Analyst: Victor Sula, Ph.D. Initial Report July 20th, 2009
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Phone: 866-223-2005 E-mail: richard@diig.biz Website: www.diig.biz
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Diagnostic Imaging International Corp. 848 N. Rainbow Blvd. # 2494 Las Vegas, Nevada 89107
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MARKET DATA
Company Introduction Symbol Exchanges Current Price Price Target Rating Outstanding Shares Market Cap. Average 3M Volume
DIIG OTCBB $0.20 $0.78 Speculative Buy 16.09 Million $3.21 Million 2,275
Source: Yahoo Finance, Analyst Estimates
Diagnostic Imaging International Corp. (DIIG) provides leading edge, virtual, remote radiology technology (teleradiology) services through its wholly owned subsidiary, Canadian Teleradiology Services 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 insurance companies, and persons not covered by government insurance programs. DIIG anticipates building a network of private clinics 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 approximately $30 million in annualized revenues by year-end 2014. either Florida or New York. Vancouver, Winnipeg and Montreal ings.
Diagnostic Imaging International Corp. (OTCOB: DIIG)
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Analyst: Victor Sula, Ph.D. Initial Report July 20th, 2009
Investment Highlights 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% annually 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 pursuDIIG anticipates adding Computed Tomography scan equipment to those facilities and evaluate future opportunities 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 positive. With these new contracts, CTS expects to double monthly study
Moreover, the Company has signed four new contracts to supply dayDaytime service represents greater volume of potential imaging studies since hospital imaging departments operate at peak capacity during the radiology modalities and higher billings.
Diagnostic Imaging International Corp. (OTCBB: (OTCOB: DIIG)
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Analyst: Victor Sula, Ph.D. Initial Report July 20th, 2009
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.
Business Model The Company provides teleradiology services to healthcare facilities and providers whose own workload is inologists. DIIG focuses on the North American marketplace, and especially on Canada, where the radiologist-topopulation 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 imaging 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 payment 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 aggregating 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: Magnetic Resonance Imaging (MRI) Computed Tomography (CT) Coronary CTA Ultrasound Echocardiography
Molecular Imaging (Nuclear Medicine) Nuclear PET Nuclear Cardiology X-ray BMD
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 centrala 24/7 help desk, case status updates in real-time, and an advanced online alert system. To ensure reliability, the Diagnostic Imaging International Corp. (OTCBB: (OTCOB: DIIG)
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Analyst: Victor Sula, Ph.D. Initial Report July 20th, 2009
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 opportunities 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:
Location
Population
Montreal, Quebec Vancouver and Lower Mainland, British Columbia Hull & Gatineau, Quebec Calgary, Alberta Edmonton, Alberta Quebec City, Quebec Winnipeg, Manitoba Halifax, Nova Scotia Victoria, British Columbia Saskatoon, Saskatchewan Kelowna, British Columbia
3,635,700 2,208,100 1,148,800 1,068,300 1,016,000 717,600 706,900 380,800 334,700 235,800 162,555
Number of MRI Clinics 12 6 3 5 2 1 1 1 1 1 1
Population per Clinic 302,975 368,017 382,933 212,060 508,000 358,800 706,900 380,800 334,700 235,800 162,555
Source: Statistics Canada – Canadian Census 2005.
Recent Developments 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 Diagnostic Imaging International Corp. (OTCBB: (OTCOB: DIIG)
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Analyst: Victor Sula, Ph.D. Initial Report July 20th, 2009
analyzing and interpreting these images. ATDS Virtual Diagnostic Center
Imaging Center
CT
ATDS router
MRI
Local PACS/RIS
X-Ray
Secure VPN
Secure VPN
Radiologist Home
In-houseRadiologist
Source: www.atds-med.com/wb/pages/en/services/technology.php
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
Diagnostic Imaging International Corp. (OTCBB: DIIG)
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Analyst: Victor Sula, Ph.D. Initial Report July 20th, 2009
location, assisting in the clearance of any existing backlog and reducing the heavy workload on hospital radiology 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.
Industry Outlook Diagnostic imaging is one of the largest medical equipment sectors globally. While the sector continues to confront 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.
The global x-ray systems market, $ Billion
Source: http://www.diagnostic-imaging-market-research.com/
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 Diagnostic Imaging International Corp. (OTCBB: (OTCOB: DIIG)
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Analyst: Victor Sula, Ph.D. Initial Report 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 specialweeks in 20052. The Canadian government has invested $5.5 billion in addressing the wait time problem. Canadian 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, diagnostic 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 availability 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 governments 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.
Diagnostic Imaging International Corp. (OTCBB: DIIG)
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Analyst: Victor Sula, Ph.D. Initial Report July 20th, 2009
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.
Financial Analysis
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. Income statement, $
Q1 2008 Revenue: Cost of revenue Depreciation and amortization Gross Margin General and administrative expenses Operating Income/Loss Interest Expense Net Income/(Loss) Diluted EPS
76 -76 5,591 -5,667 -5,667 -0.001
Q1 2009 94,439 76,564 34,715 -16,840 67,074 -83,914 -2,986 -86,900 -0.008
Source: Company’s filings
Liquidity Since its inception through March 31, 2009, the Company has funded operations with stock sales and loans from its president and majority shareholder. Diagnostic Imaging International Corp. (OTCBB: (OTCOB: DIIG)
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Analyst: Victor Sula, Ph.D. Initial Report July 20th, 2009
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
Balance sheet, $
31-Dec-08
31-Mar-09
427 427 600 4,089 5,116
139,006 27,974 8,945 958,384 1,106,335
136,825 -131,709
505,360 333,355 48,460 552,515
Total Current Assets, including Cash and equivalents Property and Equipment, net Intangible Assets, net Other Assets Total Assets Total Current Liabilities, including Short term debt Long Term Liabilities: Total Stockholders’ Equity
Source: Company’s filings
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 issued 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 payable upon demand. ness operations. The Company plans to raise funds by selling stock in public or private placement transactions,
Diagnostic Imaging International Corp. (OTCBB: DIIG)
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Analyst: Victor Sula, Ph.D. Initial Report July 20th, 2009
Outlook and Valuation 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 annualized run rate by year-end 2014.
Organic revenue growth forecast, $ Mn
Source: Analyst estimates
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.
Diagnostic Imaging International Corp. (OTCBB: (OTCOB: DIIG)
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Analyst: Victor Sula, Ph.D. Initial Report July 20th, 2009
Earnings forecast, $ Thousands (assumes one clinic acquisition in 2009) 2009E Revenue: Cost of revenue Gross Margin General and administrative expenses Operating Income Interest Expense Net Income Diluted EPS, $
2010E
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
Source: Analyst estimates
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.
Company November 28, 2008 NightHawk Radiology Holdings Inc. Virtual Radiologic Corp. Gentiva Health Services Inc. America Service Group Inc. Health Fitness Corp. RadNet Inc. Median Diagnostic Imaging International
Ticker Price Market Symbol $ Cap. $ Mn NHWK VRAD GTIV ASGR FIT RDNT
3.86 9.6 16.49 15.84 6.2 2.50
102 152 478 142 62 90
DIIG
0.20
3
P/E 2009E
2010E
6.23 15.74 9.21 18.42 17.71 19.23 16.73
5.68 12.63 8.87 13.77 15.50 7.35 10.75
P/S 2009E 2010E 0.64 1.30 0.41 0.23 0.78 0.17 0.52
0.60 1.21 0.38 0.22 0.73 0.16 0.49
Source: Yahoo Finance
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 target. However, we strongly advise investors to consider the risk factors mentioned below since the Company faces many challenges in building its network. Diagnostic Imaging International Corp. (OTCBB: DIIG)
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Analyst: Victor Sula, Ph.D. Initial Report July 20th, 2009
Investment Risks Inherent business risks
progress may be negatively by the following: 1) failure to secure new contracts or renew existing contracts; 2) inregulation; (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 crimimany 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.
Diagnostic Imaging International Corp. (OTCBB: (OTCOB: DIIG)
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Analyst: Victor Sula, Ph.D. Initial Report July 20th, 2009
Management Team Richard Jagodnik
Mr. Jagodnik is a Chartered Accountant in Canada. He graduated from Concordia University in 1990 and -
President and Chairman
through 1997, Mr. Jagodnik worked in public practice with Friedman and Friedman, Chartered Accounplanning, budgeting, project and contract management and organizational planning.
Diagnostic Imaging International Corp. (OTCBB: DIIG)
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Analyst: Victor Sula, Ph.D. Initial Report 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
The information contained in our report should be viewed as commercial advertisement and is not intended to be investment advice. The report is not provided 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.
all shares immediately. We reserve the right to buy or sell the shares of any the companies mentioned in any materials we produce at any time. This compensa-
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. (OTCBB: DIIG)
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