MEDICSIGHT INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2005

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

For the transition period from to

Commission file number 0-26886

MEDICSIGHT, INC.

(Exact name of registrant as specified in its charter)

Delaware		13-4148725
(State or other jurisdiction of 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 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 May 9, 2005: 33,571,125 shares of Common Stock, par value $0.001 per share.

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 March 31, 2005 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 Quarterly Report to “the Company”, “we” or “us” are to Medicsight, Inc., the Delaware corporation and subsidiaries, if the referenced event occurred on or after December 19, 2000 or to HTTP Technology, Inc., the Utah corporation and subsidiaries, if the referenced event occurred prior to December 19, 2000. On January 27, 2004 the Company increased its authorized share capital from 25,000,000 shares to 40,000,000 shares.

During the three months ended March 31, 2005 the Company issued approximately 504,000 shares of restricted stock raising $1,813,000 (net of commissions paid to Asia IT, a related party) as part of a private placement.

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

BUSINESS STRATEGY

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

MS-PLC. Our majority-owned subsidiary, MS-PLC, is currently developing automatic detection and analytical tools for clinicians to improve their ability to diagnose and treat diseases. At March 31, 2005, the Company owned 70,677,300 ordinary shares in MS-PLC, constituting 81.8% of the outstanding shares.

Lifesyne UK. 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 operates scanning centers in the United Kingdom. As the Company has decided to focus on the delivery of software, no further development of the Lifesyne strategy is envisaged beyond the Company’s current scanning requirements. We are now focusing Lifesyne on the rapid acquisition of patient scan data necessary to enable our expert software to refine its characterization capabilities.

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.

MIL. MIL, a wholly owned subsidiary of MS-PLC, was established to co-ordinate operations outside the United States of America and Europe and is based in Geneva, Switzerland. It has established further offices in China and Japan.

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. As Lifesyne’s strategy changed MAM’s business was limited so all assets were transferred to MS-PLC or Lifesyne at market value on December 31, 2004. We are currently in the process of selling the assets not deployed by MS-PLC or Lifesyne. MAM will cease operations in the next few months once all assets are disposed of.

Medicsight is a medical imaging software company. The Company’s core technology is focused on developing automatic detection and analytical tools for clinicians to improve their ability to diagnose and treat diseases. For the last four years the Company has been working on developing algorithms in this area through a team of over 30 scientists and software developers.

Medicsight has focused so far on 3 therapeutic areas - three leading causes of premature death, lung cancer, coronary heart disease and colorectal cancer. Between them these diseases are responsible for over 8.5 million premature deaths globally. There’s increasing evidence in all three areas that early detection leads to an improved life expectancy and this fact 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 such potential expansion in the application of our products.

The Company has to date primarily focused on multi slice computed tomography (“CT”) scan analysis. In the world today there are over 120 million scans done a year. Over a third of these are conducted in the U.S and, of that number, around seven million scans are lung scans and approximately one million are heart scans. These are nearly all diagnostic scans – that is, scans on patients with symptoms. When screening of asymptomatic patients begins (scans of patients without specific symptoms), these figures are expected to increase dramatically. The Company’s technology is equally applicable to magnetic resonance imaging (“MRI”) and Medicsight has begun research into brain diseases with a leading global institution.

Mission Statement

The Company aims be a leading global supplier of medical imaging analysis software, through

• Focusing on developing our core technology

• Creating a global network of leading medical partners

• Developing industry best data collection programmes and validation studies

• Staying ahead of the competition by continuously developing our databases, technology and products

Corporate Strategy Objectives

• Developing the broadest range of detection and analysis products in CT and MRI technology

• Working with third parties to develop the necessary distribution channels

• Developing a strategic presence in Asia

• Making selective acquisitions/partnerships that broaden

• Product range/rate of product development

• Geographic scope

• The skills base

What differentiates the Company

We are 100% focused in our field and in delivering our vision, which is to take CAD software beyond detection to diagnosis and patient management. This is a clearly differentiating position from the competition who, we believe, are more focused on detection only. To make this claim, the Company needs to be able to combine:

• World leading science

• World leading medical expertise

• The largest patient and scan databases

How does this evidence itself?

As far as science is concerned, we have had over 30 PhDs and software engineers working on developing the core algorithms for the last four years. We believe we have developed more sophisticated tools than others currently available in the market place. The key to reliable detection and to accurate measurement is accurate boundary identification of the suspect lesion. 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 accurately measure; this is where we have focused much of our scientific development.

In each of the therapeutic areas, heart, lung and colon, we are working in, we have attracted many of the world’s leading radiologists, including Drs Henschke and Yankelvitz from Cornell, the leading world opinions in lung cancer screening and also Drs Pickhardt and Nugent who conducted the ground breaking colon study published in New England Medical Journal in December 2003. Doctors of this caliber are integral to our product strategy and our data collection strategy.

The third area, after science and medical expertise, is data; data is crucial to the training and testing of our products; the more data you have the better your product performance and we have, we believe access to the world’s largest lung and colon scan databases; 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. As the databases grow and our access to them increases, it will enable the Company to continue to stay ahead of the field in the area of data acquisition and thus improve the development of the Company’s software products – a clearly sustainable point of differentiation.

Product Portfolio

Our products currently target three therapeutic areas: colon, lung and heart.

Medicsight introduced a number of innovations to the market in 2004:

• The first approved joint read detection products

• The first colon detection product

• The first adjustable filter system to allow radiologists to adjust their settings to suite their requirements

Medicsight was the first company to use the term, Computer Assisted Reader™ or CAR™, a term gaining much industry usage now. CAR signifies “joint-read” software that assists radiologists in detecting and evaluating lesions or nodules found during CT scans of the lung or colon. Unlike current “second-read” software, in which software is employed after radiologists have completed their reviews, joint-read software enables the radiologist to review “unfiltered” images side-by-side and simultaneously with software-enhanced regions of interest. For a radiologist reviewing up to 600 images from a single CT scan, the joint-read capability saves time and aids in the evaluation of nodules.

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

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

Diagnostic; incidental detection and” disease tracking” products. These are products designed for symptomatic patients to detect disease incidentally (for example when a patient is being scanned for another symptom/disease), and then subsequently 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 an improved life expectancy. CAD CT will provide a cost effective solution in identifying these diseases early enough to significantly alter the economics of population screening programs in these areas.

In October 2004, MS-PLC received clearance from the U.S. Food and Drug Administration (“FDA”) for its Colon CAR^TM product, an image analysis software tool that is used with CT colonography (“virtual colonoscopy”) to assist radiologists in searching for and measuring potential colorectal polyps. Virtual colonoscopy uses a CT scanner to generate both two-dimensional and three-dimensional views of inside of the colon so is non-invasive, as opposed to the traditional colonoscopy, in which a viewing instrument is physically inserted into the bowel. Colon cancers most often start when malignant cells form within polyps attached to the inner surface of the large bowel. Detection and removal of these polyps can prevent them from becoming cancerous.

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

In July 2004, MS-PLC received clearance from the FDA and Conformité Europeène (“CE”) certification for its Lung CAR^TM 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^TM is the first “joint-read” software available for CT lung scans.

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

The Company’s heart product, MedicHeart received FDA approval in November 2003. MedicHeart is a software application for annotating MSCT scans of the heart used by radiologists to identify coronary artery calcium (“CAC”). The reason we consider that this software product is superior to other products in its category is due to its extensive segmentation capabilities, which enable the radiologist to accurately extract the CAC boundary and therefore accurately measure it. This means that the radiologist can accurately track CAC growth or regression.

Business Development

In November 2004 MS-PLC announced that it had signed letters of intent with Agfa-Gevaert N.V. and Viatronix and a commercial agreement with Vital Images for global distribution of MS-PLC’s medical imaging software products. These agreements are the first of their kind for Medicsight and represent a

major step forward in the Company’s plans to commercialize its advanced imaging technology on a worldwide basis. The intent is to incorporate MS-PLC’s software into the three companies’ existing product offerings. MS-PLC’s software was demonstrated at the exhibitor booths of Agfa, Vital Images, and Viatronix during the annual meeting of the Radiological Society of North America (RSNA) that was held at the end of November 2004 in Chicago, Illinois.

Vital Images will be integrating MS-PLC’s Colon CAR™ software into its CT colon product InnerviewGI™. The letter of intent signed by Viatronix and MS-PLC includes MS-PLC’s Lung CAR™ and Colon CAR™ software. The letter of intent with Agfa is for all three products.

In April 2005 the Company signed a Letter of Intent with a major Japanese distributor to integrate MS-PLC’s Colon CAR™ software product into the workstations of its Japan distribution partner.

On the marketing side the Company achieved success in 2004, with a significant number of articles in the medical press concerning the Company and its products culminating in being voted “Best Industry Newcomer” by AuntMinnie (www.auntminnie.com) at the Radiological Society of North America 2004 conference. These articles can be viewed on our website: www.medicsight.com.

Expanding distribution

Medicsight aims to build on the progress made in 2004 by announcing new distribution partnerships in 2005; these will both expand the geographic scope and depth of our market penetration. The Company’s aim is for an additional three to five partners to be signed up during 2005, not just in the US but also in the key Asia markets.

Significant business development has already taken place that has lead to an announcement regarding a Colon CAR™ distribution deal in Japan and plans to finalize agreements for distribution of its Lung CAR™ software product in Japan in the fourth quarter of 2005.

The Company sees Japan and China, in particular, as strategically important and the Company believes that the significant business development to date should lead to further announcements in these areas this year.

Expanding product range and range of technologies

Whilst there is a significant ongoing investment in internal new product development programmes, the company is always seeking to build on its leading position. The market for advanced software applications is still embryonic, its ultimate structure still to be defined; we aim to be one of the leaders and drivers of change and ultimately one of the consolidators in the sector.

Medicsight has stated as part of its corporate objectives that it will expand its operations via acquisition to fill in gaps in technology or product. During 2005 we aim to put this into practice; a number of interesting targets have been identified already that will enhance our abilities to offer innovative, integrated clinical solutions to our partners. We believe we are in an excellent position to develop differences between the competition and ourselves in this way. MS-PLC is also reviewing other potential distribution channels including a web-based browser.

International Advisory Board

As the Company’s strategy has evolved, in particular, following the decision to concentrate our efforts on software development and international product distribution, we have acted to align our medical advisory mechanisms to the new circumstances. The Company has therefore set up three International Advisory Boards (“IAB”). The IABs have recruited and will continue to recruit individuals with the relevant 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. John Costello (MS-PLC’s medical director), who reports back to the MS-PLC Board; however, much of the scientific advice and leadership will be provided through a co-chairman, chosen from the IAB members.

Terms of Reference of the International Advisory Board

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

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

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

• Assist in investor relations on an international basis.

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

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

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

Objectives of the International Advisory Board

The objectives of the IAB 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 motivated to participate in its development and application, both locally and internationally.

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

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

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

Risk Factors

We cannot assure you that the Company will be successful in commercializing the Medicsight™ system, or if such a 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 operate in the field, but, in our view, such other systems are overly dependent on human resources to carry out the analysis, as none have the automated 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. Approvals may not be obtained, 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 may develop a competitive offering to the Medicsight^TM 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 over the Medicsight^TM system.

Financial Risk. These consolidated financial statements are presented on the basis that the Company will continue as a going concern. The going concern concept contemplates the realization of assets and satisfaction of liabilities in the normal course of business over a reasonable length of time. 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 March 31, 2005 and there is uncertainty with respect to the availability and the utilization of its credit facility with Asia IT Capital Investments Limited (a related party) – see Note 3. 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 is actively developing the technology in order to bring it to market.

Foreign Exchange Risks. As the Company’s operating currency is UK sterling (£) and its financial statements are reported in US Dollars, the Company’s assets and liabilities and its results of operations are affected by movements in the $: £ exchange rate.

Other Risks. The Company’s ability to deliver its software could be hindered by risks such as the loss of key personnel or the patents and trademarks being successfully challenged or credit facilities being reduced or terminated by lenders.

RESULTS OF OPERATIONS

Revenues. For the quarters ended March 31, 2005 and March 31, 2004, the Company’s gross revenues from operations were $151,000 and $152,000, respectively. The Company’s revenues are derived from the Company’s Lifesyne™ scanning operations.

Selling, General and Administrative Expenses. The Company’s selling, general and administrative expenses for the quarter ended March 31, 2005, were $2,620,000 as compared to $3,151,000 for the quarter ended March 31, 2004.

The primary components of the decreased selling, general and administrative expenses for quarter ended March 31, 2005 were decreases in professional fees, regulatory costs, software license fees and travel costs. This was offset slightly by increases in staff and public relation costs as the Company initiated its various marketing strategies.

Professional fees, including consulting services, were $339,000 for the quarter ended March 31, 2005 as compared to $437,000 for the quarter ended March 31, 2004. In the quarter ended March 31, 2005 salaries and directors’ compensation was $1,486,000, service charges and rates for property leasing were $124,000, and rent was $268,000. In the quarter ended March 31, 2004, salaries and directors’ compensation was $1,363,000, service charges and rates for property leasing was $78,000, and rent was $271,000.

Research and Development Cost. The Company’s research and development cost for the quarter ended March 31, 2005, was $639,000 as compared to $669,000 for the quarter ended March 31, 2004 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 $3,094,000 for the quarter ended March 31, 2005 compared to a net loss of $3,534,000 for the quarter ended March 31, 2004. Net loss per share for the quarter ended March 31, 2005 was $0.09, based on weighted average shares outstanding of 33,302,325, compared to a net loss per share of $0.13 for the quarter ended March 31, 2004, based on weighted average shares outstanding of 26,461,309.

The decrease in net losses for the quarter to March 31, 2005 as compared to the quarter to March 31, 2004 are due to decreases in selling, general and administrative expenses and research and development costs.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital Information as at March 31:

	($000’s)
	March 31, 2005		December 31, 2004

Cash and Cash Equivalents	4,569		5,276

Current Assets	5,448		6,515

Current Liabilities	(2,906	)	(2,353	)

Working Capital Surplus	2,542		4,162

Ratio of Current Assets to Current Liabilities	1.87		2.77

Net Increase in Cash and Cash Equivalents. During the quarter ended March 31, 2005, the Company’s cash and cash equivalents decreased by $707,000. This decrease was primarily the result of cash flows received from shares issued by the Company being exceeded by the net cash used in operating and investing activities. The Company used net cash of $2,314,000 in operations. The Company received net cash of $1,781,000 in financing activities and used $20,000 in investing activities.

Net Cash Used in Operations. The use of cash in operations of $2,314,000 in the quarter ended March 31, 2005, was attributable to the Company’s relatively minimal revenues at the same time that the Company incurred significant operating and software research and development costs. These significant costs

included professional fees, salaries and director compensation, marketing, regulatory costs and property service charges and rent. The Company used cash in operations in the quarter ended March 31, 2004 of $4,165,000.

Net Cash Used in Investing Activities. In the quarter ended March 31, 2005, the Company had a net cash outflow from investing activities of $20,000. The Company used these funds to purchase additional fixed assets. In the quarter ended March 31, 2004 the Company had a net cash outflow from investing activities of $45,000. The Company used the funds to purchase additional fixed assets.

Net Cash Provided by Financing Activities. In the quarter ended March 31, 2005, the Company had a net cash inflow from financing activities of $1,781,000. The funds received in the quarter ended March 31, 2005, consisted of $1,813,000 from the Company’s private offerings. For the quarter ended March 31, 2004, the Company had a net cash inflow from financing activities of $13,190,000. The funds received consisted of $13,907,000 received from the private offering of the Company’s stock, which were partly used to reduce the bank overdraft ($196,000) and to repay the short term debt – related party by $503,000.

Stockholders’ Equity. The Company’s stockholders’ equity at March 31, 2005 was $16,881,000, including an accumulated deficit of $(181,592,000), as compared to $18,465,000 at December 31, 2004, including an accumulated deficit of $(178,498,000). Additional paid-in capital was $198,465,000 and $196,652,000, at March 31, 2005 and December 31, 2004 respectively. The increase in stockholders’ equity was a result of an increase in additional paid-in capital of $1,813,000 resulting from the placement of the Company’s stock offset by an increase in accumulated deficit of $3,094,000.

Additional Capital. The Company will require additional capital during its fiscal years ending December 31, 2005 and 2006 to implement its business strategies, including cash for payment of increased operating expenses such as salaries for additional employees. Such additional capital may be raised through additional public or private equity offerings, as well as borrowings and other resources. Currently, the Company has two available lines of credit.

On December 15, 2000, the Company entered into an unsecured credit facility with Asia IT that provides a $20,000,000 line of credit. Such line of credit originally expired on December 31, 2001, but has been extended until December 31, 2006. Interest on advances under the credit facility accrues at 2% above US LIBOR. The Company can draw down on this credit facility for its financing requirements, upon approval by the Company’s Board of Directors and subject to approval by Asia IT (such approval not to be unreasonably withheld). The Company is restricted from borrowing funds, directly or indirectly, other than through the credit facility with Asia IT, without the consent of Asia IT. The availability of the credit facility reduces upon the Company’s sale of any of its investment assets. The amounts drawn and interest charged under this facility are repayable on demand or at the maturity of the facility.

On November 20, 2001, Asia IT entered into a £10,000,000 ($18,000,000) credit facility with MS-PLC. Such facility matures on December 31, 2006 and is secured by a lien on all assets of MS-PLC. Interest on outstanding amounts accrues at 2% above GBP LIBOR. 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.

At March 31, 2005, the Company had not drawn down any funds under the $20,000,000 facility with Asia IT, and MS-PLC had not drawn down any funds under its £10,000,000 ($18,000,000) facility with Asia IT.

To the extent that additional capital is raised through the sale of equity or equity-related securities of the Company or its subsidiaries, the issuance of such securities could result in dilution to the Company’s stockholders. No assurance can be given, however, that the Company will have access to the capital markets in the future, or that financing will be available on acceptable terms to satisfy the Company’s cash requirements to implement its business strategies. If we are unable to access the capital markets or obtain acceptable financing, our results of operations and financial conditions could be materially and adversely affected. We may be required to raise substantial additional funds through other means. The products 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 (for example installation, activation and up-front license fees), on-going license fees, upgrade fees, termination fees and maintenance fees. Where fees are received prior to any service being delivered the fees are deferred until the related service has been delivered successfully and the revenue can then be recognized. Again if there are fees that relate to any “milestone” agreements these are deferred until the “milestone” has passed and then the revenue can be recognized.

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

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

The Company decided that capitalizing such expenditure was inappropriate because of the difficulty in assigning costs accurately to the various software products and versions being developed as technical and 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.

Under this standard, goodwill is tested for impairment on an annual basis or wherever indicators of impairment arise.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (revised 2004), Share-Based Payment (Statement 123(R)), which replaces Statement No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Statement 123 (R) requires all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value and recognize the cost in the financial statements. The pro forma disclosures previously permitted under Statement 123 will no longer be an alternative to financial statement recognition. This statement applies to all awards granted after the date of adoption and to awards modified, repurchased, or cancelled after that date. The cumulative effect of initially applying Statement 123(R), if any, will be recognized as of the date of adoption.

In April 2005, the SEC delayed the effective date of SFAS 123(R) to fiscal years beginning after June 15, 2005. As a result SFAS 123(R) will be effective for the Company beginning in the first quarter of 2006. The Company has not completed its evaluation of the impact that adopting SFAS 123(R) will have on its financial statements.

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	$	298	$	277	$	21	$	—	$	—
Operating Lease Obligations	1,627		507		1,013		107		—
Total	$	1,925	$	784	$	1,034	$	107	$	—

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 March 31

Asia IT Capital Investments Ltd	$	20,000,000	$	nil	US Libor + 2%	5.84	%

Asia IT Capital Investments Ltd	$	18,000,000	$	nil	GBP Libor + 2%	7.12	%

A hypothetical 100 basis point 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 limited cash balances in British Pounds so any adverse movements in the exchange rates are considered immaterial.

As the Company’s operating currency is UK sterling (£) and its financial statements are reported in US Dollars, the Company’s assets and liabilities and its results of operations are affected by movements in the $: £ exchange rate.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, our management carried out an evaluation of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” as of March 31, 2005. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. As defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, disclosure controls and procedures are controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2005. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Changes in Internal Control over Financial Reporting

As required by Rule 13a-15(d) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any change occurred during the quarter ended March 31, 2005, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation during the quarter ended March 31, 2005 there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

MEDICSIGHT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In $ thousands)

	March 31, 2005			December 31, 2004
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	4,569		$	5,276
Accounts receivable	25			26
Other receivables	82			28
Prepaid expenses	642			498
Sales tax receivable	130			687
Total current assets	5,448			6,515

PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation of $3,354 and $3,227, respectively	1,917			2,066

INVESTMENTS, at cost	359			359

SECURITY DEPOSITS	884			901

EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED	11,200			11,200

Total assets	$	19,808		$	21,041

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	1,891		$	1,193
Accrued expenses	738			1,053
Current portion of obligations under capital leases	277			107
Total current liabilities	2,906			2,353
CAPITAL LEASE	21			223
Total liabilities	$	2,927		$	2,576

STOCKHOLDERS’ EQUITY:
Common stock, $0.001 par value, 40,000,000 shares authorized, 33,571,125 and 33,067,125 shares issued and outstanding, respectively	34			33
Additional paid-in capital	198,465			196,652
Cumulative foreign currency translation adjustment	(26		)	278
Accumulated deficit	(181,592		)	(178,498		)
TOTAL STOCKHOLDERS’ EQUITY	16,881			18,465

Total liabilities and stockholders’ equity	$	19,808		$	21,041

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 March 31, 2005			Three Months Ended March 31, 2004
	(unaudited)			(unaudited)

REVENUES	$	151		$	152

EXPENSES:
Selling, general and administrative charges	2,620			3,151
Research and development cost	639			669

	3,259			3,820

Operating loss	(3,108		)	(3,668		)

OTHER INCOME
Interest and other income	14			—

Net Loss before minority interest	(3,094		)	(3,668		)

MINORITY INTEREST	—			134

Net loss	$	(3,094	)	$	(3,534	)

PER SHARE DATA:
Basic and diluted loss per share	$	(0.09	)	$	(0.13	)

Weighted average number of common shares outstanding	33,302,325			26,461,309

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

F-3

MEDICSIGHT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(In $ thousands)

	Three months Ended March 31, 2005			Three months Ended March 31, 2004
	(unaudited)			(unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3,094	)	$	(3,534	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation	127			191
Minority interest in net loss of subsidiary	—			(134		)
(Increase)/decrease in assets
Accounts receivable	1			(4		)
Prepaid expenses and other current assets	(144		)	(56		)
Sales tax receivable	503			132
Increase/(decrease) in liabilities
Accounts payable	650			(521		)
Accrued expenses	100			(246		)
Accrued professional expenses	(457		)	7
Net cash used in operating activities	(2,314		)	(4,165		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets	(20		)	(45		)
Net cash used in investing activities	(20		)	(45		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations	(32		)	(18		)
Decrease of bank overdraft	—			(196		)
Proceeds from sale of common stock	1,813			13,907
(Decrease)/increase in short term debt - related party	—			(503		)
Net cash provided by financing activities	1,781			13,190

Effects of exchange rates on cash and cash equivalent	(154		)	(9		)

NET CHANGE IN CASH & CASH EQUIVALENTS	(707		)	8,971

CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD	5,276			845

CASH & CASH EQUIVALENTS, END OF PERIOD	$	4,569		$	9,816

SUPPLEMENTAL DISCLOSURES OF CASH PAID
Interest	2			24
Income taxes	—			—

NON CASH FINANCING ACTIVITIES
Capital lease obligations for equipment	—			—

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

F-4

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^TM, MedicHeart^TM, and MedicLung^TM) 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 and liquidity

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, 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 quarter ended March 31, 2005, are not necessarily indicative of the results to be expected for any other interim period or any future fiscal year.

These consolidated financial statements are presented on the basis that the Company will continue as a going concern. The going concern concept contemplates the realization of assets and satisfaction of liabilities in the normal course of business over a reasonable length of time. 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 March 31, 2005 and there is uncertainty with respect to the availability and the utilization of its credit facility with Asia IT Capital Investments Limited (a related party) – see Note 3. 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 is 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 management’s efforts will be successful or that the products the Company develops and markets will be accepted by consumers. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this going concern uncertainty.

F-5

(3) Lines of Credit

On December 15, 2000, the Company entered into an unsecured credit facility with Asia IT, which provides a $20,000,000 line of credit. Such line of credit originally expired on December 31, 2001, but has been extended until December 31, 2006. 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 ($18,000,000) credit facility with Asia IT. Such facility matures on December 31, 2006 and is secured by a lien on all assets of MS-PLC. Interest on outstanding amounts accrues at 2% above GBP LIBOR. 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.

(4) Stockholders’ Equity

(5) 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 March 31, 2005, 50% of the options issued were exercisable under the plan.

The Company has elected to adopt the disclosure only provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123”, and measures the cost for MS-PLC’s employee stock compensation plan by using the accounting methods prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees”, which allows that no compensation cost be recognized unless the exercise price of the options granted is 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.

F-6

	Three months Ended March 31, 2005		Three months Ended March 31, 2004
	(unaudited) $’000		(unaudited) $’000
Net loss as reported:	(3,094	)	(3,534	)

Fair value method of stock based compensation	(20	)	(22	)

Proforma net loss	(3,114	)	(3,556	)

Reported earnings per common share
Basic and diluted	(0.09	)	(0.13	)
Proforma earnings per common share
Basic and diluted	(0.09	)	(0.13	)

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.

(6) Goodwill and Other Intangible Assets

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.

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

(7) 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 ($884,000) and is interest-bearing.

(8) Lease Commitments

The Company has entered into property leases for the Westminster and Ravenscourt centers. Future minimum obligations under these lease arrangements are as follows:

For the 12 months ending March 31,		Property Leases
		($’000)
2006		507
2007		506
2008		507
2009		22
2010 and thereafter		85

The Company’s corporate offices at 46 Berkeley Square are leased to International Cellulose Company Limited (ICCL), a company registered in England and Wales. STG Holdings PLC, a significant stockholder of the Company, acquired 100% of the issued share capital of ICCL in November 2001. There is no formal lease agreement between ICCL and the Company for its offices at 46 Berkeley Square but the Company is charged by ICCL on the basis of space occupied. The approximate charge is $140,000 per quarter.

F-7

(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).

(b)	Reports on Form 8-K

	None

Condensed Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and December 31, 2004	F-2

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2005 (Unaudited) and the Three Months Ended March 31, 2004 (Unaudited)	F-3

Condensed Consolidated Statement of Cash Flows for the Three months Ended March 31, 2005 (Unaudited) and the Three months Ended March 31, 2004 (Unaudited)	F-4

Notes to Condensed Consolidated Financial Statements	F-5 to F-8

	MEDICSIGHT, INC.


	By:	/s/ Tim Paterson-Brown
	Tim Paterson-Brown
	Chief Executive Officer


	By:	/s/ Paul Gothard
	Paul Gothard
	Chief Financial Officer


May 11, 2005

None.

None.

None.

(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).