MGT CAPITAL INVESTMENTS, INC. - Quarter Report: 2006 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

x		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2006
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)

 

 

 

011-44-20-7598-4070

(Registrant’s telephone number, including area code)

 

 

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:

 

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

 

 

The number of shares outstanding of the registrant’s common stock as of May 12, 2006 was 37,667,883.

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 March 31, 2006 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

Medicsight, Inc. was originally incorporated as a Utah corporation in 1977 and was re-incorporated in Delaware in 2000. All references in this report to “the Company”, “we” or “us” refer to Medicsight, Inc. and subsidiaries. The Company has two primary business objectives:

·                  To conceive, develop and commercialize innovative medical imaging applications derived from our core technology known as Medicsight CAD.

 

·                  To establish a global online community for medical imaging professionals (to be known as MedicExchange) with a rich selection of specialist clinical content for registered users combined with a product marketplace where medical imaging vendors can sell their solutions online.

 

During the quarter ended March 31, 2006 the Company raised $4,590,000 (net of commission and expenses) by issuing 1,275,000 restricted shares of common stock. These private placements were underwritten by Asia IT Capital Investments Limited (“Asia IT”), a related party. Asia IT received commissions of $510,000 on the these private placements. This amount is inclusive of the common stock subscribed but unissued of $3,600,000 at December 31, 2005.

During the year ended December 31, 2005 the Company raised $12,035,000 (net of commission and expenses) by issuing 3,327,000 restricted shares of common stock.

During 2005 the Company initiated a plan of disposal of its Lifesyne scanning business which was subsequently sold in November 2005 and its results are reflected as discontinued operations.

The Company’s authorized share capital is 40,000,000 shares of common stock, par value $0.001. At March 27, 2006, 37,667,883 shares of common stock had been issued.

We maintain our corporate offices at 46 Berkeley Square, London, W1J 5AT, United Kingdom, telephone +44 (0) 207-598-4070, facsimile: +44 (0) 207-598-4071.

BUSINESS STRATEGY

We have four principal operating subsidiaries: Medicsight PLC (“MS-PLC”), Medicsight U.S.A., Inc (“MS-US”) (previously Lifesyne U.S.A.), Medicsight (International) Limited (“MIL”) and Medic Exchange, Inc (“MDX”) (previously known as Medicsight On-line, Inc (“MOL”).

Lifesyne UK Limited (“Lifesyne”) was sold to an independent third party in November 2005 and is reported as discontinued operations in the quarter ended March 31, 2005. In addition Medicsight Asset Management Limited (“MAM”) ceased operations during the year.

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MS-PLC.   Our majority-owned subsidiary, MS-PLC, is currently engaged in efforts to commercialize the groups CAD products (“Medicsight CAD”). At December 31, 2005 and December 31, 2004, the Company owned 70,677,300 ordinary shares in MS-PLC, constituting 81.8% of the outstanding shares.

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.

MDX.   MDX, a majority-owned subsidiary, incorporated in Delaware (with initial capital of 1,500 shares of common stock, par value $1.00) is currently engaged in developing the online business — “MedicExchange” and began operating in January 2006. The Company owns 90% of MDX and 10% is owned by Compile Nominees Limited, a company registered in Gibraltar, who is assisting MDX with the development of the portal.

Lifesyne.   Lifesyne was a wholly owned non-core subsidiary of MS-PLC that was established in September 2002 to provide scanning services and thereby acquire patient CT scan data necessary to test and validate the Medicsight CAD software. Lifesyne operated one scanning center in Westminster, London. On November 10, 2005, we sold Lifesyne to an independent third party for approximately $450,000. At that time the net assets of Lifesyne totaled approximately $844,000 leading to an impairment loss of approximately $394,000.

Revenues and operating losses for Lifesyne follow:

 

 

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 or fully impaired on December 31, 2004. MAM had ceased trading once all of its assets had been disposed of.

MedicExchange

MedicExchange is being established to provide medical imaging professionals with a global online community containing a variety of relevant clinical papers, training materials and content. This combined with a multi-vendor online sales channel for diagnostic, treatment and surgery planning solutions will give these professionals access to information and products that they otherwise would have difficulty accessing. We believe that our low cost, on demand, digitally downloadable model is unique in this sector.

MedicExchange will offer medical imaging software vendors a single channel through which they can access a large community of medical imaging professionals globally in order to sell and market their product solutions. MedicExchange is scheduled to be available later in 2006.

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Product Benefits

MedicExchange will provide vendors the opportunity to sell a variety of applications directly to radiologists in an efficient and low-cost manner (web-based downloads). MedicExchange will offer traditional pricing plans in addition to flexible “per use” pricing. This decreases the financial purchasing risk and setup times for radiologists by giving them an attractive pricing model via an online channel.

MedicExchange will seek to add value for the radiologists by delivering a centralized meeting place for clinical information, information collaboration and training services.

MedicExchange intends to cover the following imaging specialty areas: Women’s Imaging, Cardiology, Gastroenterology, Thoracic, Orthopedic and Neurology.

Market Opportunity

Radiologists expect frequency of computed tomography (“CT”) procedures to grow by over 35% over the next five years (source: Frost & Sullivan research). Traditional original equipment manufacturers (“OEM”) typically control the access to these applications and charge high per unit price points (typically $50,000 to $200,000). These high price points create long sales cycles. The “per use” pricing model removes this obstacle to purchase. Online product purchasing and downloads create a flexible, on demand usage model.

Radiologists state a preference for the concept of a “per use” pricing model and web-based downloadable tools. Over 80% would consider a dedicated internet portal for their area of specialty a useful service (source: Frost & Sullivan research).

What differentiates the company?

By creating strong relationships with our 3rd party partner vendors MDX intends to develop the clinical information and contacts, provide products and product demonstrations, training and support that will result in MedicExchange achieving its aim to be the leading global portal for clinical vendors and professionals.

MedicExchange aims to provide essential information, training and collaborative tools to attract customers, enable them to use the demonstration applications, purchase the applications and retain them as repeat users.

The MedicExchange portal will be a global distribution portal (initially with websites in the U.S., Europe and Asia). We believe that the MedicExchange could materially change the way in which new medical products reach the market. Other websites in the area, in our view, have not been able to take full advantage of the expressed desire in the medical community for portals, such as the MedicExchange, because their product offerings are limited compared to those of MedicExchange.

Medicsight CAD

Medicsight CAD products help clinicians identify, measure, and analyze suspicious pathology, such as colorectal polyps and lung lesions. For the last four years, the Company has been working on developing advanced technical algorithms in this area employing a team of scientists, image processing experts and software developers.

To date, MS-PLC has focused on two of the leading causes of premature death, lung cancer and colorectal cancer. Between them, these diseases are responsible for over 8.5 million premature deaths globally. There is increasing evidence that early detection leads to an improved life expectancy. Developing technology that enables early detection of lung and colorectal cancers has been a core focus of our product development. However, MS-PLC’s technology is scalable to many other disease areas. We have plans to further extend our technologies to new areas of abdominal imaging such as liver during 2006.

The Company’s CAD products include ColonCAD Application Programming Interface (“API”), the first CAD technology available for CT colonography, and LungCAD API. Medicsight CAD software is

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provided to medical imaging partners as an integrated solution and will also be available online through MedicExchange directly to clinicians.

Product benefits

Medicsight CAD products enable radiologists to read CT scans using a “concurrent-read” approach. Unlike “second-read” software, in which software is used after radiologists complete their primary review, concurrent-read software enables radiologists to review the original, “unfiltered” images side-by-side simultaneously, with a software-enhanced image showing regions of interest. MS-PLC believes that using CAD in a concurrent-read capacity increases colonic polyp and lung nodule detection efficiency by minimizing the impact on existing radiology workflows while providing valuable additional information to the radiologist.

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

“Diagnostic”  products; incidental “disease detection” and “disease tracking”.   These products have been designed to be used in symptomatic patients but to detect other diseases incidental to those for which the investigation was originally requested. Subsequently, these incidentally identified lesions may be tracked so that their progress may be monitored by measurement.

“Screening” products; population screening of asymptomatic patients.   CAD CT seeks to provide a cost effective solution to identify certain diseases sufficiently early to make population screening programs more cost effective in terms of life years saved.

Business Development

MS-PLC has signed non—exclusive agreements with TeraRecon, Inc (for the distribution of both LungCAD and ColonCAD), Viatronix, Inc (for the distribution of both LungCAD and ColonCAD) and Vital Images, Inc (for the distribution of Colon CAD). These agreements are part of the the Company’s plans to commercialize its advanced imaging technology on a worldwide basis. MS-PLC’s CAD software is integrated into the partner companies’ existing product offerings.

TeraRecon has successfully integrated MS-PLC’s ColonCAD and LungCAD software into TeraRecon’s flagship Aquarius family of medical imaging. The combined TeraRecon / Medicsight imaging system made its debut in November 2005 at the annual meeting of the Radiological Society of North America (“RSNA”) in Chicago, Illinois.

Viatronix has successfully integrated MS-PLC’s ColonCAD and LungCAD software into its V3D TM Colon and V3DTM Explorer software applications. This was shown at the RSNA conference in Chicago in November 2005.

Vital Images has successfully integrated MS-PLC’s Colon CAD software into its CT Colonography application which is part of the VitreaTM software package. This was also shown at the November 2005 RSNA conference in Chicago.

In addition to these signed partnerships, MS-PLC is in discussion with a number of other major imaging companies in North America and Europe and is looking to have further announcements in the near future.

In Japan, we expect to finalize agreements for distribution of MS-PLC LungCAD and ColonCAD are expected in the coming months.

The Company sees Japan and China as strategically important in terms of future growth and believes that the extensive business development and commitment of opening offices in these countries should lead to further opportunities and announcements in these areas in 2006.

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Regulatory Process

In order to release new products into a specific market, MS-PLC must gain regulatory approvals for its Medicsight CAD products. In the U.S., the Food and Drug Administration (“FDA”) is the regulatory authority. In Europe, regulatory approval is gained through Conformité Europeène (“CE”) marking. The procedure used and timescales involved differ depending on the region but fundamentally each region requires evidence of products being developed under a strict quality management system. In October 2005 we gained ISO 13485:2003 certification confirming the MS-PLC’s compliance with international quality standards. All of our products are designed, built, distributed and supported to this level of quality control.

MS-PLC can follow one of two routes to obtain FDA approval for its products: a pre-market notification (“510(k)”) or a pre-market assessment (“PMA”). A 510(k) application is submitted when the product is substantially equivalent to an existing legally marketed device. A PMA is required for higher risk products and is the more stringent route which requires scientific evidence to demonstrate that the product is safe and effective for its intended use.

For European CE approvals, a company is required to be regularly audited by an external notified body to demonstrate an effective quality system. If successful, the company may then label its products with CE mark.

Markets such as China and Japan have their own regulatory bodies but these often require companies outside of these markets to show evidence of an existing CE or FDA approval for a product before gaining approval in the local market.

MS-PLC has a significant amount of experience in preparing, submitting and gaining regulatory approvals for its products. In the US, MS-PLC has existing FDA 510(k) approvals for its LungCAR and ColonCAR products and has approvals pending for the recent ColonCAD and LungCAD releases. In Europe, MS-PLC has CE approval for all released products and is regularly audited by an external notified body. MS-PLC is seeking approvals for its ColonCAD and LungCAD products in Japan and China. As each new product is prepared for release, MS-PLC’s internal regulatory team prepares the regulatory documentation for each market in order to allow that product to be marketed and sold.

Because MS-PLC manages the approval process, its business partners can rapidly integrate and release their own products containing Medicsight CAD technology more quickly than if they had to gain all the approvals independently.

We regard our extensive experience in successfully obtaining European and FDA approvals as a valuable asset of the Company. We believe this experience will be useful in our efforts to obtain approval for our products in new markets such as China and Japan.

Risk Factors

We cannot assure you that the Company will be successful in commercializing the Medicsight CAD products or the MedicExchange portal, or if the products or the portal are commercialized, that they will be profitable to the Company. We face obstacles in commercializing the Medicsight CAD products and the MedicExchange portal and in generating operating revenues as detailed below.

The Company does not believe that there is currently any comparable system that is competitive with the Medicsight CAD products. There are computer-aided diagnostic systems that operate in the field, but, in our view, such other systems are more dependent than ours on human resources to carry out the analysis. We are not aware of other systems in the field that have the automated capability of our products.

The Company has had only a limited operating history and no revenues from its continuing operations 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

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constantly changing industry. There can be no assurance that the Company will be able to achieve profitable operations in the foreseeable future or at all.

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

Technical Risks.   The Medicsight CAD 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 CAD products and MedicExchange 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 CAD and MedicExchange products or be slower to accept them than we expect. Revenues from Medicsight CAD and MedicExchange may be delayed or costs may be higher than expected which may result in the Company requiring additional funding.

Regulatory Risks.   The Medicsight CAD system is subject to regulatory requirements in the United States Europe, Japan, China and our other targeted markets. Necessary regulatory approvals may not be obtained or may be delayed. We may incur substantial additional cost in obtaining regulatory approvals for our products in our targeted markets.

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 CAD and MedicExchange. 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 Medicsight CAD and MedicExchange.

Financial Risk.   The Company has incurred significant operating losses since inception and has generated no revenues from continuing operations. As a result, the Company has generated negative cash flows from operations and has an accumulated deficit at March 31, 2006. 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 that management’s efforts will be successful or that the products the Company develops and markets will be accepted by consumers.

Corporate Structure.   The Company’s corporate structure may make it more difficult or costly to take certain actions. The Company conducts substantially all its business through MS-PLC, a U.K. public company which is 81.8% owned by the Company, and through MS-PLC’s subsidiaries in the United Kingdom and the United States and through MDX, which is 90% owned by the Company. Although the Company and MS-PLC share directors and management, they are required to comply with corporate governance and other laws and rules applicable to public companies in the United Kingdom and the United States. Should the Company propose to take any action, such as a transfer or allocation of assets or liabilities between the Company and MS-PLC, the Company would have to take into consideration the potentially conflicting interests of the Company’s stockholders and the minority stockholders of MS-PLC. This may deter the Company from taking such actions that might otherwise be in the best interest of the Company or cause the Company to incur additional costs in taking such actions. MS-PLC would not be able to pay dividends or make other distributions of profits or assets to the Company without making pro rata payments or distributions to the minority stockholders of MS-PLC. Although neither MS-PLC nor the Company has plans to pay dividends or make distributions to its shareholders, the Company’s corporate structure may deter MS-PLC and the Company from doing so in the future. This risk will also apply to MDX as it begins its operations this year as the Company owns 90% of MDX’s equity.

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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, 2006 and March 31, 2005 the Company’s gross revenues from continuing operations were $nil.

The Company’s only revenues for the quarter ended March 31, 2005 were derived from the Company’s discontinued Lifesyne™ scanning operations — see “Discontinued Operations” below.

Selling, General and Administrative Expenses.   The Company’s selling, general and administrative expenses from continuing operations for quarters ended March 31, 2006 and March 31, 2005, were $2,468,000 and $2,223,000 respectively.

The significant elements of the Selling, General and Administrative Expenses from continuing operations are outlined in the table below:

 

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Research and Development Cost.   The Company’s research and development cost for quarters ended March 31, 2006 and March 31, 2005, was $627,000 and $639,000 respectively.

Discontinued Activities.   During the third quarter of 2005 a plan was initiated for the disposal of the Lifesyne business and Lifesyne was subsequently sold on November 10, 2005. In accordance with Statement of Financial Accounting Standards No. 144 Accounting for Impairment or disposal of Long-Lived Assets Lifesyne has been accounted for as discontinued operations. Accordingly, our financial statements for the quarter ended March 31, 2005 has been restated to reflect the Lifesyne Segment as a discontinued operation in our consolidated statements of operations and cash flows.

Revenues and operating losses for Lifesyne follow:

 

Net Loss and Net Loss per Share.   Net loss was $3,030,000 and $3,094,000 respectively for the quarters ended March 31, 2006 and March 31, 2005. Net loss per share for the quarters ended March 31, 2006 and March 31, 2005 was $0.08 and $0.09, respectively, based on weighted average shares outstanding of 37,291,216 and 33,302,325 respectively.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital Information as March 31:

 

Net Increase in Cash and Cash Equivalents.   During the quarter ended March 31, 2006, the Company’s cash and cash equivalents increased by $115,000. This increase was primarily the result of cash flows received from shares issued by the Company exceeding the net cash used in operating activities. The Company used

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net cash of $4,632,000 in continuing operations. The Company received net cash of $985,000 in financing activities and received $3,912,000 from investing activities.

Net Cash Used in Operations.   The Company used cash in continuing operations of $4,632,000 in the quarter ended March 31, 2006, as 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 and the payment of $1,151,000 to Asia IT for the commissions due to them on the Company’s private placements. The Company used cash in continuing operations in the quarter ended March 31, 2005 of $2,069,000.

Net Cash provided by Investing Activities.   In the quarter ended March 31, 2006, the Company had a net cash inflow from investing activities of $3,912,000. The main component was the release of $4,000,000 received by the Company in December 2005 following the issuance of the common stock in January 2006. Additionally, the Company purchased $88,000 in fixed assets in the same period. In the quarter ended March 31, 2005, the Company had a net cash outflow from investing activities of $20,000. The Company used the funds to purchase additional fixed assets.

Net Cash Provided by Financing Activities.   In the quarter ended March 31, 2006, the Company had a net cash inflow from financing activities of $985,000. The funds received consisted mainly of $990,000 from the Company’s private offerings. For the quarter ended March 31, 2005, the Company had a net cash inflow from financing activities of $1,781,000. The funds received consisted of $1,813,000 received from the private offering of the Company’s stock.

Stockholders’ Equity.   The Company’s stockholders’ equity at March 31, 2006 was $19,586,000, including an accumulated deficit of $(193,744,000), as compared to $21,734,000 at December 31, 2005, including an accumulated deficit of $(190,714,000). Additional paid-in capital was $213,373,000 and $208,684,000, at March 31, 2006 and December 31, 2005 respectively.

Additional Capital.   The Company will require additional capital during the balance of 2006 and 2007 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.

During the quarter ended March 31, 2006 the Company raised $4,590,000 (net of commission and expenses) by issuing 1,275,000 restricted shares of common stock. These private placements were underwritten by Asia IT Capital Investments Limited (“Asia IT”), a related party. Asia IT received commissions of $510,000 on the above private placements.

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 June 30, 2007. 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 June 30, 2007 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.

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At March 31, 2006, 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, Medicsight CAD, and our online portal, MedicExchange, 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 revenues from our commercial operations associated with the software products. 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. Management believes it has sufficient cash and available facilities to fund operations for the coming year. 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 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 will be recognized in accordance with Statement of Position 97-2 (SOP 97-2), as amended by Statement of Position 98-9. The Company’s revenues were derived from its discontinued scanning services operated by Lifesyne. Scan revenue is recognized when the service is delivered.

The recognition of revenues from software licenses and related services will require difficult and complex judgments. The terms of the license contract, such as whether the contract is long-term (over 12 months) or short-term, cancelable or non-cancelable and the basis on which the licensee is charged , for example, will affect the recognition of revenues from services, such as up-front fees on 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 recognition of the fees is deferred until the related service has been delivered successfully. Recognition of fees that relate to any “milestone” is deferred until the “milestone” has been achieved.

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 collectibility of accounts.

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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 concluded that capitalizing such expenditures on completion of a working model was inappropriate because the Company did not incur any material software production costs and therefore 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 CAD 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 an asset involves significant judgments and a variety of assumptions. Judgments that the Company makes concerning the value of its intangible assets include assessing time and cost involved for development, time to market, and 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 include long-term forecasts of revenue growth, gross margins and capital expenditures.

An impairment analysis was performed as of December 31, 2005 and 2004 and the Company concluded there was no impairment loss.

Impairment of Excess of Purchase Price Over Net Assets Acquired.   The Company adopted SFAS No. 142 on January 1, 2002. Under this standard, goodwill is no longer be amortized over its estimated useful life, but is 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 continue to perform an impairment analysis at least annually.

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

None.

13

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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:

 

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.

14

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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, 2006. 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, 2006. 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, 2006, 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, 2006 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.

The Company is currently undergoing a comprehensive effort in preparation for compliance with Section 404 of the Sarbanes-Oxley Act of 2002. This will involve the documentation, testing and review of our internal controls under the direction of senior management.

15

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PART II

Item 1.                          Legal Proceedings

There are currently no pending legal proceedings.

Item 2.                          Unregistered Sales of Equity Securities and Use of Proceeds

Between January 1, 2006 and March 31, 2006 the Company issued approximately 1,275,000 shares of common stock at $4.00 per share to a number of institutional investors and private individuals as part of a private placement raising approximately $4,590,000 net of commissions payable to Asia IT, a related party. The shares of common stock were issued without registration in reliance upon the exemption provided by Section 4(2) of the Securities Act of 1933.

Item 3.                          Defaults Upon Senior Securities

None.

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

None.

Item 5.                          Other Information

None.

16

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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).

(b)            Reports on Form 8-K

None

 

17

MEDICSIGHT, INC. AND SUBSIDIARIES

INDEX TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2006

Condensed Consolidated Balance Sheets as of March 31, 2006 (Unaudited) and December 31, 2005		F-2
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2006 (Unaudited) and the Three Months Ended March 31, 2005 (Unaudited)		F-3
Condensed Consolidated Statement of Cash Flows for the Three months Ended March 31, 2006 (Unaudited) and the Three months Ended March 31, 2005 (Unaudited)		F-4
Notes to Condensed Consolidated Financial Statements		F-5 to F-10

 

F-1

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MEDICSIGHT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
($ thousands, except per share data)

 

		March 31,			December 31,
		2006			2005
		(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	7,364		$	7,249
Cash held for common stock subscribed but unissued		—			4,000
Other receivables		322			344
Prepaid expenses		211			213
Value-Added Tax receivable		117			61
Total current assets		8,014			11,867
PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation of $1,481 and $1,542 respectively		225			252
INVESTMENTS, at cost		359			359
SECURITY DEPOSITS		808			808
EXCESS OF PURCHASE PRICE OVER
NET ASSETS ACQUIRED		11,200			11,200
Total assets		$	20,606		$	24,486
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	764		$	1,172
Accounts payable — related party		—			1,151
Accrued expenses		236			404
Current portion of obligations under capital leases		15			19
Total current liabilities		1,015			2,746
Obligations under capital leases, net of current portion		5			6
Total liabilities		1,020			2,752
Commitments and contingencies
STOCKHOLDERS’ EQUITY:
Common stock, $0.001 par value, 40,000,000 shares authorized, 37,667,883 and 36,392,883shares issued and outstanding respectively		38			36
Additional paid-in capital		213,373			208,684
Common stock subscribed but unissued, net		—			3,600
Accumulated comprehensive income		(81		)	128
Accumulated deficit		(193,744		)	(190,714		)
TOTAL STOCKHOLDERS’ EQUITY		19,586			21,734
Total liabilities and stockholders’ equity		$	20,606		$	24,486

 

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

F-2

MEDICSIGHT, INC. AND SUBSIDIARIES

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

		Three Months			Three Months
		Ended			Ended
		March 31, 2006			March 31, 2005
		(unaudited)			(unaudited)
REVENUES		$	—		$	—
EXPENSES:
Selling, general and administrative charges		2,468			2,223
Research and development cost		627			639
		3,095			2,862
Operating loss		(3,095		)	(2,862		)
OTHER INCOME
Interest and other income		65			14
LOSS FROM CONTINUING OPERATIONS		(3,030		)	(2,848		)
DISCONTINUED OPERATIONS:
Loss from operations of Lifesyne		—			(246		)
NET LOSS		$	(3,030	)	$	(3,094	)
LOSS PER SHARE:
Basic and diluted:
Loss from continuing operations		$	(0.08	)	$	(0.09	)
Loss from discontinued operations		$	(0.00	)	$	(0.00	)
Net loss		$	(0.08	)	$	(0.09	)
Weighted average number of common shares outstanding		37,291,216			33,302,325

 

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

F-3

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MEDICSIGHT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In $ thousands)

		Three months			Three months
		ended			ended
		March 31, 2006			March 31, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(3,030	)	$	(3,094	)
Adjustments to reconcile net loss to net cash used in operating activities
Loss from discontinuing operations		—			246
Share-based compensation		96			—
Depreciation and amortization		61			127
(Increase)/decrease in assets
Prepaid expenses and other receivables		24			(238		)
VAT receivable		(56		)	503
Increase/(decrease) in liabilities
Accounts payable		(408		)	744
Accounts payable — related party		(1,151		)	—
Accrued expenses		(168		)	(357		)
Net cash used in operating activities		(4,632		)	(2,069		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash held for common stock subscribed but unissued		4,000			—
Purchase of property and equipment		(88		)	(20		)
Net cash (used in)/provided by investing activities		3,912			(20		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations		(5		)	(32		)
Proceeds from sale of common stock (net of commissions)		990			1,813
Net cash provided by financing activities		985			1,781
Cash flows of discontinued operations
Net cash used in operating activities		—			(174		)
Net cash (used in) financing activities		—			(5		)
		—			(179		)
Effects of exchange rates on cash and cash equivalents		(150		)	(220		)
NET CHANGE IN CASH & CASH EQUIVALENTS		115			(707		)
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD		7,249			5,276
CASH & CASH EQUIVALENTS, END OF PERIOD		$	7,364		$	4,569
SUPPLEMENTAL DISCLOSURES OF CASH PAID
Interest		$	1		$	2
NON CASH FINANCING ACTIVITIES
Issuance of stock subscribed		$	3,600		$	—

 

F-4

MEDICSIGHT, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)                               Formation and Business of the Company

Medicsight, Inc. was originally incorporated as a Utah corporation in 1977 and was re-incorporated in Delaware in 2000. All references in this report to “the Company”, “we” or “us” refer to Medicsight, Inc. and subsidiaries. The Company has two primary business objectives:

·                  To conceive, develop and commercialize innovative medical imaging applications derived from our core technology known as Medicsight CAD.

·                  To establish a global online community for medical imaging professionals (to be known as MedicExchange) with a rich selection of specialist clinical content for registered users combined with a product marketplace where medical imaging vendors can sell their solutions online.

(2)                               Basis of Presentation and liquidity

The accompanying unaudited condensed 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 condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the Fiscal year ended December 31, 2005. In the opinion of management, the accompanying unaudited condensed 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.

The results of operations for the quarter ended March 31, 2006 are not necessarily indicative of the results expected for the full fiscal year or for any future period.

The unaudited condensed consolidated include the accounts of Medicsight, Inc. and its subsidiaries in which it has a controlling interest. All inter-company accounts have been eliminated in consolidation. The Company has ceased recognizing the minority interest in its consolidated subsidiaries losses because the losses have exceeded the minority shareholders equity interest in those subsidiaries.

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, 2006. 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 that management’s efforts will be successful or that the products the Company develops and markets will be accepted by consumers.

(3)                               Lines of Credit

On December 15, 2000, the Company entered into an unsecured credit facility with Asia IT, a related party, 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, 2007. 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

F-5

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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 June 30, 2007 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, 2006, 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.

(4)                               Discontinued Activities

During the third quarter of 2005 a plan was initiated for the disposal of the Lifesyne business and Lifesyne was subsequently sold on November 10, 2005. In accordance with Statement of Financial Accounting Standards No. 144 Accounting for Impairment or disposal of Long-Lived Assets Lifesyne has been accounted for as discontinued operations. Accordingly, our financial statements for the quarter ended March 31, 2005 has been restated to reflect the Lifesyne Segment as a discontinued operation in our consolidated statements of operations and cash flows.

On November 10, 2005 Lifesyne was sold to an independent third party for approximately $450,000. On August 18, 2005 MS-PLC entered into an option agreement with the purchaser to acquire Lifesyne for a non-refundable deposit of approximately $90,000 as the purchaser needed further time to arrange the financing for the acquisition. This deposit constituted part of the sale proceeds on completion of the acquisition. At that time the net assets of Lifesyne totaled approximately $844,000 leading to an impairment loss of approximately $394,000.

Revenues and operating losses for Lifesyne follow:

$(000)

 

(5)                               Stockholders’ Equity

During the quarter ended March 31, 2006 the Company raised $4,590,000 (net of commission and expenses) by issuing 1,275,000 restricted shares of common stock. These private placements were underwritten by Asia IT, a related party. Asia IT received commissions of $510,000 on these private placements. This amount is inclusive of the common stock subscribed but unissued of $3,600,000 at December 31, 2005.

F-6

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(6)                               Accounting for Stock Based Compensation

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised), “Share-Based Payment” (SFAS 123(R)), utilizing the modified prospective approach. Prior to the adoption of SFAS 123(R), we accounted for stock option grants in accordance with Accounting Principle Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (the intrinsic value method) and, accordingly, recognized no compensation expense for stock option grants if the intrinsic value of a grant was zero or less.

Under the modified prospective approach, SFAS 123(R) applies to new awards and to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation cost recognized in the first quarter of 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Prior periods were not restated to reflect the impact of adopting the new standard.

As a result of adopting SFAS 123(R) on January 1, 2006, the net loss for the quarter ended March 31, 2006 was $96,000 higher than if we had continued to account for stock-based compensation under APB Opinion No. 25 for our stock option grants.

On March 20, 2003, the Board of Directors of MS-PLC approved a stock option plan “A” 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 granted options over 2,828,600 shares to employees of MS-PLC. At March 31, 2006 there were 1,833,000 options outstanding and 100% of the options issued were exercisable under this plan.

On September 30, 2004 MS-PLC granted options over 3,400,500 shares to its employees under the stock option plan “B”. Subsequently on August 15, 2005, the Board of Directors of MS-PLC approved the stock option plan “B”. At March 31, 2006 there were 2,043,700 options outstanding and 70% of the options issued were exercisable under this plan after MS-PLC had passed certain vesting criteria.

On June 30, 2005 MS-PLC initially granted options over 200,000 shares to its employees under the stock option plan “C”. Subsequently on August 15, 2005, the Board of Directors of MS-PLC approved a stock option plan “C”. At March 31, 2006 there were 245,000 options outstanding and none of the options issued were exercisable. Options issued under this plan vest equally after employees have been employed for 12, 24 and 36 months.

F-7

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The following table illustrates the effect on operating results and per share information if the Company had accounted for stock-based compensation in accordance with SFAS 123(R) for the three months ended March 31, 2005:

 

We used the Black-Scholes option-pricing model to estimate the fair value of MS-PLC’s stock-based awards with the following weighted-average assumptions for the indicated periods:

 

The assumptions above are based on multiple factors including 10 year United Kingdom treasury bonds for the risk-free rate, expected future exercising patterns (we cannot base the estimate on the historical exercise patterns as no options have been exercised) and the volatility of the Company’s own stock price stock price as MS-PLC’s stock is not liquid.

(7)                               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.

(8)                               Security Deposits

As MS-PLC occupies approximately 95% of 46 Berkeley Square it acquired the security deposit on the offices for cash from ICC Properties Limited (“ICCP”) (previously Yang Cellulose Company Limited and International Cellulose Company Limited) in February 2003. The value of the security deposit is £470,000 ($808,000) and is interest-bearing.

F-8

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(9)                               Investments

The Company accounts for its investments in non-marketable securities under the cost method of accounting as it owns less than a 20% interest in each of the companies and does not have significant influence over the entities. The Company reviews each investment continually to assess for other-than-temporary decreases in value in its investments. The Company reviews all available financial and non-financial data in assessing the extent of any impairment.

At March 31, 2006, the Company held the following investment:

A 6% holding in Eurindia PLC, a company that seeks to invest in small Indian IT services companies. Following information received from Eurindia’s management the Company estimates the current value of the investment to be approximately $790,000.

(10)                        Lease Commitments

The Company had entered into property leases for the Westminster and Ravenscourt centers through its Lifesyne subsidiary. Following the sale of Lifesyne the Company has no outstanding formal property lease agreements.

The Company’s corporate offices are at 46 Berkeley Square, London W1J 5AT, United Kingdom. The office is comprised of 9,642 square feet. Until June 30, 2003, rent was paid quarterly in advance to a property management company, Berkeley Square Ventures Limited, which in turn collects the rent for ICCP, the entity that holds the lease on the property. Subsequent to June 30, 2003, rent has been paid directly to ICCPL. In November 2001, ICCP was acquired by Macniven and Cameron Equity Holdings Limited (“M&C”) (previously STG Holdings PLC), a major shareholder of the Company. The rent payable is based on the amount of space each company occupies. There are no formal leases between the Company and ICCP.

(11)                        Comprehensive Income

As of March 31, 2006 and the 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 $3,030,000 and foreign currency translation adjustments of $(209,000) resulting in comprehensive loss of  $3,239,000.

(12)        Recent Accounting Pronouncements

None.

F-9

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(13)        Related Party Transactions

On December 29, 2000, the Company acquired all of the issued and outstanding shares of HTTP Insights Limited (“Insights”). Asia IT Capital Investments Limited (“Asia IT”) was a shareholder in Insights as well as the Company at the time of the acquisition, and has provided a credit facility for up to $20,000,000. The credit facility expired on December 31, 2001, but has been extended to June 30, 2007. All advances under the credit facility accrue interest at 2% above US LIBOR. The Company is restricted from borrowing funds, directly or indirectly, other than through the credit facility, without the consent of Asia IT.

On November 20, 2001, Asia IT entered into a 10,000,000 ($18,000,000) credit facility with MS-PLC. Such facility ceases on June 30, 2007 and is secured by a lien on all of the assets of MS-PLC. Interest on outstanding amounts accrues at 2% above Sterling 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 ($45,000,000) not later than March 2002. MS-PLC did not complete such an offering and the facility nevertheless remains in place.

In addition to the loan facilities made available by Asia IT to the Company and MS-PLC, Asia IT received commissions on shares issued under private placements in the fiscal quarter ended March 31, 2006, and in the fiscal years ended December 31, 2005 and 2004. A director of Asia IT is a brother of Tim Paterson-Brown who was appointed to the Board on December 8, 2003 and to the Board of MS-PLC on September 5, 2003.

During the quarter ended March 31, 2006 the Company raised $4,590,000 (net of commission and expenses) by issuing 1,275,000 restricted shares of common stock. These private placements were underwritten by Asia IT, a related party. Asia IT received commissions of $510,000 on these private placements. This amount is inclusive of the common stock subscribed but unissued of $3,600,000 at December 31, 2005.

The Company’s corporate offices are at 46 Berkeley Square, London W1J 5AT, United Kingdom. The office is comprised of 9,642 square feet. Until June 30, 2003, rent was paid quarterly in advance to a property management company, Berkeley Square Ventures Limited, which in turn collects the rent for ICCP, the entity that holds the lease on the property. Subsequent to June 30, 2003, rent has been paid directly to ICCPL. In November 2001, ICCP was acquired by Macniven and Cameron Equity Holdings Limited (“M&C”) (previously STG Holdings PLC), a major shareholder of the Company. The rent payable is based on the amount of space each company occupies. There are no formal leases between the Company and ICCP. The Company paid rent of $156,000 in the quarter ended March 31, 2006, and $153,000 in the quarter ended March 31, 2005.

F-10

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/ TIM PATERSON-BROWN
		Tim Paterson-Brown
		Chief Executive Officer
	By:	/s/ GLYN THOMAS
		Glyn Thomas
		Chief Financial Officer

 

May 12, 2006