diagnostic imaging international corp

Analyst: Victor Sula, Ph.D.Initial Report

July 20th, 2009

Diagnostic Imaging International Corp. (OTCOB: DIIG) 1


July 20th, 2009

Company Introduction

Diagnostic Imaging International Corp.848 N. Rainbow Blvd. # 2494Las Vegas, Nevada 89107

Phone: 866-223-2005E-mail: [email protected] Website: www.diig.biz

MARKET DATA

SymbolExchangesCurrent PricePrice TargetRatingOutstanding SharesMarket Cap.Average 3M Volume

Source: Yahoo Finance, Analyst Estimates

DIIG OTCBB

$0.20$0.78

Speculative Buy16.09 Million$3.21 Million

2,275

Diagnostic Imaging International Corp. (DIIG) provides leading edge, virtual, remote radiology technology (teleradiology) services through its wholly owned subsidiary, Canadian Teleradiology Ser-vices Inc. (“CTS”). Teleradiology services are delivered accurately and on a timely basis to clients, including individuals, physicians, workers compensation boards and insurance companies.

CTS has provided teleradiology services in North America for three

largest service contract. The contract covers three public hospitals, which CTS supplies with remote reading and reporting, covering imaging modalities such as MRI, CT, X-Ray, and Ultrasound.

The Company plans to open and/or acquire diagnostic imaging clinics in Canada and the United States, which will provide related services to individuals, workers compensation boards, private in-surance companies, and persons not covered by government insur-ance programs. DIIG anticipates building a network of private clin-ics that will provide teleradiology services on a worldwide basis, and expects to be operating three groups of private clinics (some clinics may have multiple locations) that will together generate ap-proximately $30 million in annualized revenues by year-end 2014.

either Florida or New York. Vancouver, Winnipeg and Montreal -

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Diagnostic Imaging International Corp. (OTCBB: DIIG) 2

Sizable Market Opportunity

Canada’s current public MRI delivery model is not meeting the needs of many Canadians. Waiting lists are long,

basis, Canada lags behind many other industrialized nations. The Canadian Institute for Health Information found that Canada has 4.6 MRI scanners per million citizens, while Japan and the United States have much higher coverage at 35.3 per million and 19.5 per million, respectively. The median for the industrialized countries is 6.1 MRI scanners per million citizens. The institute report also noted that despite repeated promises from both federal and provincial governments to reduce patient wait times, wait times are increasing in Canada. In 2003, Canadians waited on average 47 days for non-emergency MRIs, up from 39 days in 2001.

Canada’s healthcare system will likely evolve into a system similar to what is available in Sweden or Germany, with a mix of private and public health delivery and almost non-existent waiting lists. Private MRI clinics now represent 10% of the Canadian market, where demand for MRI diagnostic imaging is forecast to grow 6% annu-ally over the next decade.

Plans to build a network of private MRI clinics in Canada

The Company plans to build a network of private diagnostic clinics, primarily in Canada, and is actively pursu-

DIIG anticipates adding Computed Tomography scan equipment to those facilities and evaluate future oppor-tunities for Positron Emission Tomography clinics.

CTS acquisition lays groundwork for network

With the acquisition of CTS, the Company has begun to implement its network plans. The acquisition allowed the Company to enter the North American imaging market in Q1 09, and provides a solid base for expanding its business. CTS generated revenues exceeding $0.8 million in 2008; management expects revenues to double in 2009.

New agreements expand client base and revenues

In April 2009, CTS secured contracts to supply teleradiology services to 10 additional hospitals in Ontario. Night time and weekend service has already begun, and early feedback from the hospitals has been very pos-itive. With these new contracts, CTS expects to double monthly study

Moreover, the Company has signed four new contracts to supply day-

Daytime service represents greater volume of potential imaging studies since hospital imaging departments operate at peak capacity during the

radiology modalities and higher billings.

Investment Highlights


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Strong revenue growth outlook

DIIG anticipates providing teleradiology services on a worldwide basis and operating a network of private clinics in North America, and has the goal of generating $30 million in annualized revenues by year-end 2014. Over the

coverage expansion agreements already announced, we expect the Company to increase revenues to a $1.9 million range in 2009 and $4.5 million in 2010.

The Company provides teleradiology services to healthcare facilities and providers whose own workload is in--

ologists. DIIG focuses on the North American marketplace, and especially on Canada, where the radiologist-to-population ratio is 1:18,000, as compared to a ratio of 1:8,000 in the United States. In addition, the Company plans to provide MRI reading services to hospitals and clinics in the Middle East and around the world.

In March 2009, DIIG completed the acquisition of Canadian Teleradiology Services (CTS), a provider of remote teleradiology service to hospitals, clinics and physician practices. These services are provided 24- hours-a-day, seven-days-a-week. Using telecommunications links, physicians are able to submit and receive diagnostic imag-ing interpretations nights, days and weekends. CTS receives image scans from hospitals and clinics, and transmits

clinics.

Under the terms of the acquisition agreement, DIIG acquired all the outstanding shares of CTS for: (1) a cash pay-ment of CDN$400,000; (2) a non-interest bearing $300,000 promissory note payable in 12 months and secured by DIIG’s assets; (3) 500,000 shares of DIIG common stock; and (4) an earn-out for the selling shareholders aggregat-ing 500,000 DIIG shares, pro rata to the selling shareholders and payable March 2, 2010.

other imaging modalities. The Company specializes in the following interpretative services:

CTS’ open source system is compatible with existing DICOM (Digital Imaging and Communications in Medicine) equipment, PACS (Picture Archival and Communications Systems) and teleradiology systems. Equipment costs for CTS partners are minimal. In some cases, CTS provides the necessary equipment to its partners at no charge, including on-site equipment necessary to facilitate HIPPA-compliant transmissions to the Company data center.

DIIG employs high-level encryption to ensure the security and privacy of health data transmissions. Its central-

a 24/7 help desk, case status updates in real-time, and an advanced online alert system. To ensure reliability, the

Business Model

Magnetic Resonance Imaging (MRI) Computed Tomography (CT) Coronary CTA UltrasoundEchocardiography

Molecular Imaging (Nuclear Medicine) Nuclear PET Nuclear Cardiology X-ray BMD


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Company deploys a fully-redundant wide area network (WAN) or local area network (LAN), supported by secure network technologies. DIIG receives data over secure VPN (Virtual Private Network), HIPAA-compliant systems and public IP Networks.

Corporate strategy

-vate clinics in major metropolitan areas across Canada and the United States, while expanding its CTS business segment.

The Company plans to focus primarily on Magnetic Resonance Imaging (MRI) clinics. As its network grows, DIIG may add Computed Tomography (CT) scan equipment to its facilities. It is also examining future opportu-nities for Positron Emission Tomography (PET) clinics.

DIIG uses population statistics and related data to select private imaging clinic locations. Based on existing data for MRI clinics per population and provincial restrictions, the Company determined that Vancouver (British

the table below:

weekend service has already begun. With this new contract, CTS expects to double monthly study reads and

Remote Radiology Technology

Remote Radiology Technology (teleradiology) refers to the electronic transmission of radiologic images from one location to another for the purposes of interpretation and/or consultation. Today, it is possible to transmit images encompassing the entire range of diagnostic modalities to a remote site for interpretation. Centralizing expertise in this way enables cost savings and greater diagnostic accuracy from experts focused exclusively on

Montreal, QuebecVancouver and Lower Mainland, British ColumbiaHull & Gatineau, QuebecCalgary, AlbertaEdmonton, AlbertaQuebec City, QuebecWinnipeg, ManitobaHalifax, Nova ScotiaVictoria, British ColumbiaSaskatoon, SaskatchewanKelowna, British Columbia

3,635,7002,208,1001,148,8001,068,3001,016,000

717,600706,900380,800334,700235,800162,555

126352111111

302,975368,017382,933212,060508,000358,800706,900380,800334,700235,800162,555

Location PopulationNumber of

MRI ClinicsPopulation per

Clinic

Source: Statistics Canada – Canadian Census 2005.

Recent Developments


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analyzing and interpreting these images.

1:

• Provision of radiological interpretation where services aren’t readily available -

• Access to Subspecialty radiological input

in subspecialty areas. Through teleradiology, centers without on-site subspecialty expertise may tap the expert opinion of a subspecialist radiologist.

• 24/7 radiology service and consultation

.

• Enhances education and information-sharing across medical facilities Teleradiology can be used to increase the range of case presentations, learning opportunities and tutorials for radiologists. Images can be shared across top tertiary centers during multidisciplinary meetings, with the aim of enhancing patient care.

• Tapping previously unavailable radiological resources Teleradiology enables radiologists working part time or in the private sector to review images sent from a remote

Imaging Center

CT

MRI

X-Ray

ATDS router

Local PACS/RIS

In-houseRadiologist

SecureVPN

SecureVPN

ATDS Virtual DiagnosticCenter

Radiologist Home

Source: www.atds-med.com/wb/pages/en/services/technology.php


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location, assisting in the clearance of any existing backlog and reducing the heavy workload on hospital radiol-ogy departments.

• Reduction in healthcare costs The use of teleradiology to tap the skills of radiologists in countries with lower labor costs has been actively explored by several countries.

Diagnostic imaging is one of the largest medical equipment sectors globally. While the sector continues to con-front challenges posed by shrinking hospital budgets in the U.S. and Europe, booming health economies in the

valued at $4.9 billion in 2008. Driven by growth in the digital X-ray systems category, this market is forecast to grow 6.7% annually and reach $7.8 billion by 2015.

Healthcare in Canada

Healthcare spending in Canada reached $160 billion, or 10.6% of GDP, in 2007. Canada’s healthcare spending was forecast to climb to $171.9 billion, or $5,170 per person, in 2008. Hospitals account for the largest segment in spending at $48.1 billion; however, their share is declining.

In Canada, the government pays about 71 % of Canadians’ healthcare costs, which is slightly below the OECD average. Under the terms of the Canada Health Act, publicly funded insurance plans are required to pay for medically necessary care, but only if it is delivered in hospitals or by physicians. There is considerable variation across the provinces/territories regarding the extent to which costs for outpatient prescription drugs, physical

Industry Outlook

The global x-ray systems market, $ Billion

Source: http://www.diagnostic-imaging-market-research.com/


July 20th, 2009


therapy, long-term care, home care, dental care and even ambulance services are covered. Canada has a federally sponsored, publicly funded Medicare system, with most services provided by the private sector. Canada’s system is known as a single payer system, where basic services are provided by private doctors. Doctors receive a fee per visit. These rates are negotiated between the provincial government and the province medical associations, usually on an annual basis. A physician cannot charge a fee higher than the negotiated rate, even to patients who are not covered by the publicly funded system, unless the physician opts out of billing the publicly funded system. Pharmaceutical reimbursements are set at a global median cost by government price controls. Other areas of health care, such as dentistry and optometry, are wholly private.

Complaints about Canadian Healthcare

poor and funding is either inadequate or poorly allocated. There is widespread public dissatisfaction with long wait times.

Wait times are especially long for consulting a specialist, elective surgery (such as a hip replacement), imaging procedures (such as MRI or Cystoscopy), and specialized treatments (such as radiation for breast cancer). Studies by the Commonwealth Fund found that 57% of Canadians reported waiting four weeks or more to see a specialist; 24% of Canadians waited four hours or more in the emergency room.

According to the Fraser Institute, treatment time from initial referral by a GP through consultation with a special-

weeks in 20052. The Canadian government has invested $5.5 billion in addressing the wait time problem. Cana-dian Prime Minister Stephen Harper announced in 2007 that all 10 provinces and three territories would establish patient wait time guarantees by 2010. The intent is to guarantee timely access to healthcare in at least one of the following priority areas, prioritized by each province: cancer care, hip and knee replacement, cardiac care, diag-nostic imaging, cataract surgeries or primary care.

According to the National Review of Medicine, the need for diagnostic imaging is growing 6% per year, but most -

lion earmarked for diagnostic imaging equipment under former Prime Minister Jean Chretien, wait times are long because there are not enough radiologists to run Medicare-funded MRI scanners for more than a few hours a day. Widespread dissatisfaction with wait times, especially for diagnostic imaging, has helped make healthcare the number one pre-election issue among 80% of Canadian voters.

The Fraser Institute study indicated that Canada had 151 MRI scanners at the beginning of 2004, up from 144 in 2003. The report also revealed that the number of CT scanners has risen to 338 from 234. In terms of MRI availabil-ity to patients, Canada ranked 19th out of 25 countries, just ahead of Luxembourg, the Czech Republic, Hungary, Greece, Poland and Mexico. Canada had 4.6 MRI scanners per million people, while Japan and the United States had 35.3 and 19.5 per million, respectively. Despite repeated promises from both federal and provincial govern-ments to reduce patient wait times, wait times appear to have increased nationwide. In 2003, Canadians waited on average 47 days for non-emergency MRIs, up from 39 days in 2001. The CIHI report noted that, while more high-tech imaging machines are available, there are not enough medical imaging professionals to operate the technology and read the diagnostic results.


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Diagnostic Imaging Opportunity

Certain radiological procedures in Canada, such as CT scans and MRIs, are funded by the public healthcare

-novative in delivering service. The medical community asserts that greater savings will be realized in terms of a more productive and healthier population resulting from more timely diagnosis and treatment. Also, greater utilization of the equipment will result in lower operating costs.

The provinces are unlikely to agree that MRI should become an insured health service under a new Canada Health Act. Proponents of a two-tiered system argue that a parallel private MRI system will make more funds and resources available on a per capita basis for the public system. It is estimated that private MRI clinics now represent 10% of the market.

DIIG has only recently begun revenue-generating operations. During Q1 09, the Company acquired Canadian Teleradiology Services. Q1 09 revenues totaled $94,439. This amount represents only revenues generated by CTS between March 2nd and March 31st as required by SEC accounting rules.

Cost of sales during Q1 09 was $76,564 and represents costs incurred by CTS between March 2nd and March 31st. General and administrative expenses for same period were $67,074. We expect the Company’s expenses to increase as DIIG ramps up CTS services and builds its clinic network.

Liquidity

Since its inception through March 31, 2009, the Company has funded operations with stock sales and loans from its president and majority shareholder.

Financial Analysis

Revenue:Cost of revenueDepreciation and amortizationGross MarginGeneral and administrative expensesOperating Income/LossInterest ExpenseNet Income/(Loss)Diluted EPS

- -

76 -76

5,591 -5,667

- -5,667-0.001

94,439 76,564 34,715

-16,84067,074

-83,914-2,986

-86,900-0.008

Q1 2008 Q1 2009

Source: Company’s filings

Income statement, $


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As of March 31, 2009, DIIG’s assets totalled $1,106,335, which included cash, accounts receivable, intangible as-

$61,552 due to the president, loans payable of $48,460, and promissory notes of $333,355. Investors should note

In March 2009, the Company issued 500,000 shares of common stock to three individuals as partial consideration for the CTS purchase. The shares were valued at $150,000, based on the closing price of DIIG common stock on March 2, 2009. The Company also issued 300,000 shares to Premium Performance Group LLC in connection with a contract for marketing services. Also in March, DIIG sold 2,520,914 shares to six individuals for $378,137. All of the sales were private placements. Between March 20 and May 15, 2009, DIIG raised gross proceeds of $247,000 through private placements to accredited investors. The Company sold 1,647,003 shares of common stock and warrants to purchase 823,502 shares to investors in units priced at $0.30 per unit. The proceeds were used to fund the acquisition of CTS and for working capital.

On March 2, 2009, the Company completed the CTS acquisition. In connection with the acquisition, DIIG issued

liabilities of CTS. Two of the notes were issued in the principal amount of CDN$36,000 and the third note was is-sued in the principal amount of CDN$53,760.48. The two $36,000 notes have been paid in full and the Company has received an extension on the third note until July 2, 2009.

The Company’s president has loaned DIIG $61,552 to fund operations. The note is non-interest bearing and pay-able upon demand.

-ness operations. The Company plans to raise funds by selling stock in public or private placement transactions,

Total Current Assets, includingCash and equivalentsProperty and Equipment, netIntangible Assets, netOther AssetsTotal Assets

Total Current Liabilities, includingShort term debtLong Term Liabilities:Total Stockholders’ Equity

427 427 600

- 4,089 5,116

136,825 - -

-131,709

139,006 27,974 8,945

958,384 -

1,106,335

505,360 333,355 48,460

552,515

31-Dec-08 31-Mar-09

Source: Company’s filings

Balance sheet, $


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Outlook

current service contract. In addition, the Company has secured contracts to provide service to 10 additional hos-

capacity and perform higher billing radiology modalities during the day.

In addition to operating CTS, the Company plans to acquire MRI clinics in Vancouver and Winnipeg. A third clinic in Montreal is also being considered. DIIG estimates it will need approximately $10 million to acquire its

-vate MRI clinic could easily double DIIG’s revenues.

Through organic growth and acquisitions, the Company expects to increase revenues to a $30 million annual-ized run rate by year-end 2014.

We expect the majority of DIIG’s revenue to come from CTS coverage expansion agreements this year and are forecasting organic revenue growth to $1.9 million in 2009 and $4.5 million in 2010. Closing one clinic acquisition in late 2009 could easily add $2.5 million to DIIG 2010 revenues and $500,000 to 2010 net income.

Outlook and Valuation

Organic revenue growth forecast, $ Mn

Source: Analyst estimates


July 20th, 2009


We are also assuming equity sales will increase the share count to 17.5 million in 2009 and 20 million in 2010.

Valuation

We based our peer comparison on companies that provide professional services, business services, and clinical

The peer group companies currently trade at 10.8 time forward Price/Earnings multiples. Most of the peer group -

rants a valuation at the higher end of the peer group range due to superior growth prospects associated with the Canadian market opportunity.

Multiplying our 2010 EPS estimate by a 15.5 times forward Price/Earnings multiple, we derive a 12-month price target for DIIG of $0.78. This price target assumes one clinic acquisition in 2009. If the Company completes more acquisitions in 2009 and 2010, revenues, EPS and our price target would likely adjust upward. We are initiating coverage of Diagnostic Imaging International Corp. with a Speculative Buy rating and a near-term $0.78 price tar-get. However, we strongly advise investors to consider the risk factors mentioned below since the Company faces many challenges in building its network.

Revenue:Cost of revenueGross MarginGeneral and administrative expensesOperating IncomeInterest ExpenseNet IncomeDiluted EPS, $

1,940 1,552 388 268 120 12 108

0.01

7.000 4,900

2,100 1.100 1,000

0 1,000

0.05

2009E 2010E

Source: Analyst estimates

Earnings forecast, $ Thousands (assumes one clinic acquisition in 2009)

NightHawk Radiology Holdings Inc. Virtual Radiologic Corp. Gentiva Health Services Inc. America Service Group Inc. Health Fitness Corp. RadNet Inc. Median

Diagnostic Imaging International

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18.4217.7119.2316.73

5.6812.638.87

13.7715.507.35

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0.641.300.410.230.780.170.52

0.601.210.380.220.730.160.49

CompanyNovember 28, 2008

Price$

MarketCap. $ Mn

P/E P/S TickerSymbol 2009E 2010E 2010E 2009E

Source: Yahoo Finance


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Inherent business risks

progress may be negatively by the following: 1) failure to secure new contracts or renew existing contracts; 2) in-

regulation; (4) increased competition; (5) unfavorable litigation outcomes; and 6) a very competitive and rapidly changing operating environment.

Highly regulated business

The Company is subject to extensive regulation by the Canadian government, provinces and territories. To open a clinic, it must be licensed by the Ministry of Health and sanctioned by the College of Physicians and Surgeons in the province where the clinic is located.

If DIIG’s operations are found to be in violation of any laws and regulations, it may be subject to civil and crimi-

many of these laws and regulations have not been fully interpreted by regulatory authorities or the courts, and their provisions are open to a variety of interpretations.

Intense competition

The medical equipment and clinical diagnostic sectors are highly competitive. There are many companies, both public and private, engaged in diagnostics-related sales, including a number of well-known pharmaceutical and chemical companies. Many of these companies have substantially greater capital resources and larger marketing and distribution infrastructures than DIIG. There is no assurance that DIIG can compete successfully.

Need for additional funding

The Company has incurred losses from operations and has minimum cash, which raises substantial doubt about its ability to continue as a going concern. DIIG needs to secure additional capital to implement its business plan. At this stage of its development where operations are minimal, management believes DIIG will be able to obtain

-ever, the Company’s working capital requirements will increase exponentially.

Investment Risks


July 20th, 2009


Mr. Jagodnik is a Chartered Accountant in Canada. He graduated from Concordia University in 1990 and -

through 1997, Mr. Jagodnik worked in public practice with Friedman and Friedman, Chartered Accoun-

planning, budgeting, project and contract management and organizational planning.

Richard Jagodnik

President and Chairman

Management Team


July 20th, 2009


Disclaimer

DO NOT BASE ANY INVESTMENT DECISION UPON ANY MATERIALS FOUND ON THIS REPORT. We are not registered as a securities broker-dealer or an investment adviser either with the U.S. Securities and Exchange Commission (the “SEC”) or with any state securities regulatory authority. We are neither

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We distribute opinions, comments and information free of charge exclusively to individuals who wish to receive them.

research.

Any individual who chooses to invest in any securities should do so with caution. Investing in securities is speculative and carries a high degree of risk; you may lose some or all of the money that is invested. Always research your own investments and consult with a registered investment advisor or licensed stock broker before investing.

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Securities Exchange Act of 1934. Subscribers are cautioned not to place undue reliance upon these forward looking statements. These forward looking state--

the report and not place undue reliance upon such statements.

-

we believe to be reliable.

To the fullest extent of the law, we will not be liable to any person or entity for the quality, accuracy, completeness, reliability, or timeliness of the information provided in the report, or for any direct, indirect, consequential, incidental, special or punitive damages that may arise out of the use of information we provide

incompleteness of this information).

I, Victor Sula, Ph.D, the author of this report, certify that the material and views presented herein represent my personal opinion regarding the content and securities included in this

that I do not currently own, nor will own and shares or securities in any of the companies featured in this report.

Victor Sula, Ph.D. - Senior Analyst

-tions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Productivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.

diagnostic imaging international corp

Documents

diagnostic imaging clinics

private mri clinics

initial reportjuly

imaging modalities

victor sula

mri scanners

mri diagnos

groups of private clinics