MEDD Medical Imaging Corporation (CE)

Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Forward Looking Statements

This Form 10-Q quarterly report of Medical Imaging Corp. (the “Company”) for the six months ended June 30, 2018, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby.  To the extent that there are statements that are not recitations of historical fact, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties.  In any forward-looking statement, where the Company expresses an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished.

The following are factors that could cause actual results or events to differ materially from those anticipated, and include, but are not limited to: variations in revenue; possible inability to attract investors for its equity securities or otherwise raise adequate funds from any source should the Company seek to do so; increased governmental regulation; increased competition; unfavorable outcomes to litigation involving the Company or to which the Company may become a party in the future; and a very competitive and rapidly changing operating environment.

Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof.  The Company believes the information contained in this Form 10-Q to be accurate as of the date hereof. Changes may occur after that date, and the Company will not update that information except as required by law in the normal course of its public disclosure practices.

Additionally, the following discussion regarding the Company’s financial condition and results of operations should be read in conjunction with the financial statements and related notes contained in Item 1 of Part 1 of this Form 10-Q, as well as the financial statements in Item 8 of Part II of the Company’s Form 10-K for the fiscal year ended December 31, 2017.

Business description

Guided by the Canada Health Act of 1984, healthcare in Canada is delivered through a publicly funded healthcare system, which is mostly free at the point of use and has most services provided by private entities.  CTS’ revenues are derived from service agreements we enter into with hospitals, clinics and other medical facilities where patients are treated.  Fees for services provided by CTS are billed to the government by each CTS client, which, upon being paid by the government, remits payment to CTS in accordance with the contracted payment terms.

CTS primary growth objectives are concentrated on optimizing our current contract portfolio and increasing our share of the Teleradiology market in the province of Ontario, expanding our geographic service region to include penetrating other Canadian provinces, and scaling our Canadian network of board certified radiologists to ensure effective support of our geographic expansion initiatives.

SMI

SMI operates a medical imaging facility serving patients in Schuylkill County, Pennsylvania. SMI has provided high quality medical diagnostic imaging services for more than 16 years in a caring, safe and convenient environment.  Located in Pottsville, Pennsylvania and accredited by the American College of Radiology, SMI has the first and only Open MRI in Schuylkill County and has earned a strong reputation within the communities it serves through its board-certified radiologists, highly trained technologists, medical equipment and advanced technology matched with high quality care and service.

Our facility currently houses two types of MRI systems; Our digital imaging equipment includes a Siemens Concerto Open MRI System, as well as a closed 1.5 T Siemens Symphony MRI System.  The open MRI system is open on three sides, providing a panoramic 270° view – ideal for pediatric patients and those who may suffer from claustrophobia or are large bodied. SMI is capable of facilitating MRI procedures that include cranial, spinal, abdominal, pelvic, musculoskeletal and head/neck scans.

SMI’s business is highly reliant upon referrals from area physicians and group practices and does not maintain dedicated or contractual relationships with hospitals or clinics.  In fact, hospitals and clinics may compete with SMI to provide services to patients.  We believe that our community presence assists referring physicians with further enhancing their practices by providing well-coordinated and responsive care to their patients who require diagnostic imaging services. Therefore, we maintain an active outreach program, with the goal of seeing that the SMI brand and quality service offerings are well represented and communicated to practicing physicians in the region and to local healthcare consumers who exercise their own personal discretion in determining at what local medical imaging facility they choose to have their imaging procedures performed.

Florida Operations (PIV, PIN, PIC)

On April 30 ^th , 2018, the Company closed its operations in Florida.

MIC owned three diagnostic centers in the State of Florida, operating under the names of Partners Imaging Center of Venice, LLC, Partners Imaging Center of Charlotte, LLC, and Partners Imaging Center of Naples, LLC.  These centers have been operating under the Partners name for more than seven years and have been in their respective locations from 9 to 16 years. The centers rely on referring physicians and marketing efforts to drive business.  The centers offer a 1.5T MRI and 16 slice CT in Naples, a 1.5T MRI in Charlotte, and 3T MRI, 16 slice CT, ultrasound and X-ray at the Venice location. Reports are provided to the patients’ physician within 24 hours and as quick as 60 minute for emergency exams.

The centers have dedicated marketing personnel that work to ensure we have a presence both in the community and to meet the needs of our referring physicians.

Canadian Government Regulation

Healthcare services in Canada are subject to extensive regulation by the Canadian federal government, as well as the governments of the provinces and territories in which we business is conducted. A diagnostic imaging clinic or hospital must be licensed by the Ministry of Health and sanctioned by the College of Physicians and Surgeons in the province in which it is located.  CTS radiologist must be licensed to work in the province for which they report.  CTS must follow strict protocols and systems as laid in place by each client hospital and uses appropriate medical software for transferring patient data.

In addition to extensive existing Canadian government healthcare regulation, there could be at the federal and provincial levels reforms affecting the payment for and availability of diagnostic healthcare services. Limitations on reimbursement amounts and other cost containment pressures could result in a decrease in the revenue we expect to receive for each scan we perform. At this time, it is not clear what proposals, if any, will be adopted or, if adopted, what affect these proposals would have on our business.

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U.S. Government Regulation

Our U.S. subsidiaries are subject to extensive regulation under federal, State, and local laws.  This includes, but is not limited to complying with HIPPA, accreditation standards, Medicare/Medicaid and private insurance standards. Generally, our MRI facilities must be licensed by the state, unless we can qualify for an applicable exemption. In addition, we believe that our business will continue to be subject to increasing regulation, the scope and effect of which we cannot predict.

Competition

We compete with numerous private diagnostic imaging clinics and both private and public hospitals. We also compete for the hiring of qualified medical experts and MRI, CT and x-ray technicians to perform and evaluate the diagnostic imaging scans.  Most of our current competitors have, and our future competitors are expected to have, greater resources than us. Therefore, our ability to compete largely depends on our financial resources and capacity.

Customers

Between direct hospital contracts and satellite hospitals that feed into the main hospital, we have a client roster of 15 hospitals that utilize CTS. The loss of any of these clients would have a negative impact on the Company.

The diagnostic imaging centers rely on a referral base of specialized and family practitioners in each respective community. The average center may have over 100 local physicians that refer patients to us for medical imaging services.  In addition, each center uses marketing efforts and community involvement to reach out and educate patients that they have a choice as to where to have a scan.

For our Florida centers, we have a sizeable amount of self-pay patients in the winter time from foreign visitors.

Employees

MIC currently has one full time executive (Chief Executive Officer), one part time executive (Chief Financial Officer) and approximately 40 employees who include accounting staff, administrators, as well as technical employees and imaging center location managers. In addition, the Company employs as many as 40 sub-contractors who are physicians, radiologists, accountants, business development consultants, clerical staff and IT professionals.

Operations

CTS

In the second quarter, focus was put on preparing for the new CTS client hospital, including workflow adjustments, hiring new radiologists and credentialing.  Demand for CTS services with existing clients remained strong with year over year revenue increase as the company continues to meet the needs and requirements of emergency rooms.

SMI

The second quarter continued a strong trend of consistency in patient visits and a slight increase in year over year revenue.  Attention to ensuring community support, building relationships with referring offices and providing the best in patient care continues to be the clinics focus.

PIV, PIN, PIC, (Florida)

The Company closed its Florida operations on April 30 ^th , 2018.

Overall Operating Results:

For the three months ended June 30, 2018, revenues were $1,383,371 compared to $1,252,029 for the three months ended June 30, 2017, an increase of 10.5% or $131,342. The increase in revenues is primarily from teleradiology services and owing to an increase in readings from existing hospital clients.

For the three months ended June 30, 2018 cost of sales was $861,652, compared to $762,500 for the three months June 30, 2017; an increase of $99,152 or 13%. The increase was due to an increase in additional costs directly related to revenue billing activities.

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Operating expenses for the three months ended June 30, 2018 and 2017 totalled $369,960 and $461,355, respectively, a decrease of $91,395 or 20%, owing to the following:

During the three months ended June 30, 2018, we incurred $169,012 in labor expenses as compared to $172,352 for the three months ended June 30, 2017.

During the three months ended June 30, 2018, we incurred $53,509 in general and administrative costs as compared to $71,210 for the three months ended June 30, 2017.  The decrease in general and administrative costs is owing to reduced staff at our head office.

During the three months ended June 30, 2018, we incurred $33,844 in depreciation expense, as compared to $65,565 for the three months ended June 30, 2017. The decrease in depreciation expense is due to equipment being fully depreciated and some equipment disposals.

During the three months ended June 30, 2018, we incurred $7,279 in legal and professional fees compared to $40,789 in the three months ended June 30, 2017.

During the three months ended June 30, 2018 we incurred $15,000 in bad debt expense compared to $11,702 for the three months ended June 30, 2017.

During the three months ended June 30, 2018, we incurred $6,287 in management fees as compared to $4,579 for the three months ended June 30, 2017.

During the three months ended June 30, 2018, we incurred $2,077 in advertising and promotion, as compared to $14,940 for the three months ended June 30, 2017. The decrease was due to the closure of our Florida operations.

During the three months ended June 30, 2018, we incurred $64,249 for rent, and $10,887 for insurance, as compared to $57,348 in rent and $10,404 in insurance for the three months ended June 30, 2017.

For the three months ended June 30, 2018, net loss was $975,471 as compared to a net loss of $469,030 for the three months ended June 30, 2017, the increase in net loss is primarily due to loss from discontinued operations in Florida.

For the six months ended June 30, 2018, revenues were $2,738,116 compared to $2,384,301 for the six months ended June 30, 2018, an increase of 15% or $353,815. The increase in revenue is owing to an increase in readings from existing hospital clients from our Teleradiology business.

For the six months ended June 30, 2018 cost of sales was $1,772,524, compared to $1,455,961 for the six months June 30, 2017; an increase of $316,563 or 22%. The slight increase is due to an increase in directly related revenue billing activities.

Operating expenses for the six months ended June 30, 2018 and 2017 totalled $891,193 and $1,003,180, respectively, a decrease of $111,987 or 11%, owing to the following:

During the six months ended June 30, 2018, we incurred $347,676 in labor expenses as compared to $364,877 for the six months ended June 30, 2017.

During the six months ended June 30, 2018, we incurred $108,192 in general and administrative costs as compared to $131,046 for the six months ended June 30, 2017. 

During the six months ended June 30, 2018, we incurred $69,447 in depreciation expense, as compared to $131,541 for the six months ended June 30, 2017. The decrease in depreciation expense is due to equipment being fully depreciated and some equipment disposals.

During the six months ended June 30, 2018, we incurred $157,487 in legal and professional fees compared to $103,892 in the six months ended June 30, 2017. This was due to increased primarily to increased consulting costs.

During the six months ended June 30, 2018 we incurred $29,021 in bad debt expense compared to $80,257 for the six months ended June 30, 2017.

During the six months ended June 30, 2018, we incurred $9,404 in management fees as compared to $8,462 for the six months ended June 30, 2017.

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During the six months ended June 30, 2018, we incurred $6,636 in advertising and promotion, as compared to $23,877 for the six months ended June 30, 2017. The decrease was due to closure of our Florida operation and less head office required travelling.

During the six months ended June 30, 2018, we incurred $123,728 for rent, and $20,865 for insurance, as compared to $117,298 in rent and $20,872 in insurance for the six months ended June 30, 2017.

For the six months ended June 30, 2018, net loss was $1,579,683 as compared to a net loss of $859,289 for the six months ended June 30, 2017, the increase in net loss is primarily due to the loss from discontinued operations.

Liquidity and Capital Resources:

The Company used a combination of capital financing and revenues from operations to fund its acquisitions and working capital. The Company from time to time has sold shares of common stock and warrants and issued convertible notes. For the six months ended June 30, 2018 the Company borrowed $54,752 from its CEO but sold no other shares or debt as compared to the six months ended June 30, 2017, it raised $100,000 from the issuance of promissory notes.

The Company’s operations have produced $1,383,371 and $2,738,116 of revenues for the three and six months ended June 30, 2018, respectively, which have been used to fund its operating expenses and to reduce its liabilities.

Based on the debt payment obligations of the Company that are due within the next 12 months, there is doubt about its ability to continue as a going concern, and the Company’s continued operations therefore are dependent upon either increasing revenues or adequate additional financing being raised, or both, to enable it to continue its operations as currently conducted. As a result of this and other factors, the report of our independent auditors, dated May 10, 2018, on our consolidated financial statements for the period ended December 31, 2017 included an emphasis of matter paragraph indicating that there is a substantial doubt about the Company’s ability to continue as a going concern.  Alternatively, the Company could adjust some of its operational requirements or modify some of its debt obligations; however, these changes may not necessarily provide sufficient funds to continue as a going concern   in the event that the Company is unable to continue as a going concern, it may be forced to realize upon its assets or even elect or be required to seek protection from its creditors as provided by law or be subject to claims by creditors or a general creditor action. To date, management has not considered these alternatives as a likely outcome, since it has continuing revenues from operations and is considering capital raising actions.

As of June 30, 2018, our assets totaled $3,221,930 which consisted of cash balances, accounts receivable, prepaid expenses, deposits, goodwill and property and equipment. As of June 30, 2018, our total liabilities consisted of accounts payable and accrued liabilities of $2,998,474, capital lease obligations of $81,277, promissory notes of $875,418, Royalty financing of $2,645,452 (net of discount), and non-related party convertible notes of $2,292,132. As of June 30, 2018, we had an accumulated deficit of $9,747,150 and a working capital deficit of $7,880,332.

Promissory Notes:

As of June 30, 2018, the Company had promissory notes due to non–related parties for a total amount of $875,418 .

On July 28, 2017, the Company’s CTS subsidiary received $291,500 in Canadian funds from the sale of a promissory note to Think Capital. The note calls for daily payment each business day for 248 payments of $1,419 in Canadian funds. On December 6, 2017 the Company’s CTS subsidiary received an additional $93,674 in Canadian funds from a top up transaction for the note which resulted in a payment extension. On March 14, 2018, the Company renegotiated with Think Capital to extend the maturity date of the note and reduce the daily payments to $1,145 each business day.

On July 26, 2017, the Company’s Partners Imaging Center of Naples, LLC subsidiary received $48,000 in exchange for 300 daily payments of $212.80.

On May 17, 2017, the Company received $100,000 from forward sale of receivables. In accordance with ASC 860,  Transfers and Servicing , (“ASC 860”) the sale of future accounts receivable as per the agreements does not represent a sale of accounts receivable for accounting purposes and as such, the transaction will be presented in the consolidated financial statements as a promissory note. The forward sale of receivable does not carry a security interest and the only recourse is against accounts receivable. The forward sale of receivables calls for eleven monthly payments of $15,000 towards the principal balance and interest starting September 1, 2018

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On October 3, 2016, the Company received $113,625 from a promissory note to On Deck Capital Inc from a forward sale of receivables. In accordance with ASC 860, Transfers and Servicing, (“ASC 860”) the sale of future accounts receivable as per the agreements does not represent a sale of accounts receivable for accounting purposes and as such, the transaction will be presented in the consolidated financial statements as a promissory note. The forward sale of receivable does not carry a security interest and the only recourse is against accounts receivable. The forward sale of receivables calls for sixty-five weekly payments of $2,976.92 towards the principal and interest starting October 5, 2016.

On July 1, 2016, the Company received $350,000 from forward sale of receivables. In accordance with ASC 860,  Transfers and Servicing , (“ASC 860”) the sale of future accounts receivable as per the agreements does not represent a sale of accounts receivable for accounting purposes and as such, the transaction will be presented in the consolidated financial statements as a promissory note. The forward sale of receivable does not carry a security interest and the only recourse is against accounts receivable. The forward sale of receivables calls for twenty monthly payments of $20,000 towards the principal balance and interest starting August 1, 2016.

On March 22, 2016, the Company sold additional $70,000 in a bridge convertible promissory note to a private investor. The Note pays interest monthly at an annual rate of 12%. As an inducement to purchase the Note, the investor was also given 100,000 shares of common stock of the Company. The Note is due on March 22, 2017 but may be converted into a future financing of notes sold by the Company. On February 28, 2018, the Company renegotiated this note into a note that is convertible at $0.10 per share with a maturity date of February28, 2019 and a new balance of $80,000. The Balance of the note at June 30, 2018 is $70,532, net of $9,468 in unamortized discount.

On March 2, 2016, promissory notes with balance owing of $58,581 as of December 31, 2015, were paid off in full.

On February 25, 2016, the Company sold to Grenville Strategic Royalty Corp. (“Holder”) a convertible note for the principal amount of $500,000. The Note pays interest monthly at an annual rate of 25%. From July 30, 2016 through to August 31, 2017, the Holder may elect to convert the Note into a temporary royalty and receive a monthly payment equal to a specified percentage of the Company’s revenue for the previous month, subject to certain minimum payments, in lieu of interest payments. However, in such case the Company may still buy back the temporary royalty for the original face value of the Note. If the Note is outstanding as of August 31, 2017, then the Note may be converted into a permanent royalty based on the revenues of the Company (the “Royalty”) at the Holder's election, subject to certain minimum payments. The Holder will maintain a security interest in the Company until such time as the Note is retired, the Company raises $1,200,000 in additional capital, or the Note is converted into the Royalty. The balance of the note at June 30, 2018 is $500,000.

On February 23, 2016, the Company sold a bridge convertible promissory note for $100,000 to a private investor. The Note pays interest monthly at an annual rate of 12%. As an inducement to purchase the Note, the investor was also given 100,000 shares of common stock of the Company. The note is due on February 23,2017 but may be converted into a future financing of notes sold by the Company.

Convertible Notes:

As of June 30, 2018, the Company had convertible notes due to non–related parties for a total amount of $2,292,132 .

On July 7, 2017 the Company issued a $153,000 convertible note to a non-affiliate. The note pays interest at a rate of 12% per annum, payable at maturity. The note holder has the right at any time following the initial 180 days of note issuance, to convert all or any part of the outstanding and unpaid principal amount of this note to shares of common stock. The conversion price shall equal the variable conversion price of 65% multiplied by the market price. The market price shall mean the average of the lowest three (3) VWAP’s for the common stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date. “VWAP” shall mean the daily dollar volume-weighted average sale price for the common stock on the principal market on any particular trading day. Conversion is subject to limitation of 4.99% beneficial ownership of the outstanding shares of common stock. The notes maturity is January 5, 2019. Prepayment on the note within one hundred twenty-one (121) day from the issue date and ending one hundred eighty (180) days following the issue day is subject to 120% Prepayment amount.

On May 22, 2014, the Company issued, through a private placement to accredited investors, three-year 12% convertible notes (“Series C Notes”) in the aggregate principal amount of $95,000. The Series C Notes bear interest at a rate of 12% per annum, payable to the holder at1% per month, with the principal amount due on May 31, 2017. The Series C Notes are convertible into shares of the Company’s common stock at an initial conversion rate of $0.15 per share. In addition, each holder of Series C Notes received shares dependent on the dollar amount of Notes purchased. The total number of shares of common stock issued was 95,000 shares. A detailed schedule of the Series C Notes is presented in Note 6 to the consolidated financial statements. On October 31, 2014, the Company sold, through a private placement to accredited investor, an additional Series C Note in the principal amount of $50,000 and has issued 50,000 shares of common stock of the company accordingly.

On March 26, 2014, the Company issued a $300,000 convertible note to a non-affiliate.  The note pays interest at a rate of 12% per annum, payable to the holder at 1% per month. In addition to interest payments, the Company is making monthly payments of $5,000 towards the principal balance beginning June 1, 2014 until the note due date of February 27, 2018. The note is convertible into common shares of the Company at $0.15 per share. In addition, the purchaser of the note received 300,000 shares as part of the note agreement.  A detailed schedule of this note is presented in Note 6 to the consolidated financial statements. As of June 30 2018, principal balance of the note was $70,082.

On December 5, 2012 and March 27, 2013, the Company sold, through a private placement to accredited investors, three-year 12% convertible notes (“Series B Notes”) in the aggregate principal amount of $1,865,000, and $365,000, respectively. The Series B Notes pay interest at a rate of 12% per annum, payable to the holder at 1% per month, and convertible into common shares of the Company at $0.10 per share. $1,840,000 of the notes mature July 1, 2017, $50,000 mature September 1, 2017, $25,000 mature September 1, 2019, and $100,000 of the notes mature on May 31, 2016.  In addition, each purchaser of the Series B Notes received shares dependent on the dollar amount of Series B Notes purchased. The total number of shares of common stock issued was 5,315,000 shares. A detailed schedule of the Series B Notes is presented in Note 6 to the consolidated financial statements.  $1,840,000 of Series B Notes original maturity was extended to their current maturity of July 1, 2017 in consideration of warrants to purchase shares in equal number of one share for every $1 of note at an exercise price of $0.07 per share, which warrants will be exercisable from November 16, 2015 to and including July 1, 2018. $50,000 of series B Notes original maturity was extended to their current maturity of September 1, 2017 in consideration of warrants to purchase shares in equal number of one share for every $1 of note at an exercise price of $0.07 per share, which warrants will be exercisable from March 25, 2016 to September 1, 2018. $25,000 of series B Notes original maturity was extended to their current maturity of September 1, 2019 in consideration of warrants to purchase shares in equal number of one share for every $1 of note at an exercise price of $0.07 per share, which warrants will be exercisable from March 25, 2016 to September 1, 2019.

Royalty Financing:

A royalty financing arrangement was entered on October 31, 2014 with Grenville Strategic Royalty Corp.  The royalty was purchased for $2,000,000 in return for a series of payments based on a percentage of certain revenue items of the Company.  The Company and the royalty holder may agree to a subsequent increase in the amount of the royalty purchase by up to an additional $1,000,000.  The royalties are payable monthly, subject to an agreed upon minimum amount.  The royalty holder may advance additional sums in which case the royalty payment percentage and minimum amounts will be adjusted. The royalty payments will extend for a period of up to 10 years, which may be shortened if, depending on the amount of the royalty purchase, the Company has paid an agreed upon aggregate royalty amount.  The Company has certain rights to buy out the royalty payments, including in the event of a change of control of the Company, which are calculated based on a variable formula at a multiple of the purchase amount and other factors.

The Company intends to explore capital raising options in the near term which may include the issuance of additional debt and the sale of equity or equity based securities.  The Company has no agreements or arrangements for additional capital at this time.  There can be no assurance that it will be able to raise additional capital, or if funds are offered, that they will on terms acceptable to the Company. A substantial amount of the assets of the Company, held through its subsidiaries, are pledged to secure certain debt; therefore, the ability of the Company to issue secured debt may be limited or require waivers or modifications to the current outstanding debt, which the current lenders do not have to provide.

Off Balance Sheet Arrangements

None.

New Accounting Pronouncements

There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s condensed consolidated financial position, results of operations or cash flows.