Placing or other public offering of its ordinary shares, at the same price per share as the offering price. Due to the private offering being undertaken by MS-PLC, the loan is currently convertible.

 

At June 30, 2004, the Company had drawn down $410,000 under the $20,000,000 facility with Asia IT, and MS-PLC had drawn down $nil under its £10,000,000 ($16,000,000) facility with Asia IT.

 

(5)                               Stockholders’ Equity

 

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

 

During the six months ended June 30, 2004 the Company issued approximately 7,873,000 restricted shares of stock raising $20.93m as part of a private placement.

 

(6)                               Accounting for Stock Based Compensation

 

On March 20, 2003, the Board of Directors of MS-PLC approved a stock option plan for its employees and reserved 4,000,000 shares of its common stock for issuance upon exercise of options granted under this plan. On April 19, 2003, the Remuneration Committee of MS-PLC also approved the stock option plan and implemented it on April 30, 2003 by issuing options over 2,828,600 shares to employees of MS-PLC. At June 30, 2004 only 20% of the options issued were exercisable under the plan.

 

The Company has elected to adopt the disclosure only provisions of Statement of Financial Accounting

 

F-11

 

 

Standards No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123”, and measures the cost for MS-PLC’s employee stock compensation plan by using the accounting methods prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees”, which allows that no compensation cost be recognized unless the exercise price of the options granted is lower than the fair market value of the Company’s stock at date of grant. Accordingly, no stock-based employee compensation cost is reflected in net loss, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. SFAS No. 123, as amended by SFAS No. 148, requires disclosure of pro forma income and pro forma income per share as if the fair value based method had been applied in measuring compensation expense.

 

		Six Months Ended June 30, 2004		Six Months Ended June, 2003
		(unaudited) $’000		(as restated and unaudited) $’000
Net loss as reported:		(6,737	)	(4,823	)
Fair value method of stock based compensation		(44	)	—
Proforma net loss		(6,781	)	(4,823	)
Reported earnings per common share
Basic and diluted		(0.23	)	(0.23	)
Proforma earnings per common share
Basic and diluted		(0.23	)	(0.23	)

 

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

 

(7)                               Goodwill and Other Intangible Assets

 

Goodwill

 

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

 

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

 

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

 

(8)                               Security Deposits

 

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

 

(9)                               Lease Commitments

 

The Company has entered into property leases for the Westminster and Ravenscourt centers. Future

 

F-12

 

minimum obligations under these lease arrangements are as follows:

 

For the 12 months ending June 30,		Property Leases
		($’000)
2005		496
2006		506
2007		509
2008		325
2009 and thereafter		127

 

(10)                        Major Customers

 

The Company’s revenue in the six months ended June 30, 2004 and 2003 was derived from the Company’s Lifesyne™ scanning operations.

 

(11)                        Comprehensive Income

 

As of June 30, 2004 and the six months and quarter then ended, comprehensive income is comprised of a net loss from operations and the net effect of foreign currency translation adjustments. This comprised a net loss of $6,737,000 and $3,203,000 and foreign currency translation adjustments of $22,000 and $190,000, resulting in comprehensive loss of  $6,759,000 and $3,393,000, respectively.

 

(12)                        Recent Accounting Pronouncements

 

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

 

F-13

 

SIGNATURE

 

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

 

	MEDICSIGHT, INC.
	By:	/s/STEPHEN FORSYTH
		Stephen Forsyth
		Chief Executive Officer
	By:	/s/PAUL GOTHARD
		Paul Gothard
		Chief Financial Officer
August 13, 2004