Diagnos Inc — Interim / Quarterly Report 2021

Nov 25, 2020

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Interim Management Discussion & Analysis – Quarterly Highlights Three-month and Six-month Periods ended September 30, 2020

DIAGNOS Inc.

Interim Management Discussion and Analysis – Quarterly Highlights

This Interim Management Discussion and Analysis – Quarterly Highlights (“MD&A”) of DIAGNOS Inc. and its subsidiaries (“DIAGNOS”, “the Corporation” or “we”), dated November 25, 2020 and approved by the board of directors on the same date, provides an update, as at September 30, 2020 and for the three-month period and the six-month period ended September 30, 2020, to the last Corporation’s annual MD&A dated March 31, 2020. It should be read in conjunction with the September 30, 2020 interim condensed consolidated financial statements and accompanying notes. The currency used is the Canadian dollar, unless otherwise stated.

Description and Objective

This MD&A is a narrative explanation, through the eyes of management, of the Corporation’s performance during the periods covered by the financial statements, and of the Corporation's financial condition and future prospects. This MD&A complements and supplements the Corporation’s financial statements, but does not form part of the Corporation’s financial statements.

The objective of this MD&A is to improve the Corporation's overall financial disclosures by providing a balanced discussion of the Corporation's financial performance and financial condition.

Forward-looking statements

This MD&A contains certain forward-looking statements with respect to the Corporation. By their nature, these forward-looking statements necessarily imply risks and uncertainties that could cause actual results to differ materially from those contemplated by these forward-looking statements. These risks and uncertainties include risks associated with the going concern assumption, market acceptance, competitive developments, the world economic situation and other factors. Except for ongoing obligations under securities laws to disclose all material information to investors, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Non-GAAP financial measure

This MD&A contains non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of an issuer's historical or future financial performance, financial position or cash flow that is not specified, defined or determined under the Corporation’s GAAP (as that term is defined in Regulation 52-107 respecting Acceptable Accounting Principles and Auditing Standards) and is not presented in the Corporation’s financial statements.

Working capital and cash liquidities are the only non-GAAP financial measures presented in this document. The working capital amount is obtained by subtracting accounts payable and accrued liabilities and other current liabilities from cash, non-restricted short-term investments, accounts receivable and other current assets. It is an indicator for assessing short-term solvency. Cash liquidities consist of cash and short-term investments.

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Going concern assumption

The Corporation’s current level of revenue is not sufficient to cover its expenses and ongoing commitments. The Corporation's ability to generate positive cash flows from its operating activities is dependent on achieving and maintaining profitable operations. Since inception, the Corporation has been able to finance its activities and operate on a going concern basis through issuances of debt and equity instruments as well as benefiting from governmental assistance programs. Until it is able to generate cash flows from its operations to meet its operating and financial obligations, the Corporation intends to continue seeking additional financing through the issuance of debt and equity instruments. While the Corporation has been successful in securing financing in the past, there can be no assurance it will be able to continue doing so, that such sources of funding or initiatives will be available on terms acceptable to the Corporation. If the Corporation is unable to obtain sufficient additional funding, it may be unable to continue its operations, and amounts from the sale of assets might be less than the amounts reflected in the financial statements.

Description of the Corporation and activities

DIAGNOS has built an Artificial Intelligence (“AI”) platform called FLAIRE to provide assistance to general practitioners in interpreting medical imaging at the primary care facilities. The Corporation operates in Healthcare and offers image analysis services through Computer Assisted Retinal Analysis (CARA), a software tool, which assists health specialists in the detection of diabetic retinopathy. CARA is an in-house hosted web-based application that integrates fundus cameras with an image processing engine over a secure internet connection and has been developed by, and is proprietary to, DIAGNOS.

The common shares of DIAGNOS are currently listed on (i) the TSX Venture Exchange of the Toronto Stock Exchange under the symbol “ADK” and (ii) the OTCQB, under the symbol “DGNOF”.

DIAGNOS group of entities is organized as follows:

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AI market in healthcare and trends

The AI market in healthcare has high growth opportunities due to rising needs of self-care monitoring in real-time. Globally, AI in healthcare market is driven by the ability to improve patient outcomes, increase in need for coordination between healthcare workforce & patients, rise in adoption of precision medicine, significant use of big data in the healthcare sector, and remarkable rise in venture capital investments. Key healthcare applications using AI at present include – Intelligent Diagnostics, Patient and Provider Data Management, Drug Discovery Process, and Medical Devices and Robotics. According to Allied Market Research, the global AI in healthcare market was valued at $1,441 million in 2016, and is estimated to reach at $22,790 million by 2023. With its established CARA technology and worldwide presence, we believe DIAGNOS is well positioned to capture a sizeable portion of the AI market in healthcare.

Management also believes that, over the next several years, AI-based technologies will fundamentally transform the diagnostic imaging market where the focus would be towards meeting the rising demand for imaging examinations, prevent diagnostic errors, and enable sustained productivity increases rather than replacing the need for radiologists.

It is estimated that medical images account for 90% of the medical data which makes it the largest data source in healthcare industry. Nowadays, healthcare algorithms are created to get more accurate and quicker assessments. Presently, medical imaging is applied in many healthcare sectors such as tumour detection, tracking tumour development, blood flow visualization, medical interpretation and diabetic retinopathy detection.

CARA

The Corporation has developed a proprietary set of algorithms and associated software platform to assist eye specialists in the detection of diabetic retinopathy. According to the Canadian Diabetes Association, diabetic retinopathy is the most common cause of blindness in people under age 65 and the most common cause of new blindness in North America. Also, according to the Canadian Diabetes Association, it is estimated that approximately 2 million individuals in Canada (i.e. almost all people with diagnosed diabetes) have some form of diabetic retinopathy. According to the World Health Organization, the number of people with diabetes worldwide has risen from 108 million in 1980 to 422 million in 2014.

Our application is named CARA, which stands for “Computer Assisted Retinal Analysis”. The Corporation’s management view is that this application will contribute to the increase in revenue streams based on the fact that automating the screening process for diabetic retinopathy will benefit the healthcare system.

The CARA suite of applications allows an eye care specialist to more clearly visualize both normal retinal landmarks (optic nerve, vascular system, macula, fovea), as well as pathological changes (exudates, haemorrhages, microaneurisms, neo-vascularisation).

Services rendered by the Corporation vary from image enhancement only, to turn-key solutions including deploying imaging equipment on a mobile basis using the Corporation’s staff.

The commercialization of CARA is done by our internal sales team and through our network of agents and resellers. Our solution CARA is currently being showcased at the CHUM, a major hospital in Montreal, Canada. Our focus is to (i) continue to build revenue and sales in emerging markets and (ii) substantially grow sales in Canada and in the USA, where we believe CARA offers a unique value proposition to payers and patients.

CARA can be deployed in many countries and has received certifications from regulatory bodies in Canada, the United States of America, the countries of the European Union, Mexico, the United Arab Emirates and Saudi Arabia.

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Business model and main risks

The Corporation’s main line of business is the screening of diabetic patients for diabetic retinopathy.

Screening projects are classified into two categories; managed and standalone. Managed projects are those which require a full-time technician for each screening unit to manage the screening unit logistics, whereas standalone projects comprise one part-time technician and/or remote technical support to manage several screening units. In standalone projects, a camera is usually deployed at the screening site for the duration of the contract, after the parttime technician and/or remote technical support has trained site staff on how to acquire images.

Revenue arises from fees charged to analyse the retina of the eye image through the CARA web platform, usually on a per-transaction basis. The per-transaction fee varies based on the degree of deployment; managed or standalone. Revenue may also arise from fixed-amount subscription to the CARA platform. The Corporation also earns revenue from consulting services in the field of Artificial Intelligence.

The main risks related to its business model that the Corporation is exposed to include (i) concentration of customers since the Corporation’s main source of revenue is derived from only one specific segment of healthcare, diabetic retinopathy, and (ii) product acceptance, since the CARA technology is (a) based on Artificial Intelligence, which is in development, and (b) not intended to make any diagnosis but rather to help the healthcare professionals in making diabetic retinopathy diagnosis assessments.

Significant event during the period

Impact of the COVID-19 pandemic

On March 11, 2020, the World Health Organization declared the recent outbreak of a novel and highly contagious form of coronavirus known as COVID-19 to be a pandemic. Since then, the Corporation's sales process has been somewhat impacted and screening activities have slowed down. It is currently impossible for the Corporation to clearly assess the full impact of this pandemic on the results for the current fiscal year, however, it should not significantly impact our ability to maintain our operations. The Corporation was able to retain all of its key employees and to qualify for various federal financial relief programs. The Corporation is monitoring the situation closely and may take additional measures to reduce its costs and preserve its liquidities.

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Quarterly Highlights

This section provides a short discussion of all material information about the Corporation’s operations, liquidity and capital resources.

Financial condition

The comparative financial information contained in this section is derived from the Corporation’s interim condensed consolidated financial statements.

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As at
September 30, 2020 March 31, 2020
$
Cash and short-term investments 1,326,185 1,872,107
Accounts receivable 183,821 343,682
Other current assets 39,428 122,285
Non-current assets 399,276 95,873
Total assets 1,948,710 2,433,947
Accounts payable and accrued liabilities 272,122 273,057
Other current liabilities 377,738 307,977
Non-current liabilities 297,247 33,742
Shareholders' equity 1,001,603 1,819,171
Total liabilities and shareholders’ equity 1,948,710 2,433,947
Working capital 899,574 1,757,040
Decrease in working capital (857,466)
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Analysis of the variation in working capital

The decrease in working capital of $857,466 for the six-month period ended September 30, 2020 is mainly due to the net loss of $848,500 for the same period. To improve its working capital in the near term, the intentions of the Corporation are discussed in the below section “Cash flows”.

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Financial performance

The comparative financial information for the comparative three-month and six-month periods ended September 30, 2020, contained in this section, is derived from the Corporation’s interim condensed consolidated financial statements.

Comparative results

Three-month period ended September 30, 2020 2019 $ Revenue 79,787 82,057 Operating expenses (526,105) (604,163) Other income 105,467 - Interest expense (11,330) (23,915) Gain (loss) on disposal of capital assets - (450) Loss on settlement of debt - - (431,968) (628,528) Net loss (352,181) (546,471) Variation in net loss (194,290) The variations in net loss are attributable to: $ Decrease in revenue (2,270) Decrease in costs of services and research and development 73,616 Decrease (increase) in selling and administrative expenses 4,442 Increase in other income 105,467 Decrease in interest expense 12,585 Decrease in gain (loss) on disposal of capital assets 450 Decrease in loss on settlement of debt -	Three-month period ended September 30, 2020 2019 $ Revenue 79,787 82,057 Operating expenses (526,105) (604,163) Other income 105,467 - Interest expense (11,330) (23,915) Gain (loss) on disposal of capital assets - (450) Loss on settlement of debt - - (431,968) (628,528) Net loss (352,181) (546,471) Variation in net loss (194,290) The variations in net loss are attributable to: $ Decrease in revenue (2,270) Decrease in costs of services and research and development 73,616 Decrease (increase) in selling and administrative expenses 4,442 Increase in other income 105,467 Decrease in interest expense 12,585 Decrease in gain (loss) on disposal of capital assets 450 Decrease in loss on settlement of debt -	Six-month period ended September 30, 2020 2019 $ 127,477 163,491 (1,201,002) (1,350,396) 247,030 17,056 (22,005) (208,990) - 2,833 - (175,722) (975,977) (1,715,219) (848,500) (1,551,728) (703,228) $ (36,014) 160,953 (11,559) 229,974 186,985 (2,833) 175,722
	194,290	703,228

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Detailed analysis of the variations in net loss

Revenue

The following table presents the comparative revenues by country. It is followed by an analysis of the main variations.

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Three-month period ended Six-month period ended September
September 30, 30,
2020 2019 Variance 2020 2019 Variance
$ $
Canada 58,187 48,715 9,472 97,462 80,052 17,410
United States of America 19,723 20,176 (453) 28,138 43,747 (15,609)
Colombia 1,877 - 1,877 1,877 - 1,877
Bangladesh - 60 (60) - 13,108 (13,108)
United Arab Emirates - 11,881 (11,881) - 23,900 (23,900)
Saudi Arabia - 1,225 (1,225) - 2,684 (2,684)
79,787 82,057 (2,270) 127,477 163,491 (36,014)
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Canada

78% of revenues from Canada, for the six-month period ended September 30, 2020, were attributable to data interpretation consulting services rendered to one company active in the mining sector (six-month period ended September 30, 2019 - 59%). The increase of $17,410, for the six-month period ended September 30, 2020, is mainly due to the increase in the level of data interpretation consulting services rendered to the client active in the mining sector.

United States of America

Revenues are derived from the healthcare sector (CARA). The decrease of $15,609 for the six-month period ended September 30, 2020 is attributable to the decrease in the volume of screenings mainly due to the impact of the Covid-19 pandemic.

Bangladesh

Revenues are derived from the healthcare sector (CARA). The decrease of $13,108 for the six-month period ended September 30, 2020 is attributable to the non-renewal of sales agreements.

United Arab Emirates

Revenues are derived from the healthcare sector (CARA). The decrease of $23,900 for the six-month period ended September 30, 2020 is attributable to the non-renewal of sales agreements.

Saudi Arabia

Revenues are derived from the healthcare sector (CARA). The decrease of $2,684 for the six-month period ended September 30, 2020 is attributable to the absence of screenings.

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Cost of services and research and development (R&D)

The decreases of $73,616 for the three-month period ended September 30, 2020 and of $160,953 for the six-month period ended September 30, 2020 are mainly due to decreases in payroll and consulting expenses.

Selling and administrative expenses

The increase of $11,559, for the six-month period ended September 30, 2020, is mainly attributable to:

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$
Consulting 136,905
Payroll (59,699)
Travel and living (34,206)
Rent (11,092)
Others (20,349)
11,559
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Other income

The increases of $105,467 for the three-month period ended September 30, 2020 and of $229,974 for the six-month period ended September 30, 2020 are attributable to money received under the Canada emergency wage subsidy program.

Interest expense

The decrease of $208,990, for the six-month period ended September 30, 2020, is mainly attributable to the May 15, 2019 redemption of the outstanding convertible debentures and 85% of the outstanding notes.

Loss on settlement of debt

The amount of $175,722, for the six-month period ended September 30, 2019, arose from the redemption, on May 15, 2019, of the outstanding convertible debentures and 85% of the outstanding notes. It is comprised of an amount of $120,130, representing the difference between the fair value of the shares issued and the amortized cost of the debt and interest amounts, as well as an amount of $55,592 representing the fees paid in connection with the redemption.

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Cash flows

For the comparative six-month period ended September 30, 2020, cash liquidities varied as follows:

	Six-month period ended September 30,
Cash liquidities1at beginning of period Receipts from: Clients Grants Equity financings Loans Disbursements: Payroll, suppliers and others Interest Net change in liquidities Cash liquidities1at period end	2020 2019 Variance
	$
	1,872,107 693,954 151,179 153,082 (1,903) 243,003 63,719 179,284 - 550,000 (550,000) 40,000 250,000 (210,000)
	434,182 1,016,801 (582,619)
	(814,489) (1,212,956) 398,467 (15,415) (15,000) (415)
	(829,904) (1,227,956) 398,052
	(395,722) (211,155) (184,567)
	1,476,385 482,799

Note 1: Cash liquidities consist of cash and short-term investments

Until it is able to generate a level of sales sufficient to finance its operations and financial obligations, the Corporation will need to rely on further financing. Since inception, the Corporation has been able to finance its activities and operations through issuances of debt and equity instruments as well as from governmental assistance programs.

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Capital structure

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As at
September 30, 2020 March 31, 2020 Variance
Number
Common shares 61,366,004 61,366,004 -
Stock warrants 8,285,090 10,200,090 (1,915,000)
-
Conversion options 937,500 937,500
Stock options 6,095,000 4,396,000 1,699,000
76,683,594 76,899,594 (216,000)
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The decrease of 1,915,000 in the number of stock warrants is attributable to expiries.

The increase of 1,699,000 in the number of stock options is attributable to:

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Number
Grants 1,700,000
Cancellation (1,000)
1,699,000
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Head Office

DIAGNOS Inc. 7005 Taschereau Blvd. Suite 265 Brossard, Quebec J4Z 1A7 450 678-8882 or 877 678-8882

Stock Exchange Listing

DIAGNOS Inc. shares are listed on the TSX Venture Exchange under the symbol ADK and on the OTCQB under the symbol DGNOF.

Transfer Agents and Registrar

Computershare Trust Company of Canada

Auditor

Raymond Chabot Grant Thornton LLP