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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2003
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ___ to ___
Commission File Number: 0-22319
Patient Infosystems, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware 16-1476509
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
46 Prince Street
Rochester, New York 14607
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area
code: (585) 242-7200 Securities registered
pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days:Yes _X_ No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in a definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _X_
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ___ No _X_
As of March 25, 2004, the aggregate market value of the voting and nonvoting
common stock held by nonaffiliates of the registrant was $12,084,880 and
2,416,976 shares of common stock were outstanding.
As of March 30, 2004, there were 6,002,854 shares of the issuer's common stock
outstanding.
Portions of the Proxy Statement for the Registrant's 2002
Annual Meeting of Stockholders to be filed prior to
April 30, 2002 are incorporated by reference in Part III.
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PART I
Item 1. Description of Business.
General
Patient Infosystems, Inc. ("Patient Infosystems") was incorporated in the
State of Delaware on February 22, 1995 under the name DSMI Corp., changed its
name to Disease State Management, Inc. on October 13, 1995, and then changed its
name to Patient Infosystems, Inc. on June 28, 1996. Patient Infosystems'
principal executive offices are located at 46 Prince Street, Rochester, New York
14607 and its telephone number is 585-242-7200. Patient Infosystems' Internet
address is www.ptisys.com.
Patient Infosystems is a health management solutions company that
integrates clinical expertise with advanced Internet, call center and data
management capabilities. Founded in 1995 as a disease management company,
Patient Infosystems has evolved to offer a comprehensive portfolio of products
and services designed to improve patient clinical outcomes and quality of life,
reduce healthcare costs and facilitate patient-provider-payor communication.
These products are now marketed under the label Care Team Connect for Health.
Patient Infosystems has historically marketed its services to a broad range
of clients, including self-insured employers and trust funds, insurance
companies, pharmaceutical and medical equipment and device manufacturers,
pharmacy benefit managers ("PBMs"), other healthcare payors, such as managed
care organizations ("MCOs") and healthcare providers, including integrated
delivery networks ("IDN's"). Current marketing efforts are targeted to
self-insured employers, employer groups, union health and welfare funds, and
others who pay for the health care of defined populations.
During its first two years of operations, Patient Infosystems emphasized
the development of pure disease management programs, which accounted for a
substantial portion of its revenue through 1997. However, beginning in 1998,
Patient Infosystems devoted resources to the development of broader applications
of its technology platform, and its additional products grew to account for
nearly 45% of the total revenue of Patient Infosystems during the fiscal year
ended December 31, 2002. During 2003, the Company further expanded its product
mix to include services in support of providers and their clinical improvement
efforts. These services include support for development, training and
maintenance of clinical registry software, consultative services in improvement
methodologies and support of web-based informational and reporting resources. On
December 31, 2003, Patient Infosystems acquired the assets of American
Caresource Corporation ("ACS"). ACS provides ancillary benefits management
services, including a network of ancillary specialty providers and value-added
services that assist our clients control the cost of a range of ancillary
medical services.
The Care Team Connect portfolio now represents 40% percent of the Company's
revenue; innovation and improvement services for providers represent 60% of the
2003 revenue.
Products and Capabilities
Care Team Connect for Health
Care Team Connect for Health, which is Patient Infosystems' principal
product line, provides a complete solution for population health management
that can be marketed as a comprehensive solution or a set of discrete
services that complement a client's existing operations. Care Team Connect
integrates a number of components that had historically been marketed by
the Company as stand alone products. During the 2002 year, the clinical
content of these components was revised and all components were migrated to
an updated technology platform. During 2003, the Care Team Connect product
was expanded to include certain wellness services, as well as utilization
management and case management services, provided through subcontract
relationships with partner organizations. Care Team Connect includes the
following:
o 24-hour nurse help/triage line,
o Population analysis and identification,
o Disease management services,
o Care management,
o Smoking cessation program,
Nurse help line
The Care Team Connect for Health nurse help line is a triage, advice,
referral and health-counseling service that provides employees and members
with round-the-clock access to registered nurses who use algorithm-based
assessment tools and have access to provider and/or network information.
The help line can provide users with information about a specific health
problems or answers to their health-related questions. Use of nationally
recognized clinical algorithms assist callers in determining the most
cost-effective options for acute care treatment and has effectively been
able to reduce the use of emergency rooms and after hours physician
contact. Through the Nurse Help Line, individuals may also be identified
for referral into disease management or case management intervention. The
nurse help line is operated from Patient Infosystems' Utilization Review
Accreditation Commission ("URAC") accredited call center.
Population analysis and identification
As part of its disease management services, Patient Infosystems
provides comprehensive medical and pharmaceutical claims analysis that
includes the administration of proprietary algorithms to identify patients
with chronic disease and then stratifies them by level of risk for high
resource utilization.
The stratification algorithm employed is categorical in nature as
patients are classified into low, moderate, high and critical groupings.
The data employed in the algorithm are both nominal (using claim codes
known as "ICD9" and procedure codes known as "CPT") and ratio (usage of
resources). The nominal data determines the presence of a particular
chronic condition and thus identifies patients with a specific condition. A
combination of the nominal and ratio data, as defined in the algorithm for
each condition, determines the risk level for the individual patient.
Following identification and stratification, patients/employees can be
enrolled into the appropriate (low, moderate or high) disease management
intervention program.
The first time the claims analysis is completed on the client's
historical claims data, the client will be provided with a summary report
that profiles its population as related to health care dollars spent,
prevalence of disease, and the numbers of identified at-risk members by
risk level. Claims data is used on a retrospective basis to assess the
financial impact of the Care Team Connect programs and calculate savings
and return on investment.
Disease management services
Patient Infosystems' disease management services are provided for
individuals with a diagnosis of asthma, diabetes, hypertension, or
congestive heart failure. These services are comprehensive in approach and
focus on both the medical and behavioral aspects of chronic health care
management. The programs involve clinical assessments and the delivery of
messages on self-care, medication compliance and treatment adherence.
Through monitoring and on-going assistance, they empower the participants
to become more proficient and proactive in managing their disease or
condition. By including 24-hour access to the nurse help line, participants
always have a place to turn for questions or issues that arise with their
disease. The long-term goal of Patient Infosystems' disease management
services is a judicious use of health care resources through health care
education, as well as reinforcement of the provider's treatment plan.
The disease management programs are based on nationally recognized
treatment guidelines for each disease state. The programs provide
condition-specific assessment, support and education with behavior-based
interventions according to the patient's identified risk level. Each of
Patient Infosystems' chronic condition management programs is reviewed and
updated as needed on an annual basis to assure that these programs reflect
current knowledge and practices in clinical management.
Disease management interventions include various components according
to the risk level of the target individual. These components are as
follows:
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o Quality of life surveys
Low risk: o Reminders
o Static educational mailings
o 24-hour nurse help line
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o Nurse engagement
Moderate risk: o Quality of life surveys
o Chronic condition management program
o Reminders
o Static educational mailings
o 24-hour nurse help line
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o Nurse engagement
High risk: o Quality of life surveys
o "Gold" chronic condition management program
o Telemonitoring signs and symptoms assessment
o Reminders
o Static educational mailings
o 24-hour nurse help line
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o Dedicated registered nurse as disease care
Critical risk: manager
o Baseline clinical assessment and treatment
action plan
o Regularly scheduled on-going clinical patient
assessments
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Disease management program components
Nurse engagement call
All moderate, high and critical risk disease management programs
begin with a nurse engagement call. The nurse care counselor explains
the specific program for which the member is targeted and the benefits
of the program, while starting to build a relationship with the
member. The nurse care counselor confirms the patient's acceptance to
participate and obtains pertinent member information.
The nurse intervention assesses specific areas of clinical
management based on national clinical practice guidelines. Specific to
each disease, these include the following types of information:
o Healthcare utilization.
o Disease status.
o Functional status.
o Quality of care.
o Treatment adherence and self-care practices.
o Education/knowledge.
o Motivation and program evaluation.
The assessment focuses on the most important health behaviors the
patient must manage in order to effectively control symptoms of their
disease.
Chronic condition management program
Moderate risk patients are enrolled in our chronic condition
management programs. Each of the chronic condition management programs
utilize a combination of telephone and mail interventions to monitor
patients while providing educational information about
disease-specific treatment guidelines.
By providing unique, individually tailored intervention
strategies, Patient Infosystems provides each patient with
personalized, educational feedback and positive reinforcement, both
verbally and through written communication. Each telephonic
intervention also generates an on-demand published report for the
patient's physician/case manager.
"Gold" chronic condition management program
High risk patients are enrolled in our "gold" chronic condition
management program. The "gold" program includes all of the components
of the chronic condition management programs described previously,
plus the incorporation of symptom assessment and monitoring throughout
the duration of the contract.
Quality of life re-assessment and on-going monitoring
Quality of life surveys are periodically administered to assess
patients' functional status.
Educational mailings
During the re-assessment and on-going monitoring portion of the
program, patients receive disease-specific educational or reminder
mailings.
Reminders
Patients are periodically reminded of preventive measures they
should take to better manage their health.
Disease care management for critical risk patients
Disease care management is a specialized clinical intervention.
The highly specialized clinical support by a registered nurse provides
the management and coordination of patient care services for
critical-risk individuals in a population.
The program's key functions are the following:
1. One-on-one support by a dedicated registered nurse.
2. Establishing an extensive baseline clinical assessment and
treatment action plan.
3. Regularly scheduled on-going clinical patient assessments that
include extensive disease monitoring and surveillance.
All facets of the individual's care are comprehensively and
regularly reviewed by the disease care manager and regular
communication is made with all members of the health care team.
At any point during a disease care management intervention, if
the patient is assessed to require even more intense management, the
Nurse will connect the patient with traditional case management.
Care management services
Care management programs include the components of utilization
management and case management and ensure that participants receive quality
medical care at the best possible price, while maximizing plan benefits.
The programs assist in avoiding unnecessary expenditures with an objective,
information-intensive approach that combines clinical judgment with
accepted practice patterns.
Care management services are provided through subcontracts with
partner companies that are accredited by URAC. All policies and procedures
reflect compliance with URAC standards and are further developed to ensure
compliance with the legislative requirements of the states in which
utilization review functions are performed.
The data collected from the Care Team Connect for Health interventions
is stored in an integrated information warehouse which links the numerous
programs and services. This integrated data warehouse allows our clients,
the patient's providers and other associated service providers access to
program data as necessary in order to best manage the member's health.
Smoking Cessation Services
During 2003, Patient Infosystems began providing the call center
operations for a smoking cessation program which is owned by and marketed
by Behavioral Solutions. Patient Infosystems has the right to independently
market this program for direct sales.
Provider innovation and improvement support
In 2003, Patient Infosystems expanded its role in services to certain
federally funded health centers that are sponsored by the Bureau of Primary
Healthcare through the Institute for Healthcare Improvement that promote
disease management programs directly to the providers in the health
centers.
Population Health Disease Management Systems and Strategies
Patient Infosystems provides technical assistance to the health
centers relative to management of chronic disease. This includes
organizations such as the federal government, health plans, state primary
care associations, and the National Association of Community Health
Centers.
Learning Organization Services
Patient Infosystems serves as a teaching organization promoting
improvement in care delivery systems. This includes logistics support for
learning sessions, training; recruitment, development and support of
faculty, subject matter experts in key topics; training in improvement
methods and knowledge management of best practices. Topics include chronic
disease management, idealized clinical practice design and the business
case for planned care. Patient Infosystems collaborates with the Institute
for Healthcare Improvement on such initiatives.
Technical assistance
Patient Infosystems assists with the development of clinical
registries used to more effectively manage patients with chronic disease.
Patient Infosystems services include (i) project management and
Implementation of a patient registry for federally qualified health centers
through a national initiative known as the Health Disparities
Collaboratives and (ii) Patient Infosystems provides technical assistance
in web based reporting applications for clinical outcomes. This project is
administered as a subcontract through the Institute for Healthcare
Improvement.
Outcome Assessment, Data Collection and Reporting
Patient Infosystems collects data about clinical, financial, quality
of life and satisfaction. This data is analyzed and outcomes are reported.
Ancillary benefits management
Ancillary healthcare services include a broad array of services that
supplement or support the care provided by hospitals and physicians,
including the non-hospital, non-physician services associated with surgery
centers, free-standing diagnostic imaging centers, home health and
infusion, durable medical equipment, orthotics and prosthetics, laboratory
and many other services. These ancillary services are provided to patients
as benefits under Group Health plans and Workers Compensation plans.
o Home Health Services o Pain Management
o Surgical Centers o Pharmacy
o Laboratory Services o Respiratory Services
o Home Infusion therapy o Sleep Studies
o Chiropractic Services o Sub-Acute and Skilled Nursing facilities
o Diagnostic Imaging/Radiology o Hospice Services
o Dialysis Services o Bone Growth Stimulators
o Durable Medical Equipment o OrthoticsOandaProstheticspy/Rehab
ACS manages the administration of these non-hospital, non-physician
services.
Through its contracts with over 5000 ancillary service providers (with
over 13,000 sites nationwide), ACS is able to offer its clients direct cost
savings in the form of discounted rates for contracted services and
administrative cost savings by functioning as a single point of contact for
managing a comprehensive array of ancillary benefits. ACS benefits
management services include processing the claims submitted by its covered
providers, re-pricing the claims, submitting the claims for payment,
receiving and disbursing claims payments and performing customer service
functions for its clients and contracted providers. For preferred provider
organization ("PPO"), third party administrator ("TPA") and similar
clients, contracting with ACS also allows the clients to market
comprehensive, efficient and affordable ancillary service benefits to their
payor customers.
As part of its ancillary benefits management services, ancillary
providers submit claims at full retail charges to ACS for services
performed for covered members. ACS re-prices these claims under the
relevant payor fee schedules, performs electronic conversion and HIPAA
formatting services, and submits the re-priced claims to the appropriate
payors. After adjudication of the claims by the Payor, the Payor issues an
Explanation of Benefits and check for each claim. In most cases, these
checks are sent to ACS. ACS then pays the providers under the relevant
provider fee schedules. The difference between the amounts received by ACS
from its clients and the amounts paid by ACS to its contracted providers
represents ACS gross margin on its benefits management services.
Value-added services that ACS provides to its clients include the
following:
Ancillary network analysis. ACS analyzes the available claims history from
each client and develops a specific plan to meet their needs. This analysis
identifies high-volume providers that are not already in ACS network. ACS
attempts to contract with such providers to maximize discount levels and
capture rates.
Ancillary out-of-network negotiations. For services performed by providers
outside of the ACS network, ACS negotiates a discounted rate for the client
on a case specific basis.
Ancillary custom network. ACS customizes its network to meet the needs of
each client. In particular, ACS reviews the "out-of-network" claims history
through its network analysis service and develops a strategy to create a
network that efficiently serves the client's needs. This may involve adding
additional providers for a client and removing providers the client wants
excluded from their network.
Ancillary reimbursement. ACS uses its network analysis to develop a single
reimbursement level for all ancillary providers. ACS also processes denials
and appeals for its clients and for its contracted providers.
Ancillary network management. ACS manages ancillary service provider
contracts, reimbursement and credentialing for its clients. This provides
administrative benefits to ACS clients and reduces the burden on providers
who typically must supply credentialing documentation and engage in
contract negotiation with separate payors.
Ancillary utilization management support. ACS provides support for
utilization and case management efforts used by each payor. ACS facilitates
preauthorization at the point of referral based on pre-established
criteria. ACS also "flags" cases for follow-up, review, and concurrent
reviews to ensure all the payor guidelines are followed by each service
provider and the efficacy of services and progress of the patient is
satisfactory. There are a large number of high demand cases that are
subject to case management efforts. For those cases, ACS helps coordinate
the supporting documentation and preparation of reports to manage and
monitor progress and establishment of reserves for specific claims.
Ancillary systems integration. ACS has created a proprietary software
system that enables it to manage many different customized accounts and
includes the following modules:
o Provider network management
o Credentialing
o Eligibility management and card printing
o Claims and case referral management
o Data transfer management/EDI
o Repricing and auto-adjudication
o Multi-level reimbursement management
o Posting, EOB, check, and e-funds processes
o Customer service management
o Directory management
o Claim repricing / adjudication
o Advanced data reporting
Ancillary reporting. ACS provides a complete suite of reports to each
client monthly. The reports cover contracting efforts and capture rates,
discount levels, referral volumes by service category and complete claims
and utilization reports.
Ancillary claims management. ACS provides claims management services
through its operation in Pittsboro, Indiana. ACS can manage ancillary
claims flow, both electronic and paper, and integrate into the client's
process electronically or through repriced paper claims. ACS can also
perform a number of customized processes that add additional value for each
client. As part of the claims management process, ACS manages the
documentation requirements specific to each payor. When claims are
submitted from the service provider without required documentation, ACS
works with the provider to get the documentation so that the claim is not
denied by the payor. This also saves labor costs for the payors.
ACS estimates that at least 80% of all claims in ACS ancillary
categories are submitted by paper. ACS is able to provide a conversion of
these paper claims into the HIPAA-compliant Electronic Data Interchange
("EDI") form through its scanning operations.
Sales and Marketing
Through 1997, Patient Infosystems' efforts focused primarily on the
development of disease management programs. Beginning in 1998, Patient
Infosystems began aggressively marketing the other services that its technology
platform can provide, including demand management, patient surveys,
pharmaceutical support programs and outcomes analysis. During 2002 and 2003,
Patient Infosystems has marketed its integrated Care Team Connect for Health
product. Its target market is the organization that pays for health care
services on behalf of its members, employees or beneficiaries. These industry
organizations include several groups: insurance companies, managed care
organizations, third party administrators (TPA's), Taft-Hartley health and
welfare funds, purchasing coalitions, and self-funded employer groups.
Sales and marketing efforts for the ACS product line are currently focused
on healthcare payor organizations as well as certain value-added re-sellers in
the form of TPAs or PPOs. ACS spent several years developing its business model,
know-how, infrastructure, client base and provider base and until 2001, ACS
focused on managing ancillary benefits in the Workers Compensation market. In
early 2001, ACS expanded and refocused its business to address the management of
ancillary benefits in the Group Health market. It launched its Group Health
initiatives by marketing to healthcare networks such as TPAs and PPOs. As of the
end of 2003, ACS began to focus its marketing efforts on the direct payor
community. This is in alignment with the marketing focus for the Care Team
Connect product line.
Patient Infosystems currently employs a sales and marketing staff of three
persons to market its services. The Ancillary Network of ACS is marketed through
one full time sales person and independent contractors providing additional
commission salespersons. In addition, the senior members of Patient Infosystems'
management are actively engaged in marketing Patient Infosystems' programs.
Patient Infosystems has agreements in place with several organizations to
co-market Patient Infosystems' products and services. These agreements are in
place with CBCA, formerly USI Administrators, Inc., Gilsbar, and Behavioral
Solutions. CBCA and Gilsbar are third-party administrators; Behavioral Solutions
is a subsidiary of Nelson Communications and the developers of the Quitting Your
Way smoking cessation program. These agreements permit either company to
co-market and sub-contract for the services of the other company.
Competition
The market for health care information products and services is intensely
competitive. Competitors vary in size and in scope and breadth of products and
services offered, and Patient Infosystems competes with various companies in
each of its disease target markets. Patient Infosystems' competitors include
specialty health care companies, health care information system and software
vendors, health care management organizations, pharmaceutical companies and
other service companies within the health care industry. Many of these
competitors have substantial installed customer bases in the health care
industry and the ability to fund significant product development and acquisition
efforts. Patient Infosystems also competes against other companies that provide
statistical and data management services, including clinical trial services to
pharmaceutical companies.
Research and Development
Research and development expenses consist primarily of salaries, related
benefits and administrative costs allocated to Patient Infosystems' research and
development personnel. These personnel are actively involved in the conversion
of Patient Infosystems' technology platform to a fully web-enabled design.
Patient Infosystems' research and development expenses were $131,782, or 2.3% of
total revenues for the fiscal year ended December 31, 2003, $105,614, or 4.5% of
total revenues, for the fiscal year ended December 31, 2002, and $190,731, or
12.0%, of total revenues, for the fiscal year ended December 31, 2001. Patient
Infosystems anticipates that the amount spent on research and development will
remain relatively constant in future periods as it continues its internal
process to update its products.
Government Regulation
The health care industry, including the current business of Patient
Infosystems and the expanded operations of Patient Infosystems, including the
business of ACS, following the closing of the acquisition described in the Asset
Purchase Agreement, is subject to extensive regulation by both the Federal and
state governments. A number of states have extensive licensing and other
regulatory requirements applicable to companies that provide health care
services. Additionally, services provided to health benefit plans in certain
cases are subject to the provisions of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA").
Furthermore, state laws govern the confidentiality of patient information
through statutes and regulations that safeguard privacy rights. In addition, on
August 21, 1996 Congress passed the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"), P.L. 104-191. This legislation required
the Secretary of the Department of Health and Human Services to adopt national
standards for electronic health transactions and the data elements used in such
transactions. Patient Infosystems and its customers may be subject to Federal
and state laws and regulations that govern financial and other arrangements
among health care providers. Furthermore, Patient Infosystems and its customers
may be subject to federal and state laws and regulations governing the
submission of false healthcare claims to the government and private payers.
Possible sanctions for violations of these laws and regulations include minimum
civil penalties between $5,000-$10,000 for each false claim and treble damages.
Therefor, Patient Infosystems must continually adapt to changing
regulations. If Patient Infosystems' fails to comply with these applicable laws,
the company may be subject to fines, civil penalties, or criminal prosecution.
Employees
As of March 1, 2004, Patient Infosystems had 90 full time and 37 part-time
employees.
RISK FACTORS
Forward-Looking Statements
When used in this and in future filings by Patient Infosystems with the
Securities and Exchange Commission, in Patient Infosystems' press releases and
in oral statements made with the approval of an authorized executive officer of
Patient Infosystems, the words or phrases "will likely result," "expects,"
"plans," "will continue," "is anticipated," "estimated," "project," or "outlook"
or similar expressions (including confirmations by an authorized executive
officer of Patient Infosystems of any such expressions made by a third party
with respect to Patient Infosystems) are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Patient Infosystems wishes to caution readers not to place undue
reliance on any such forward-looking statements, each of which speak only as of
the date made. Such statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. Patient Infosystems has no
obligation to publicly release the result of any revisions that may be made to
any forward-looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statements.
An investment in Patient Infosystems' common stock is speculative in nature
and involves a high degree of risk. No investment in Patient Infosystems' common
stock should be made by any person who is not in a position to lose the entire
amount of such investment.
Working Capital Shortfalls; Urgent Need for Working Capital, Possible Cessation
of Operations
Patient Infosystems has never earned a profit and has depended upon the
over $30m that the Company has raised to date through its initial public
offering, private placements of its equity securities and debt, to fund its
working capital requirements. Patient Infosystems incurred an operating loss of
approximately $0.6 million with a net loss of approximately $3.4 million for the
year ended December 31, 2003 and had an approximate $2.8 million deficit in
working capital and shareholders' equity of approximately $2 million at December
31, 2003. As of December 31, 2003, Patient Infosystems had total liabilities of
$7,174,782 and a working capital deficit of $2,808,649. Since May 2003, Patient
Infosystems' operation has been supported substantially by its operational cash
flow. On December 31, 2003, Patient Infosystems acquired the assets of and
assumed the liabilities for American Caresource Corporation and placed the
operational assets and liabilities into a wholly-owned subsidiary, American
Caresource Holdings, Inc. ("ACS"). It is anticipated that ACS will require
significant additional working capital until it can fund its operational needs
from operational cash flow, if at all. Existing working capital will last no
more than a few months, and the Company anticipates that it will be required to
raise at least an additional $2 million in 2004 to sustain the operation of ACS.
As with any forward-looking projection, no assurances can be given concerning
the outcome of Patient Infosystems' actual financial status given the
substantial uncertainties that exist. There can be no assurances that Patient
Infosystems can raise either the required working capital through the sale of
its securities or that Patient Infosystems can borrow the additional amounts
needed. If it is unable to identify additional sources of capital, Patient
Infosystems will likely be forced to curtail its operations or the operations of
ACS. As a result of the above, the Independent Auditors' Report on Patient
Infosystems' consolidated financial statements appearing at Item 13 includes an
emphasis paragraph indicating that Patient Infosystems' recurring losses from
operations and negative working capital raise substantial doubt about its
ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
ACS' History of Operating Losses
ACS has incurred losses in each of the past four years and has not, since
its inception, operated profitability. There can be no assurance that the
acquisition of ACS will result in an increase in revenue or cash flows of
Patient Infosystems.
During the last six months, ACS has received written notification of the
termination of contractual relations from Pinnacol Assurance and two of its
other customers which in the aggregate accounted for over 56% of ACS' revenues
during the fiscal year ended December 31, 2003. The termination of these
contracts will result in a significant reduction of ACS' revenues. Although a
variety of reasons may be provided for the termination of each of the customer
agreements, the termination of such an extensive amount of customer business may
reflect a substantial level of customer dissatisfaction with the services
provided by ACS. Although Patient Infosystems believes that it can provide
assistance to ACS and that in combination with Patient Infosystems, ACS will be
able to provide better services, no assurance can be given that more customers
will not terminate their relationships with ACS following the closing of the
Acquisition. In addition, ACS generally does not have long-term contracts with
its other customers. Significant declines in the level of use of ACS services by
one or more of its remaining customers could have a material adverse effect on
ACS' business and results of operations. Additionally, an adverse change in the
financial condition of any of these customers, including an adverse change as a
result of a change in governmental or private reimbursement programs, could have
a material adverse effect on its business.
History of Operating Losses; Continued Limited Patient Enrollment
Patient Infosystems has incurred losses in every quarter since its
inception in February 1995. Patient Infosystems' ability to operate profitably
is dependent upon its ability to develop and market its products in an
economically successful manner. To date, Patient Infosystems has been unable to
do so. No assurances can be given that Patient Infosystems will be able to
generate revenues or ever operate profitably in the future.
Patient Infosystems' prospects must be considered in light of the numerous
risks, expenses, delays and difficulties frequently encountered in an industry
characterized by intense competition, as well as the risks inherent in the
development of new programs and the commercialization of new services
particularly given its failure to date to operate profitably. There can be no
assurance that Patient Infosystems will achieve recurring revenue or
profitability on a consistent basis, if at all.
Patient Infosystems currently has patients enrolled in its disease-specific
programs. Through January 2004, an aggregate of approximately 775,000 persons
have been enrolled in Patient Infosystems' programs. While Patient Infosystems
has been able to enroll a sufficient number of patients to cover the cost of its
programs, it still has not been able to generate sufficient operational margin
to achieve a net profit.
Significant Customer Concentration
During 2000, a significant customer ceased operation of services supplied
by Patient Infosystems, which had a material adverse effect on the results of
operations. As of December 31, 2003, Patient Infosystems now has more customers
than it did at December 31, 2001 or 2002. While the customer base is more
diverse, there is still a significant concentration of Patient Infosystems'
business in a small number of customers, with several of Patient Infosystems'
most significant contracts being with IHI, CBCA and CHA Health. Patient
Infosystems expects that its sale of services will be concentrated in a small
number of customers for the foreseeable future. Consequently, the loss of any
one of its customers could have a material adverse effect on Patient Infosystems
and its operations. There can be no assurance that customers will maintain their
agreements with Patient Infosystems, enroll a sufficient number of patients in
the programs developed by Patient Infosystems for Patient Infosystems to achieve
or maintain profitability, or that customers will renew their contracts upon
expiration, or on terms favorable to, Patient Infosystems.
ACS' five largest (including its non-continuing customers) customers
account for approximately 85% of its revenues. In addition, ACS does not have
long-term contracts with its customers. The loss of one or more of these
customers, or an adverse change in the financial condition of one or more of
these customers, could have a material adverse effect on the business and
results of operations of Patient Infosystems.
Consequences of the Need to Raise Additional Working Capital
As Patient Infosystems seeks additional financing or purchases, it is
likely that it will issue a substantial number of additional shares that may be
extremely dilutive to the current stockholders and required substantial and
material charges to earnings which will impact the net loss attributable to the
common shareholders. As a result, the value of outstanding shares of common
stock could decline further.
Only One Independent Director; No Separate Audit Committee
The Board of Directors of Patient Infosystems now only consists of three
persons. One director, Mr. Chaufournier, is also the Chief Executive Officer of
Patient Infosystems. It is anticipated that it will be difficult to attract
additional independent directors to join the Board of Directors. Currently, the
Board of Directors meets as the Audit Committee. There is currently no
independent director who qualifies as a qualified audit committee finance
expert. The Company is seeking to identify additional persons who can serve as
independent members of the Board of Directors and who may serve as members of
its Audit Committee.
Terminability of Agreements
Patient Infosystems' current services agreements with its customers
generally automatically renew and may be terminated by those customers without
cause upon notice of between 30 and 90 days. In general, customer contracts may
include significant performance criteria and implementation schedules for
Patient Infosystems. Failure to satisfy such criteria or meet such schedules
could result in termination of the agreements.
New Concept; Uncertainty of Market Acceptance; Limitations of Commercialization
Strategy
In connection with the commercialization of Patient Infosystems' health
information system, Patient Infosystems is marketing relatively new services
designed to link patients, health care providers and payors in order to provide
specialized disease management services for targeted chronic diseases. However,
at this time, services of this type have not gained general acceptance from
Patient Infosystems' customers. This is still perceived to be a new business
concept in an industry characterized by an increasing number of market entrants
who have introduced or are developing an array of new services. As is typical in
the case of a new business concept, demand and market acceptance for newly
introduced services are subject to a high level of uncertainty, and there can be
no assurance as to the ultimate level of market acceptance for Patient
Infosystems' system, especially in the health care industry, in which the
containment of costs is emphasized. Because of the subjective nature of patient
compliance, Patient Infosystems may be unable, for an extensive period of time,
to develop a significant amount of data to demonstrate to potential customers
the effectiveness of its services. Even after such time, no assurance can be
given that Patient Infosystems' data and results will be convincing or
determinative as to the success of its system. There can be no assurance that
increased marketing efforts and the implementation of Patient Infosystems'
strategies will result in market acceptance for its services or that a market
for Patient Infosystems' services will develop or not be limited.
Unpredictability of Patient Behavior May Affect Success of Programs
The ability of Patient Infosystems to monitor and modify patient behavior
and to provide information to health care providers and payors, and consequently
the success of Patient Infosystems' disease management system, is dependent upon
the accuracy of information received from patients. Patient Infosystems has not
taken and does not expect that it will take, specific measures to determine the
accuracy of information provided to Patient Infosystems by patients regarding
their medical histories. No assurance can be given that the information provided
to Patient Infosystems by patients will be accurate. To the extent that patients
have chosen not to comply with prescribed treatments, such patients might
provide inaccurate information to avoid detection. Because of the subjective
nature of medical treatment, it will be difficult for Patient Infosystems to
validate or confirm any such information. In the event that patients enrolled in
Patient Infosystems' programs provide inaccurate information to a significant
degree, Patient Infosystems would be materially and adversely affected.
Furthermore, there can be no assurance that patient interventions by Patient
Infosystems will be successful in modifying patient behavior, improving patient
health or reducing costs in any given case. Many potential customers may seek
data from Patient Infosystems with respect to the results of its programs prior
to retaining it to develop new disease management or other health information
programs. Patient Infosystems' ability to market its system to new customers may
be limited if it is unable to demonstrate successful results for its programs.
Competition
The market for health care information products and services is intensely
competitive and we expect this competition to increase. Patient Infosystems
competes with various companies in each of its disease target markets. Many of
Patient Infosystems' competitors have significantly greater financial,
technical, product development and marketing resources than Patient Infosystems.
Furthermore, other major information, pharmaceutical and health care companies
not presently offering disease management or other health care information
services may enter the markets in which Patient Infosystems intends to compete.
In addition, with sufficient financial and other resources, many of these
competitors may provide services similar to those of Patient Infosystems without
substantial barriers. Patient Infosystems does not possess any patents with
respect to its integrated information capture and delivery system.
Patient Infosystems' competitors include specialty health care companies,
health care information system and software vendors, health care management
organizations, pharmaceutical companies and other service companies within the
health care industry. Many of these competitors have substantial installed
customer bases in the health care industry and the ability to fund significant
product development and acquisition efforts. Patient Infosystems also competes
against other companies that provide statistical and data management services,
including clinical trial services to pharmaceutical companies.
Patient Infosystems believes that the principal competitive factors in its
market are the ability to link patients, health care providers and payors, and
provide the relevant health care information at an acceptable cost. In addition,
Patient Infosystems believes that the ability to anticipate changes in the
health care industry and identify current needs are important competitive
factors. There can be no assurance that competitive pressures will not have a
material adverse effect on Patient Infosystems.
Substantial Fluctuation in Quarterly Operating Results
Patient Infosystems' results of operations have fluctuated significantly
from quarter to quarter as a result of a number of factors, including the volume
and timing of sales and the rate at which customers implement disease management
and other health information programs within their patient populations.
Accordingly, Patient Infosystems' future operating results are likely to be
subject to variability from quarter to quarter and could be adversely affected
in any particular quarter.
Dependence on Data Processing and Telephone Equipment
The business of Patient Infosystems is dependent upon its ability to store,
retrieve, process and manage data and to maintain and upgrade its data
processing capabilities. Interruption of data processing capabilities for any
extended length of time, loss of stored data, programming errors, other computer
problems or interruptions of telephone service could have a material adverse
effect on the business of Patient Infosystems.
Quality Control
Patient Infosystems has developed quality control measures designed to
insure that information obtained from patients is accurately transcribed, that
reports covering each patient contact are delivered to health care providers and
patients and that Patient Infosystems' personnel and technologies are
interacting appropriately with patients and health care providers. Quality
control systems include random monitoring of telephone calls, patient surveys to
confirm patient participation and effectiveness of the particular program, and
supervisory reviews of telephone agents.
Patient Infosystems may have difficulty integrating the business of ACS with
existing operations
The acquisition of ACS will involve the integration of a company that has
previously operated in an entirely different business than that of Patient
Infosystems. Patient Infosystems cannot assure you that the integration of
Patient Infosystems with ACS will be successfully completed without encountering
difficulties or experiencing the loss of key Patient Infosystems or ACS
employees, customers or suppliers, or that the benefits from such integration
will be realized. In addition, Patient Infosystems cannot assure you that the
management teams of ACS and Patient Infosystems will be able to successfully
work with each other.
Government Regulation
The health care industry, including the current business of Patient
Infosystems and the expanded operations of Patient Infosystems, including the
business of ACS, is subject to extensive regulation by both the Federal and
state governments. A number of states have extensive licensing and other
regulatory requirements applicable to companies that provide health care
services. Additionally, services provided to health benefit plans in certain
cases are subject to the provisions of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") and may be affected by other state and Federal
statutes. Generally, state laws prohibit the practice of medicine and nursing
without a license. Many states interpret the practice of nursing to include
health teaching, health counseling, the provision of care supportive to, or
restorative of, life and well being and the execution of medical regimens
prescribed by a physician. Accordingly, to the extent that Patient Infosystems
assists providers in improving patient compliance by publishing educational
materials or providing behavior modification training to patients, such
activities could be deemed by a state to be the practice of medicine or nursing.
Although Patient Infosystems has not conducted a survey of the applicable law in
all 50 states, it believes that it is not engaged in the practice of medicine or
nursing. There can be no assurance, however, that Patient Infosystems'
operations will not be challenged as constituting the unlicensed practice of
medicine or nursing. If such a challenge were made successfully in any state,
Patient Infosystems could be subject to civil and criminal penalties under such
state's law and could be required to restructure its contractual arrangements in
that state. Such results or the inability to successfully restructure its
contractual arrangements, could have a material adverse effect on Patient
Infosystems.
Patient Infosystems is subject to state laws governing the confidentiality
of patient information. A variety of statutes and regulations exist to safeguard
privacy and regulating the disclosure and use of medical information. State
constitutions may provide privacy rights and states may provide private causes
of action for violations of an individual's "expectation of privacy." Tort
liability may result from unauthorized access and breaches of patient
confidence. Patient Infosystems intends to comply with state law and regulations
governing medical information privacy.
In addition, on August 21, 1996 Congress passed the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA"), P.L. 104-191. This
legislation required the Secretary of the Department of Health and Human
Services to adopt national standards for electronic health transactions and the
data elements used in such transactions. The Secretary is required to adopt
safeguards to ensure the integrity and confidentiality of such health
information. Violation of the standards is punishable by fines and, in the case
of negligent or intentional disclosure of individually identifiable health
information, imprisonment. The Secretary has promulgated final rules addressing
the standards, however, the implementation time line extends into 2003 and
beyond. Although Patient Infosystems intends to comply with all applicable laws
and regulations regarding medical information privacy, failure to do so could
have an adverse effect on Patient Infosystems' business.
Patient Infosystems and its customers may be subject to Federal and state
laws and regulations that govern financial and other arrangements among health
care providers. These laws prohibit certain fee splitting arrangements among
health care providers, as well as direct and indirect payments, referrals or
other financial arrangements that are designed to induce or encourage the
referral of patients to, or the recommendation of, a particular provider for
medical products and services. Possible sanctions for violation of these
restrictions include civil and criminal penalties. Specifically, HIPAA increased
the amount of civil monetary penalties from $2,000 to $10,000. Criminal
penalties range from misdemeanors, which carry fines of not more than $10,000 or
imprisonment for not more than one year, or both, to felonies, which carry fines
of not more than $25,000 or imprisonment for not more than five years, or both.
Further, criminal violations may result in permanent mandatory exclusions and
additional permissive exclusions from participation in Medicare and Medicaid
programs.
Furthermore, Patient Infosystems and its customers may be subject to
federal and state laws and regulations governing the submission of false
healthcare claims to the government and private payers. Possible sanctions for
violations of these laws and regulations include minimum civil penalties between
$5,000-$10,000 for each false claim and treble damages.
Regulation in the health care field is constantly evolving. Patient
Infosystems is unable to predict what government regulations, if any, affecting
its business may be promulgated in the future. Patient Infosystems' business
could be adversely affected by the failure to obtain required licenses and
governmental approvals, comply with applicable regulations or comply with
existing or future laws, rules or regulations or their interpretations.
Significant and Extensive Changes in the Health Care Industry
The health care industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operations
of health care industry participants. Several lawmakers have announced that they
intend to propose programs to reform the U.S. health care system. These programs
may contain proposals to increase governmental involvement in health care, lower
reimbursement rates and otherwise change the operating environment for Patient
Infosystems and its targeted customers. Health care industry participants may
react to these proposals and the uncertainty surrounding such proposals by
curtailing or deferring certain expenditures, including those for Patient
Infosystems' programs. Patient Infosystems cannot predict what impact, if any,
such changes in the health care industry might have on its business, financial
condition and results of operations. In addition, many health care providers are
consolidating to create larger health care delivery enterprises with greater
regional market power. As a result, the remaining enterprises could have greater
bargaining power, which may lead to price erosion of Patient Infosystems'
programs. The failure of Patient Infosystems to maintain adequate price levels
could have a material adverse effect on its business.
Dependence on Customers for Marketing and Patient Enrollment
Patient Infosystems has limited financial, personnel and other resources to
undertake extensive marketing activities. One element of Patient Infosystems'
marketing strategy involves marketing specialized disease management programs to
pharmaceutical companies and managed care organizations, with the intent that
those customers will market the program to parties responsible for the payment
of health care costs, who will enroll patients in the programs. Accordingly,
Patient Infosystems, will to a degree, be dependent upon its customers, over
whom it has no control, for the marketing and implementation of its programs and
for the receipt of valid patient information. The timing and extent of patient
enrollment is completely within the control of Patient Infosystems' customers.
Patient Infosystems has faced difficulty in receiving reliable patient
information from certain customers, which has hampered its ability to complete
certain of its projects. To the extent that an adequate number of patients are
not enrolled in the program, or enrollment of initial patients by a customer is
delayed for any reason, Patient Infosystems' revenue may be insufficient to
support its activities.
Control of Patient Infosystems
The executive officers, directors and certain stockholders of Patient
Infosystems who beneficially own in the aggregate approximately 87.5% of the
outstanding common stock control Patient Infosystems. As a result of such
ownership, these stockholders, in the event they act in concert, will have
control over the management policies of Patient Infosystems and all matters
requiring approval by the stockholders of Patient Infosystems, including the
election of directors.
Potential Liability and Insurance
Patient Infosystems will provide information to health care providers and
managed care organizations upon which determinations affecting medical care will
be made. As a result, it could share in potential liabilities for resulting
adverse medical consequences to patients. In addition, Patient Infosystems could
have potential legal liability in the event it fails to record or disseminate
correctly patient information. Patient Infosystems maintains an errors and
omissions insurance policy with coverage of $5 million in the aggregate and per
occurrence. Although Patient Infosystems does not believe that it will directly
engage in the practice of medicine or direct delivery of medical services and
has not been a party to any such litigation, it maintains a professional
liability policy with coverage of $5 million in the aggregate and per
occurrence. There can be no assurance that Patient Infosystems' procedures for
limiting liability have been or will be effective, that Patient Infosystems will
not be subject to litigation that may adversely affect Patient Infosystems'
results of operations, that appropriate insurance will be available to it in the
future at acceptable cost or at all or that any insurance maintained by Patient
Infosystems will cover, as to scope or amount, any claims that may be made
against Patient Infosystems.
Intellectual Property
Patient Infosystems considers its methodologies, processes and know-how to
be proprietary. Patient Infosystems seeks to protect its proprietary information
through confidentiality agreements with its employees. Patient Infosystems'
policy is to have employees enter into confidentiality agreements that contain
provisions prohibiting the disclosure of confidential information to anyone
outside Patient Infosystems. In addition, the policy requires employees to
acknowledge, and, if requested, assist in confirming Patient Infosystems'
ownership of any new ideas, developments, discoveries or inventions conceived
during employment, and requires assignment to Patient Infosystems of proprietary
rights to such matters that are related to Patient Infosystems' business.
Item 2. Description of Properties.
Patient Infosystems' executive and corporate offices are located in
Rochester, New York in approximately 6,500 square feet of leased office space.
American Caresource Holdings, Inc., a subsidiary of Patient Infosystems, leases
18,400 square feet of office space in Irving, Texas and 7,500 square feet of
office space in Pittsboro, Indiana. These operating leases expire at various
times between April 30, 2004 and July 31, 2008. Patient Infosystems expects to
extend those leases that expire during 2004 for a minimum of 12 months.
Patient Infosystems believes its offices are suitable to meet its current
needs.
Item 3. Legal Proceedings.
Neither Patient Infosystems, nor any of its subsidiaries, is a party to any
material legal proceeding, nor, to the knowledge of Patient Infosystems, is any
such proceeding threatened against it or any of its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders.
On December 31, 2003, Patient Infosystems held a special meeting of its
stockholders to vote on the following proposals:
1. Approval of an amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of capital stock to 100,000,000
divided into 80,000,000 shares of common stock, par value $0.01 per share
and 20,000,000 shares of preferred stock, par value $0.01 per share.
Vote results, Proposal 1:
------------------------ ---------------------- -----------------------
For Against Abstain
------------------------ ---------------------- -----------------------
48,170,647 445,940 6,920
------------------------ ---------------------- -----------------------
This proposal was approved by the majority of shares voted.
2. Approval of an amendment to the Company's Certificate of Incorporation to
change the Company's name to American CareSource Corporation.
Vote results, Proposal 2:
------------------------ ---------------------- -----------------------
For Against Abstain
------------------------ ---------------------- -----------------------
21,860,691 28,408,122 11,731
------------------------ ---------------------- -----------------------
This proposal was NOT approved by the majority of shares voted.
3. Approval of an amendment to the Company's Certificate of Incorporation to
provide for a 1 for 12 reverse stock split.
Vote results, Proposal 3:
------------------------ ---------------------- -----------------------
For Against Abstain
------------------------ ---------------------- -----------------------
50,220,884 56,700 2,890
------------------------ ---------------------- -----------------------
This proposal was approved by the majority of shares voted.
4. Approval of an amendment to the Company's Amended and Restated Stock Option
Plan to increase the number of authorized shares reserved for issuance
under the plan from 1,680,000 to 3,500,000 shares.
Vote results, Proposal 4:
------------------------ ---------------------- -----------------------
For Against Abstain
------------------------ ---------------------- -----------------------
48,506,897 112,710 3,900
------------------------ ---------------------- -----------------------
This proposal was approved by the majority of shares voted.
PART II
Item 5. Market Price for Registrant's Common Equity and Related Stockholder
Matters.
(a) Market Information
Patient Infosystems' common stock is traded on the Over-the-Counter
Bulletin Board (the "OTC Bulletin Board") under the symbol PATY. The following
table sets forth, for the periods indicated, the range of high and low bid
quotations for Patient Infosystems' common stock as quoted on the OTC Bulletin
Board. The reported bid quotations reflect inter-dealer prices without retail
markup, markdown or commissions, and may not necessarily represent actual
transactions. Prices set forth below have been adjusted to give effect to the
one for twelve reverse stock split which was approved by the stockholders on
December 31, 2003.
High Low
2002
First Quarter $2.40 $0.72
Second Quarter $2.40 $1.44
Third Quarter $3.60 $1.08
Fourth Quarter $6.12 $0.96
2003
First Quarter $3.12 $1.68
Second Quarter $3.00 $0.96
Third Quarter $3.00 $0.96
Fourth Quarter $4.08 $1.32
(b) Holders
The approximate number of record holders of Patient Infosystems' common
stock as of February 27, 2004 is 89. The approximate number of beneficial owners
is in excess of 750.
(c) Dividends
Patient Infosystems has not declared cash dividends on its common stock.
Patient Infosystems is obligated to declare 9% cumulative dividends on its
Series C Cumulative Convertible Preferred Stock that was issued on March 31,
2000 and its Series D Cumulative Convertible Preferred Stock that was issued
between April 2003 and January 2004.
(d) Recent sales of unregistered securities
On February 24, 2004, Patient Infosystems sold 592,500 shares of common
stock, for $1,185,000 to six accredited investors, under an exemption from
registration pursuant to Section 4(2) and Rule 506 of the Securities Act of
1933. There was $68,250 of fees paid and a warrant to purchase 12,500 shares of
Patient Infosystems common stock for $2.00 per share issued in connection with
these funds. Patient Infosystems has agreed to file a registration statement on
Form SB-2 for these shares by April 23, 2004.
Between April 2003 and January 2004, Patient Infosystems issued 840,118
shares of Series D 9% Cumulative Convertible Preferred Stock ("Series D
Preferred Stock") under the terms of the Note and Stock Purchase Agreement dated
April 11, 2003 and amended on September 10, 2003. There was no placement agent
and no commissions were paid to any party. These shares can be converted into
common stock at a rate of 10 shares of common stock to 1 share of Series D
Preferred Stock. Each share of Series D Preferred Stock has voting rights
equivalent to 10 shares of common stock. John Pappajohn and Derace Schaffer,
members of the Board of Directors of Patient Infosystems, held 424,233 and 5,318
shares of Series D Preferred Stock respectively. There was no placement agent
and no commissions were paid to any party. The proceeds from this issuance have
been used to repay debt and support the operations of Patient Infosystems'
subsidiary, American Caresource Holdings, Inc.
On December 31, 2003, $4,482,500 in debt and $438,099 of accrued interest
owed to Mr. Pappajohn and Dr. Schaffer was converted into 2,928,986 shares of
Patient Infosystems' common stock, adjusted for the 1 for 12 reverse stock split
that was approved by the shareholders on December 31, 2003. This debt conversion
transaction could not occur until the stockholders of Patient Infosystems
approved the amendment to the Certificate of Incorporation authorizing
sufficient capital stock on December 31, 2003. The shares were issued to
accredited investors under an exemption from registration pursuant to Section
4(2) and Rule 506 of the Securities Act of 1933. There was no placement agent
and no commissions were paid to any party. A date for a meeting of the
stockholders of Patient Infosystems has not yet been established.
On March 31, 2000, Patient Infosystems completed a private placement of
100,000 shares of newly issued Series C 9% Cumulative Convertible Preferred
Stock ("Series C Preferred Stock"), raising $1,000,000 in total proceeds. The
shares were sold to four accredited investors, under an exemption from
registration pursuant to Section 4(2) and Rule 506 of the Securities Act of
1933. There was no placement agent and no commissions were paid to any party.
Due to the effect of the anti-dilution provisions of the Series C Preferred
Stock and as a result of the issuance of the Series D Preferred Stock, these
shares can be converted into common stock at a rate of ten shares of common
stock to one share of Series C Preferred Stock. Each share of Series C Preferred
Stock has voting rights equivalent to 10 shares of common stock. John Pappajohn
and Derace Schaffer, members of the Board of Directors of Patient Infosystems,
purchased 50,000 and 25,000 shares of Series C Preferred Stock respectively. The
proceeds from this issuance have been used to support Patient Infosystems'
operations. In February 2004, certain holders of 25,000 shares of these Series C
Preferred Stock converted their shares into 250,000 shares of common stock.
On June 6, 2001, Patient Infosystems issued a total of 2,319,156 shares of
unregistered common stock to Mr. Pappajohn and Dr. Schaffer as consideration for
their continued financial support of Patient Infosystems. Based upon recent
trading of Patient Infosystems' common stock at the time of issuance, Patient
Infosystems assigned a fair market value of $0.15 per share or a total of
$347,873 to these unregistered shares and realized this amount as an operating
expense in June of 2001. The shares were issued to accredited investors under an
exemption from registration pursuant to Section 4(2) and Rule 506 of the
Securities Act of 1933. There was no placement agent and no commissions were
paid to any party.
Equity Compensation Plan Information
--------------------------------------------- -------------------- ---------------- ------------------------
Number of Weighted-average Number of
securities to be exercise securities
issued upon the price of remaining available
exercise of outstanding for future issuance
outstanding options, under equity
options, warrants warrants and compensation plans
and rights rights (excluding
securities
reflected in column(a))
(a) (b) (c)
--------------------------------------------- -------------------- ---------------- ------------------------
Equity compensation plans approved by
securities holders 101,160 $9.36 3,376,917
--------------------------------------------- -------------------- ---------------- ------------------------
Equity compensation plans not approved by
securities holders - - -
--------------------------------------------- -------------------- ---------------- ------------------------
Total 101,160 $9.36 3,376,917
--------------------------------------------- -------------------- ---------------- ------------------------
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's discussion and analysis provides a review of Patient
Infosystems' operating results for the fiscal years ended December 31, 2003 and
2002, and its financial condition at December 31, 2003. The focus of this review
is on the underlying business reasons for significant changes and trends
affecting the revenues, net losses and financial condition of Patient
Infosystems. This review should be read in conjunction with the accompanying
consolidated financial statements.
In an effort to give investors a well-rounded view of Patient Infosystems'
current condition and future opportunities, this Annual Report on Form 10-K
includes forecasts by Patient Infosystems' management about future performance
and results. Because they are forward-looking, these forecasts involve
uncertainties. They include risks of market acceptance of, or preference for,
Patient Infosystems' systems and services, competitive forces, the impact of,
and changes in, government regulations, general economic factors in the
healthcare industry, and other factors discussed in Patient Infosystems' filings
with the Securities and Exchange Commission.
Overview
Patient Infosystems was formed on February 22, 1995. Although Patient
Infosystems has completed the development of its core systems and has developed
several disease management programs for specific diseases, Patient Infosystems
is continuing to refine its products for additional applications. In October
1996, Patient Infosystems began enrolling patients in its first disease
management program and began substantial patient contacts during 1998. Also in
1998, Patient Infosystems expanded its offered products to include demand
management and health related surveys.
On December 31, 2003, Patient Infosystems acquired substantially all the
assets and liabilities of American Caresource Corporation in exchange for
1,100,000 shares of Patient Infosystems common stock. Patient Infosystems
created a wholly-owned subsidiary, American Caresource Holdings, Inc. ("ACS"), a
Delaware corporation, and assigned the acquired assets and liabilities into this
subsidiary, net of certain amounts which represented borrowings between Patient
Infosystems and American Caresource Corporation. ACS enters into agreements with
the providers of ancillary services pursuant to which ACS provides
administrative services for its contracted providers, including patient
scheduling services, call center services, payor contracting services, and
billing and collection services. ACS also enters into agreements with preferred
provider organizations ("PPOs"), third party administrators ("TPAs"), workers
compensation benefits administrators, utilization review companies, case
management companies and other healthcare networks pursuant to which ACS
provides ancillary benefits management services for these payor clients.
Because the acquisition of assets and the operation of ACS occurred on
December 31, 2003, the 2003 consolidated statement of operations of Patient
Infosystems does not include any ACS operational results. Patient Infosystems
acquired $1,118,567 of assets and assumed $2,368,327 of liabilities, resulting
in a deficiency on the fair value of the net assets acquired of $1,249,760.
During 2004, Patient Infosystems will complete an independent valuation of the
identifiable intangible assets acquired and any changes to the estimated amounts
will be offset by a corresponding change in goodwill.
Patient Infosystems currently has patients enrolled in more than 30 of its
disease-specific, demand management or survey programs. Through January 2004, an
aggregate of over 775,000 persons have been enrolled or participated in Patient
Infosystems' programs. Patient Infosystems has never been able to enroll a
sufficient number of patients to cover the administrative cost of the business.
The enrollment of patients in Patient Infosystems' programs has been limited by
several factors, including the limited ability of clients to provide Patient
Infosystems with accurate information with respect to the specific patient
populations and coding errors that necessitated extensive labor-intensive data
processing prior to program implementation.
In response to these market dynamics, Patient Infosystems has taken several
tactical and strategic steps including, formal designation of internal personnel
at customer sites to assist clients with implementation; closer integration of
Patient Infosystems' systems personnel with clients to facilitate accurate data
transfers; promotion of a broader product line to enable clients to enter
Patient Infosystems' disease management programs through a variety of channels;
fully integrating demand, disease and case management services to facilitate
internal mechanisms for patient referrals and providing the customers access and
control over their patients' confidential information through targeted use of
Internet technology. The clinical design of the programs has been refined to
enable participation through mail only, retaining those patients who previously
would have been unable to participate because of missing or inaccurate telephone
contact information. Patient Infosystems' demand management services and surveys
(general health and disease-specific), can also provide mechanisms for
enrollment into Patient Infosystems' disease management programs. Patient
Infosystems continues to develop capabilities or relationships that will enable
its customers to more effectively leverage the data stored in their legacy
systems. Nevertheless, no assurance can be given that Patient Infosystems'
efforts will succeed in increasing patient enrollment in its programs.
Patient Infosystems has entered into service agreements to develop,
implement and operate programs for: (i) patients who have recently experienced
certain cardiovascular events; (ii) patients who have been diagnosed with
primary congestive heart failure; (iii) patients suffering from asthma; (iv)
patients suffering from diabetes, (v) patients who are suffering from
hypertension, (vi) demand management, which provides access to nurses, (vii)
case and utilization management services provided by a third party, (viii)
various survey initiatives which assess, among other things, satisfaction,
compliance of providers or payors to national standards, health status or risk
of specific health related events and (ix) the performance of specific
administrative and management functions on behalf of a customer. These contracts
provide for fees paid by its customers based upon the number of patients
participating in each of its programs, as well as initial program implementation
and set-up fees from customers. To the extent that Patient Infosystems has had
limited enrollment of patients in its programs, Patient Infosystems' operations
revenue has been, and may continue to be, limited.
Patient Infosystems has completed the development of its primary disease
management programs, it anticipates that development revenue will continue to be
minimal unless and until Patient Infosystems enters into new development
agreements. Substantially all of the development revenue recognized during the
years ended December 31, 2003, 2002 and 2001 of $51,110, $36,239 and $78,632
related to requested feature modification or customization. These revenues are
recognized upon completion and delivery of the requested feature.
Patient Infosystems' contracts typically call for a fee to be paid by the
customer for each patient enrolled for a series of program services, require
payment for services incrementally as they are delivered or require payment of a
fixed fee per patient or member each month for bundled program services. The
timing of customer payments for the delivery of program services varies by
contract. Revenues from program operations are recognized ratably as the program
services are delivered. The amount of the per patient fee varies from program to
program depending upon the number of patient contacts required, the complexity
of the interventions, the cost of the resources used and the detail of the
reports generated.
Patient Infosystems' administration and management services cover a
predefined set of deliverables and responsibilities undertaken on behalf of the
customer. The customer pays for these services on a monthly basis and Patient
Infosystems recognizes revenue each month based upon the services provided.
During the year ended December 31, 2003, revenues received for administrative
and management services were the most significant source of revenue. The
services included: assisting organizations with the development of clinical
registries used to increase effective management of patients with chronic
disease. Patient Infosystems is supporting the development, including project
management and implementation, of a patient registry for federally qualified
health centers, through a national initiative known as the Health Disparities
Collaboratives. The contract for these services is renewed annually. No
assurances can be given that Patient Infosystems will be able to retain his
source of revenue at its current level if at all.
Revenues from operations of $2,241,796 for the year ended December 31,
2003, which includes fees received by Patient Infosystems for operating its
programs, is the most strategically important source of Patient Infosystems'
revenues. Patient Infosystems is continuing to devote significant efforts to
increasing the number of programs that are in operation, as well as developing
resources to expand its products. The revenue from these services currently
exceeds the cost to provide them, but the volume of patients must grow
substantially in order to provide sufficient operating margin to cover the
administrative overhead of Patient Infosystems.
During 2003, Patient Infosystems found new sources of revenue that
increased its revenue from $2.4 million for the fiscal year ended December 31,
2002 to $5.7 million for the same period of 2003. Patient Infosystems maintained
control on costs and reduced its operating loss from $1.7 million for the fiscal
year ended December 31, 2002 to $0.6 million for the same period of 2003. The
most significant new sources of revenue were (i) Provider Innovation and
Improvement support services provided to the Institute for Healthcare
Improvement which provided $3.2 million of revenue in 2003 as compared to $0.1
million in 2002, (ii) Care Team Connect service provided to Park Place
Entertainment which provided $0.6 million of new revenue in 2003 and (iii) the
Care Team Connect smoking cessation program which provided $0.5 million of new
revenue in 2003. No assurances can be given that revenue from these sources will
continue at their current level, if at all, in future periods.
One source of additional new revenue in 2004 is ACS. ACS recognizes
revenues for ancillary services when services by providers have been authorized
and performed and collections from payors are reasonably assured. Patient claims
revenues are recognized by ACS as services are provided. Cost of revenues for
ancillary services consist of expenses due to providers for providing employee
(patient) services and ACS' related direct labor and overhead of processing
invoices, collections and payments. ACS is not liable for costs incurred by
independent contract service providers until payment is received by ACS from the
payors. ACS recognizes actual or estimated liabilities to independent contract
service providers as the related revenues are recognized. Patient claim costs of
revenue consist of amounts due the providers as well as ACS' direct labor and
overhead to administer the patient claims. ACS has never operated at a profit,
and will require significant growth in either claims volume from existing
contracts, new contracts or both in order to generate sufficient operational
margin to become profitable. No assurances can be given that sufficient sources
of new revenue will be identified and other sources of capital will have to be
secured by Patient Infosystems to support these operations. If Patient
Infosystems in unable to generate enough working capital either from its own
operations or through the sale of its equity securities, ACS may be required to
curtail or cease operations.
The sales cycle for Patient Infosystems may be extensive from initial
contact to contract execution. During these periods, Patient Infosystems may
expend substantial time, effort and funds to prepare a contract proposal and
negotiate the contract. Patient Infosystems may be unable to consummate a
commercial relationship after the expenditure of such time, effort and financial
resources.
During 2003, the pressure of working capital shortfalls eased for Patient
Infosystems. Patient Infosystems' had $123,998 of net cash provided by operating
activities during 2003. During 2003. Patient Infosystems raised an additional
$3.5 million of working capital and an additional $1.6 million as of March 31,
2004, through and the sale of its equity securities. These additional funds are
being used to provide working capital for ACS. Patient Infosystems and ACS
continue to incur losses and must identify substantial additional capital to
sustain its operations. ACS' working capital shortfall is currently being funded
by Patient Infosystems. There can be no assurances given that Patient
Infosystems can raise either the required working capital through the sale of
its securities or that Patient Infosystems can borrow the additional amounts
needed. In such instance, if Patient Infosystems is unable to identify any
additional sources of capital, it will likely be forced to curtail or cease its
operations or the operations of ACS. As a result of the above, the Independent
Auditors' Report on Patient Infosystems' consolidated financial statements
appearing at Item 15 includes an emphasis paragraph indicating that Patient
Infosystems' recurring losses from operations, negative working capital and
stockholders' deficit raise substantial doubt about Patient Infosystems' ability
to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Results of Operations
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenues
Revenues are comprised of revenues from operations fees, development fees
and licensing fees. Revenues increased 141% to $5,687,293 for the fiscal year
ended December 31, 2003 from $2,355,677 for the fiscal year ended December 31,
2002. A summary of these revenues by category is as follows for the fiscal years
ended December 31:
Revenues 2003 2002
-------- -------------- --------------
Operations Fees $ 2,241,796 $ 2,125,522
Consulting Fees 3,391,867 168,606
Development Fees 51,110 36,239
Licensing Fees 2,520 25,310
-------------- --------------
Total $ 5,687,293 $ 2,355,677
============== ==============
Revenues from operations fees increased 5.5% from $2,125,522 for the fiscal
year ended December 31, 2002 to $2,241,796 for the fiscal year ended December
31, 2003. Operations revenues are generated as Patient Infosystems provides
services to its customers for their disease-specific programs, patient surveys,
health risk assessments, patient satisfaction surveys, physician education
programs and marketing support programs. Operations revenues increased in 2002
due to the growth of its disease and demand management business despite the loss
of $1,125,823 of revenue from a customer who terminated as of December 31, 2002.
This growth is attributable primarily to Park Place Entertainment which added
$622,067 of new revenues and a new smoking cessation program which added
$491,362 of new revenues. Patient Infosystems has devoted the majority of its
sales and marketing efforts toward increasing revenue from operations, and
anticipates that it will retain most of its existing business and continue to
add additional new clients. No assurances can be given that these revenues will
increase, or that any change will be material to Patient Infosystems operating
results.
Revenues from consulting increased 1,912% from $168,606 for the fiscal year
ended December 31, 2002 to $3,391,867 for the fiscal year ended December 31,
2003. This increase is due to Patient Infosystems' expanded role in support of
the Health Disparities Collaboratives funded by the Bureau of Primary Healthcare
and administered by the Institute for Healthcare Improvement. Revenues from
consulting may increase during 2004. No assurances can be given that these
revenues will increase, or that any change will be material to Patient
Infosystems operating results.
Revenues from development fees increased 41% from $36,239 for the fiscal
year ended December 31, 2002 to $51,110 for the fiscal year ended December 31,
2003. In 2002 and 2003, Patient Infosystems received development revenues in
connection with the enhancement of its existing programs. Development revenues
include clinical, technical and operational design or modification of Patient
Infosystems' primary disease management programs. Patient Infosystems
anticipates that revenue from development fees will remain immaterial.
Revenues from licensing fees decreased 90% from $25,310 for the fiscal year
ended December 31, 2002 to $2,520 for the fiscal year ended December 31, 2003.
Licensing revenue represents amounts that Patient Infosystems charges its
customers, either on a one-time only or continuing basis, for the right to
enroll patients in, or the right to license other entities, certain of its
programs, primarily Patient Infosystems' Internet-based Case Management Support
System. Patient Infosystems anticipates that revenue from licensing will remain
immaterial in future periods.
Costs and Expenses
Cost of sales includes salaries and related benefits, services provided by
third parties, and other expenses associated with the development of Patient
Infosystems' customized disease state management programs, as well as the
operation of each of its disease state management programs.
Cost of sales increased 117.4% from $1,914,464 for the fiscal year ended
December 31, 2002 to $4,162,759 for the fiscal year ended December 31, 2003. The
increase in these costs primarily reflects an $1,187,960 increase in the use of
outsourced services and addition of $893,680 in staff costs related to the 141%
increase in revenue.
Sales and marketing expenses increased 19.8% from $746,353 for the fiscal
year ended December 31, 2002 to $893,833 for the fiscal year ended December 31,
2003. These costs consist primarily of salaries, related benefits and travel
costs, sales materials and other marketing related expenses. Increased spending
in this area is attributed primarily to an $155,051 increase in staff related
expenses. It is anticipated that Patient Infosystems will need to invest heavily
in the sales and marketing process in future periods, and intends to do so as
funds are available. To the extent that Patient Infosystems has limited funds
available for sales and marketing, or cannot leverage its marketing partnerships
adequately, it will likely be unable to invest in the necessary marketing
activities to generate substantially greater sales.
General and administrative expenses include the costs of corporate
operations, finance and accounting, human resources and other general operating
expenses of Patient Infosystems. General and administrative expenses decreased
12.2% from $1,282,683 for the fiscal year ended December 31, 2002 to $1,125,926
for the fiscal year ended December 31, 2003. Patient Infosystems expects that
general and administrative expenses will increase during 2004 due to the
addition of the administrative costs of its new subsidiary, American Caresource
Holdings, Inc. and then remain relatively constant in future periods, but may
experience fluctuations due to uncertainties related to financing costs.
Research and development expenses consist primarily of salaries and related
benefits and administrative costs allocated to Patient Infosystems' research and
development personnel for development of certain components of its integrated
information capture and delivery system, its Internet-based software products
and its standardized disease state management programs. Research and development
expenses decreased 24.8% from $105,614 for the fiscal year ended December 31,
2002 to $131,782 for the fiscal year ended December 31, 2003. The addition of
American Caresource Holdings, Inc. is expected to increase overall research and
development expenses during 2004. Patient Infosystems expects these costs to
remain approximately at 15% of its total investment into information technology
resources.
Financing costs were $2,143,120 in 2003. This cost relates to the issuance
of equity to, and incurrence of debt from, certain lenders pursuant to the Note
and Stock Purchase Agreement dated April 10, 2003 and as amended on September
11, 2003, pursuant to which the lenders agreed to make short term loans to the
Company. The total value received by the lenders from the Company under the Note
and Stock Purchase Agreement as amended was $8,852,458. In accordance with APB
Opinion No. 14, a portion of the cash received totaling $2,143,120 for year
ended December 31, 2003 is allocable to equity resulting in a debt discount in
that same amount, which was fully amortized as of December 31, 2003.
Other Income/Expense is comprised of interest expense and losses on
investments. The totals are as follows for the fiscal years ended December 31:
2003 2002
------------------ -----------------
Interest expense $ (753,685) $ (535,269)
Interest income 145,473
Other income (expense) 376 4,345
------------------ -----------------
Total Expense $ (607,836) $ (530,924)
------------------ -----------------
Interest expense is due to debt. Interest expense increased to $753,685 for
the fiscal year ended December 31, 2003 from $535,269 for the fiscal year ended
December 31, 2002. The increase in interest expense reflects the increased debt
required to fund operations and obtain capital which was loaned to American
Caresource Corporation.
Interest income was realized from loans to American Caresource Corporation,
which offset substantially all interest expense which Patient Infosystems
incurred to obtain these funds.
Patient Infosystems had no tax benefit in 2003 due, in part, to recording a
full valuation allowance to reduce its deferred tax assets. Patient Infosystems'
deferred tax assets consist primarily of the tax benefit associated with its net
operating loss carryforwards.
Management of Patient Infosystems has evaluated the available evidence
about future taxable income and other possible sources of realization of
deferred tax assets. The valuation allowance reduces deferred tax assets to
zero, which represents management's best estimate of the amount of such deferred
tax assets that more likely than not will be realized.
For the fiscal year ended December 31, 2003, Patient Infosystems recorded
$7,671,557 in dividends on convertible preferred stock as compared to $90,000
for the year ended December 31, 2002. The increase was due to: (i) $153,257 of
dividends on 830,100 shares of Series D 9% Cumulative Convertible Preferred
Stock ("Series D Preferred Stock") which was issued at various times between
April and December 2003, (ii) a $2,143,120 beneficial conversion feature related
to shares of Series D Preferred Stock issued to certain lenders in connection
with borrowings and (iii) $5,285,180 beneficial conversion feature for the
shares of Series D Preferred Stock issued on December 31, 2003 upon the exercise
of the lender's option to convert their debt and accrued interest.
Patient Infosystems had a net loss attributable to common stockholders of
$11,049,518 for the fiscal year ended December 31, 2003, compared to $2,314,361
for the fiscal year ended December 31, 2002. This represents a loss of $3.25 per
basic and diluted share for 2003 and $2.36 for 2002, after giving effect to the
1 for 12 reverse stock split which was approved by the shareholders on December
31, 2003.
Liquidity and Capital Resources
At December 31, 2003, Patient Infosystems had a working capital deficit of
$2,808,649 as compared to a working capital deficit of $6,135,451 at December
31, 2002. At December 31, 2003, Patient Infosystems had a stockholders' equity
of $1,936,376. Through December 31, 2003 these amounts reflect the effects of
Patient Infosystems' continuing losses that have been funded, in part, by the
issuance of equity and long term borrowings of $3,000,000 against its line of
credit. Patient Infosystems has never earned profits and, since its inception,
Patient Infosystems has primarily funded its operations, working capital needs
and capital expenditures from the sale of its equity securities. Patient
Infosystems is currently maintaining it operations only through the receipt of
proceeds from the sale of equity securities. If these additional funds were not
available, Patient Infosystems would likely be required to reduce its
operations, reduce or cease the operations of American Caresource Holdings, Inc.
or take other measures to curtail its losses.
In December 1999, Patient Infosystems established a credit facility for
$1,500,000 guaranteed by Derace Schaffer and John Pappajohn, two directors of
Patient Infosystems. In March 2000, the facility was increased by $1,000,000
under substantially the same terms, also guaranteed by the same Board members.
On March 28, 2001, Patient Infosystems entered into an Amended and Restated
Credit Agreement with Wells Fargo Bank Iowa, N.A. ("Wells Fargo"), which
extended the term of Patient Infosystems' credit facility to March 31, 2002
under substantially the same terms. Dr. Schaffer and Mr. Pappajohn guaranteed
this extension.
On March 28, 2002, Wells Fargo extended the term of the credit facility to
March 31, 2003 under substantially the same terms. Dr. Schaffer and Mr.
Pappajohn also guaranteed this extension.
On June 28, 2002, Patient Infosystems and Wells Fargo agreed on an addendum
to the Amended and Restated Credit Agreement which extends the credit facility
by an additional $500,000, increasing the total credit facility to $3,000,000.
Mr. Pappajohn and Dr. Schaffer also guaranteed this extended credit facility.
On March 28, 2003, Wells Fargo extended the term of the credit facility to
January 2, 2004 under substantially the same terms. Dr. Schaffer and Mr.
Pappajohn also guaranteed this extension.
On December 31, 2003, Patient Infosystems and Wells Fargo further amended
the credit facility and is due and payable on June 30, 2005. Dr. Schaffer and
Mr. Pappajohn also guaranteed this extension. In consideration for their
guarantees, in February 2004 the Company granted to Dr. Schaffer and Mr.
Pappajohn warrants to purchase an aggregate of 47,500 shares of Series D
Convertible Preferred Stock, convertible into 475,000 shares of the Company's
common stock for $10.00 per preferred share.
January 2004, Patient Infosystems borrowed $200,000 from Mr. Pappajohn, a
director of the Company, in exchange for an unsecured note that bore no interest
if repaid on or before March 31, 2004. The note was repaid on March 29, 2004 and
bore no interest as of that date.
On March 30, 2004, Mr. Pappajohn and Mr. Schaffer signed a letter to
Patient Infosystems in which they committed to obtain the operating funds that
Patient Infosystems believes would be sufficient to fund its operations through
December 31, 2004. There can be no assurances given that Mr. Pappajohn or Dr.
Schaffer can raise either the required working capital through the sale of
Patient Infosystems' securities or that Patient Infosystems can borrow the
additional amounts needed.
Patient Infosystems has expended significant amounts to expand its
operational capabilities including increasing its administrative and technical
costs. While Patient Infosystems has both curtailed its spending levels and
increased its revenue, to the extent that American Caresourse Holdings, Inc.
revenues do not increase substantially, Patient Infosystems' losses will
continue and its available capital will diminish further. Patient Infosystems'
operations are currently being funded by the sale of equity securities. There
can be no assurances given that Patient Infosystems can raise either the
required working capital through the sale of its securities or that Patient
Infosystems can borrow the additional amounts needed. In such instance, if
Patient Infosystems is unable to identify additional sources of capital, it will
likely be forced to curtail or cease operations. As a result of the above, the
Independent Auditors' Report on Patient Infosystems' consolidated financial
statements includes an emphasis paragraph indicating that Patient Infosystems'
recurring losses from operations raise substantial doubt about Patient
Infosystems' ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Capital expenditures during 2003 were $34,185, as compared to expenditures
of $8,867 during 2002 and $9,240 during 2001. The expenditures during these
periods represented the purchase of technology platform components of the
integrated information capture and delivery systems, as well as purchases
required to maintain Patient Infosystems' technology infrastructure. On December
31, 2003, Patient Infosystems acquired substantially all the assets and assumed
substantially all the liabilities of American Caresource Corporation. Included
among the assets acquired was $152,480 of capital assets, which consisted of
computer hardware and software, furnishings, fixtures and leasehold
improvements.
Inflation
Inflation did not have a significant impact on Patient Infosystems'
operations during 2003, 2002 or 2001. Patient Infosystems continues to monitor
the impact of inflation in order to minimize its effects through pricing
strategies, productivity improvements and cost reductions.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46").
FIN 46 requires disclosure about variable interest entities for which it is
reasonably possible that the Company will be required to consolidate or disclose
information when the Interpretation becomes effective. The Company has
determined that it does not have any variable interest entities which would
require consolidation in accordance with FIN 46.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity, ("SFAS No. 150"). SFAS No. 150 establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). The adoption of SFAS No. 150 in
2003 did not have an effect on the Company's consolidated financial statements.
Critical Accounting Policies
The SEC recently issued disclosure guidance for critical accounting
policies. The SEC defines critical accounting policies as those that require
application of management's most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods.
Patient Infosystems significant accounting policies are described in Note 1
to the Consolidated Financial Statements. Not all of these significant
accounting policies require management to make difficult, subjective or complex
judgments or estimates. However, the following accounting policies could be
deemed to be critical by the Securities and Exchange Commission.
Use of Estimates. In preparing the consolidated financial statements
Patient Infosystems uses estimates in determining the economic useful lives of
its assets, provisions for doubtful accounts, tax valuation allowances and
various other recorded or disclosed amounts. Estimates require management to use
its judgment. While Patient Infosystems believes that its estimates for these
matters are reasonable, if the actual amount is significantly different than the
estimated amount, its assets, liabilities or results of operations may be
overstated or understated.
Impairment of Long-Lived Assets. Patient Infosystems records impairment
losses on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted future cash
flows estimated to be generated by those assets are less than the carrying
amount of those assets. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of the asset to future net cash flows
expected to be generated by the asset. If the asset is considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. If the actual
value is significantly less than the estimated value, Patient Infosystems assets
may be overstated.
Item 7. Financial Statements and Supplemental Data.
The financial statements and supplementary data, together with the report
thereon by Patient Infosystems independent auditor, are listed below in Item 13.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 8A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our Chief Executive Officer and
Vice President, Financial Planning, has evaluated the effectiveness of our
disclosure controls and procedure as of December 31, 2003. Based upon this
evaluation, our Chief Executive Officer and Vice President, Financial Planning
concluded that our disclosure controls and procedures are effective for the
recording, processing, summarizing and reporting the information that the
Company is required to disclose in the reports it files under the Securities
Exchange Act of 1934, within the time periods specified in the SEC's rules and
forms. Such evaluation did not identify any change in our internal control over
financial reporting that occurred during the quarter ended September 30, 2003
that has materially affected, or is reasonably likely to affect, our internal
control over financial reporting.
(b) Changes in Internal Controls.
There were no significant changes in Patient Infosystems' internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses
PART III
Item 9. Directors and Executive Officers of the Registrant.
Incorporated by reference to the Company's Proxy Statement for its Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the year ended December 31, 2003.
Item 10. Executive Compensation.
Incorporated by reference to the Company's Proxy Statement for its Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the year ended December 31, 2003.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the Company's Proxy Statement for its Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the year ended December 31, 2003.
Item 12. Certain Relationships and Related Transactions.
Incorporated by reference to the Company's Proxy Statement for its Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the year ended December 31, 2003.
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following financial statements and schedules are filed at the end of
this annual report, beginning on page F-1. Other schedules are omitted
because they are not required or are not applicable or the required
information is shown in the consolidated financial statements or notes
thereto.
Index to Financial Statements Page
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity (Deficit) F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
Schedule II - Valuation and Qualifying Accounts S-1
(b) Reports on Form 8-K.
Patient Infosystems filed a current report on Form 8-K on December 9, 2003
announcing the adjournment of its special meeting until December 23, 2003.
Patient Infosystems filed a current report on Form 8-K on December 23, 2003
announcing the adjournment of its special meeting until December 31, 2003.
Patient Infosystems filed a current report on Form 8-K on December 31, 2003
filing a copy of a press release dated December 31, 2003 that announced the
closing of the acquisition of American CareSource, reverse stock split and
results of special meeting of stockholders.
Patient Infosystems filed a current report on Form 8-K on January 9, 2004
with a copy of a press release announcing the reverse stock split and the new
ticker symbol PATY.
Patient Infosystems filed a current report on Form 8-K on January 15, 2004
reporting the acquisition and disposition of assets.
Patient Infosystems filed a current report on Form 8-K on February 13, 2004
filing a copy of a press release announcing that Patient Infosystems, Inc. would
present at Roth Capital Partners 16th Annual Growth Stock Conference.
Patient Infosystems filed a current report on Form 8-K/A on March 15, 2004
updating the information provided in the report on Form 8-K dated January 15,
2004, reporting the financial information required in Item 7 thereof.
(c) Exhibits.
Exhibit # Description of Exhibits
3.1 Certificate of Amendment to the Certificate of Incorporation
3.2 * By-Laws
4.1 Patient Infosystems, Inc. Amended and Restated Stock Option Plan
4.2 *** Certificate of Designations, Powers, Preferences and Relative,
Participating, Optional or Other Special Rights, and the
Qualifications, Limitations Thereof of the Series C Preferred Stock
of Patient InfoSystems, Inc.
10.20 + Lease Agreement dated as of February 22, 1995 between Patient
Infosystems and Conifer Prince Street Associates.
10.21 + First Addendum to Lease Agreement dated as of August 22, 1995
between Patient Infosystems and Conifer Prince Street Associates.
10.22 + Second Addendum to Lease Agreement dated as of November 17, 1995
between Patient Infosystems and Conifer Prince Street Associates.
10.23 + Third Addendum to Lease Agreement dated as of March 28, 1996
between Patient Infosystems and Conifer Prince Street Associates.
10.24 + Fourth Addendum to Lease Agreement dated as of October 29, 1996
between Patient Infosystems and Conifer Prince Street Associates.
10.25 + Fifth Addendum to Lease Agreement dated as of November 30, 1996
between Patient Infosystems and Conifer Prince Street Associates.
10.26 + Sixth Addendum to Lease Agreement dated as of November 24, 1997
between Patient Infosystems and Conifer Prince Street Associates.
10.30 ++ Seventh Addendum to Lease Agreement dated as of June 16, 1999
between Patient Infosystems and Conifer Prince Street Associates.
10.33 ++ Revolving Note dated as of December 23, 1999 between Patient
Infosystems and Norwest Bank Iowa, National Association.
10.34 ++ Credit Agreement dated as of December 23, 1999 between Patient
Infosystems and Norwest Bank Iowa, National Association.
10.35 ++ Security Agreement dated as of December 23, 1999 between Patient
Infosystems and Norwest Bank Iowa, National Association.
10.36 ++ Arbitration Agreement dated as of December 23, 1999 between Patient
Infosystems and Norwest Bank Iowa, National Association.
10.37 ++ Financing Statement executed by Patient Infosystems and Norwest Bank
Iowa, National Association.
10.38 ++ First Amendment to Credit Agreement dated as of March 21, 2000
between Patient Infosystems and Norwest Bank Iowa, National
Association.
10.39 ++ Note Modification Agreement dated as of March 21, 2000 between
Patient Infosystems and Norwest Bank Iowa, National Association.
10.41 *** Form of Subscription Agreement dated on or about March 31,
2000 between Patient Infosystems and John Pappajohn, Derace
Schaffer, Gerald Kirke and Michael Richards for Series C 9%
Cumulative Convertible Preferred Stock.
10.42 *** Form of Registration Rights Agreement dated on or about
March 31, 2000 between Patient Infosystems and John Pappajohn,
Derace Schaffer, Gerald Kirke and Michael Richards for Series
C 9% Cumulative Convertible Preferred Stock.
10.43 *** Eighth Addendum to Lease Agreement dated as of December 8, 2000
between Patient Infosystems and Conifer Prince Street Associates.
10.45 *** Amended and Restated Credit Agreement dated as of March 28, 2001
between Patient Infosystems and Wells Fargo Bank Iowa, National
Association.
10.46 *** Revolving Note dated as of March 28, 2001 between Patient
Infosystems and Wells Fargo Bank Iowa, National Association.
10.47 *** Form of Promissory Notes payable to Dr. Schaffer and Mr. Pappajohn.
10.48 *** Form of Security Agreements with Dr. Schaffer and Mr. Pappajohn.
10.49 *** Ninth Addendum to Lease Agreement dated as of January 7, 2002
between Patient Infosystems and Conifer Prince Street Associates.
10.50 # Letter of Agreement dated as of March 25, 2002 between Patient
Infosystems, John Pappajohn and Derace Schaffer.
10.51 # Second Amended and Restated Credit Agreement dated as of March 28,
2002 between Patient Infosystems and Wells Fargo Bank Iowa, National
Association.
10.52 # Revolving Note dated as of March 28, 2002 between Patient
Infosystems and Wells Fargo Bank Iowa, National Association.
10.53 # Security Agreement dated as of March 28, 2002 between Patient
Infosystems and Wells Fargo Bank Iowa, National Association.
10.54 ## Addendum to Amended and Restated Credit Agreement dated as of June
28, 2002 between Patient Infosystems and Wells Fargo Bank Iowa,
National Association.
10.55 ## Agreement for Purchase and Sale of Assets dated as of September 23,
2002 between Patient Infosystems and American CareSource
Corporation.
10.56 ### Tenth Addendum to Lease Agreement dated as of June 24, 2002 between
Patient Infosystems and Conifer Prince Street Associates.
10.57 ### Eleventh Addendum to Lease Agreement dated as of December 30, 2002
between Patient Infosystems and Conifer Prince Street Associates.
10.58 ### Letter of Agreement dated as of March 28, 2003 between Patient
Infosystems, John Pappajohn and Derace Schaffer.
10.59 ### Second Addendum to Second Amended and Restated Credit Agreement
dated as of March 28, 2003 between Patient Infosystems and Wells
Fargo Bank, National Association.
10.60 ### Modification Agreement dated as of March 28, 2003 between Patient
Infosystems and Wells Fargo Bank, National Association.
10.61 ^ Amended and Restated Agreement for the Purchase and Sale of Assets
among Patient Infosystems, Inc., American Caresource Corporation,
formerly known as Health Data Solutions, and the Stockholders
Signatory hereto, dated April 10, 2003.
10.62 ^ Note and Stock Purchase Agreement between Patient Infosystems, Inc.
and a group of investors, dated April 10, 2003.
10.63 ^ Patient Infosystems, Inc. Series D Convertible Preferred Stock
Registration Right Agreement dated April 10, 2003.
10.64 ^ Credit Agreement between American Caresource Corporation and Patient
Infosystems, Inc. dated April 10, 2003.
10.65 ^^ Twelfth Addendum to Lease Agreement dated as of April 28, 2003
between Patient Infosystems and Conifer Prince Street Associates.
10.66 ^^ Thirteenth Addendum to Lease Agreement dated as of June 27, 2003
between Patient Infosystems and Conifer Prince Street Associates.
10.67 ^^^ Amendment No. 1 to the Amended and Restated Agreement for the
Purchase and Sale of Assets dated as of July 30, 2003 between
Patient Infosystems and American Caresource Corporation.
10.68 ^^^ Amendment No. 1 to the Note and Stock Purchase Agreement dated as of
September 11, 2003 between Patient Infosystems and a group of
investors.
10.69 ^^^ Amendment No. 1 to the Credit Agreement dated as of July 30, 2003
between Patient Infosystems and American Caresource Corporation.
10.70 ^^^ Amendment No. 2 to the Amended and Restated Agreement for the
Purchase and Sale of Assets dated as of October 8, 2003 between
Patient Infosystems and American Caresource Corporation.
10.71 Third Addendum to Second Amended and Restated Credit Agreement dated
as of December 31, 2003 between Patient Infosystems and Wells Fargo
Bank, National Association.
10.72 Form of Securities Purchase Agreement.
11 Statements re: computation of Per Share Loss the year ended
December 31, 2003 can be found in the Patient Infosystems,
Inc. Consolidated Financial Statements for the years ended
December 31, 2003, 2002and 2001 in Note 1, "Net loss pre
share" on page F-9 of Form 10-KSB, and is incorporated herein
by reference.
21.1 Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Principal Accounting Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
------------------------------------
* Previously filed with the Securities and Exchange Commission
as an Exhibit to the Registration Statement on Form S-1 filed
on July 3, 1996 and incorporated herein by reference.
** Previously filed with the Securities and Exchange Commission
as an Exhibit to the Registration Statement on Form S-8 filed
on May 3, 2000 and incorporated herein by reference.
*** Previously filed with the Securities and Exchange Commission
as an Exhibit to the Annual Report on Form 10-K filed on April
2, 2001 and incorporated herein by reference.
+ Previously filed with the Securities and Exchange Commission
as an Exhibit to the Annual Report on Form 10-K filed on April
13, 1999 and incorporated herein by reference.
++ Previously filed with the Securities and Exchange Commission
as an Exhibit to the Annual Report on Form 10-K filed on March
30, 2000 and incorporated herein by reference.
# Previously filed with the Securities and Exchange Commission
as an Exhibit to the Annual Report on Form 10-K filed on April
10, 2002 and incorporated herein by reference.
## Previously filed with the Securities and Exchange Commission
as an Exhibit to the Quarterly Report on Form 10-Q filed on
November 14, 2002 and incorporated herein by reference.
### Previously filed with the Securities and Exchange Commission
as an Exhibit to the Annual Report on Form 10-K filed on March
31, 2003 and incorporated herein by reference.
^ Previously filed with the Securities and Exchange Commission
as an Exhibit to the Quarterly Report on Form 10-QSB filed on
May 15, 2003 and incorporated herein by reference.
^^ Previously filed with the Securities and Exchange Commission
as an Exhibit to the Quarterly Report on Form 10-QSB filed on
August 15, 2003 and incorporated herein by reference.
^^^ Previously filed with the Securities and Exchange Commission
as an Exhibit to the Quarterly Report on Form 10-QSB filed on
November 14, 2003 and incorporated herein by reference.
Item 14 Principal Accountant Fees and Services.
Incorporated by reference from the Item 9(e) of Schedule 14A to be filed
with the Securities and Exchange Commission within 120 days after the close of
the year ended December 31, 2003.
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PATIENT INFOSYSTEMS, INC.
By: /s/Roger L. Chaufournier March 30, 2004
-------------------------------------------- --------------
Roger L. Chaufournier Date
Director, President, and Chief Executive Officer
Pursuant to the requirements the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/Roger L. Chaufournier March 30, 2004
-------------------------------------------- --------------
Roger L. Chaufournier Date
Director, President and Chief Executive Officer
(Principal Executive Officer)
By: /s/Kent A. Tapper March 30, 2004
-------------------------------------------- --------------
Kent A. Tapper Date
Vice President Financial Planning
(Principal Financial and Accounting Officer)
By: /s/Derace L. Schaffer, M.D. March 30, 2004
-------------------------------------------- --------------
Derace L. Schaffer, M.D. Date
Chairman of the Board
By: /s/John Pappajohn March 30, 2004
-------------------------------------------- --------------
John Pappajohn Date
Director
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Patient InfoSystems, Inc.
Rochester, New York
We have audited the accompanying consolidated balance sheets of Patient
Infosystems, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
2003. Our audits also included the financial statement schedule listed in the
Index at Item 13. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Patient Infosystems, Inc. and
subsidiaries at December 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2003, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations and negative working capital raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning this
matter are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Rochester, New York
March 30, 2004
F-1
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
-------------------------------------------------------------------------------------------------- ------------------
ASSETS 2003 2002
CURRENT ASSETS:
Cash and cash equivalents $ 397,851 $ 5,011
Accounts receivable (net of doubtful accounts allowance of $52,141 and $55,000) 771,258 441,216
Prepaid expenses and other current assets 156,729 105,827
Notes receivable - 200,000
----------------- ------------------
Total current assets 1,325,838 752,054
PROPERTY AND EQUIPMENT, net 305,551 285,747
OTHER ASSETS:
Intangible assets (net of accumulated amortization of $586,830 and $443,258) 497,893 179,465
Goodwill 6,981,876
----------------- ------------------
TOTAL ASSETS $ 9,111,158 $ 1,217,266
----------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Bank overdraft $ 189,608 $ -
Accounts payable 1,337,862 379,004
Accrued salaries and wages 442,299 208,752
Accrued expenses 1,472,445 351,621
Accrued interest 61,558 713,554
Current maturities of long-term debt 294,117 -
Borrowings from directors - 5,077,500
Deferred revenue 336,598 157,074
----------------- ------------------
Total current liabilities 4,134,487 6,887,505
LINE OF CREDIT 3,000,000 3,000,000
LONG-TERM DEBT 40,295 -
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock - $.01 par value: shares authorized: 20,000,000
Series C, 9% cumulative, convertible
issued and outstanding: 2003 & 2002 - 100,000 1,000 1,000
Series D, 9% cumulative, convertible
issued and outstanding: 2003 - 830,100 8,301 -
Common stock - $.01 par value:
authorized: 80,000,000; issued and outstanding: 2003 - 4,960,354
authorized: 20,000,000; issued and outstanding: 2002 - 10,956,024 49,604 109,560
Additional paid-in capital 45,596,684 24,132,153
Accumulated deficit (43,719,213) (32,912,952)
----------------- ------------------
Total stockholders' equity (deficit) 1,936,376 (8,670,239)
----------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 9,111,158 $ 1,217,266
----------------- ------------------
See notes to consolidated financial statements.
F-2
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
-----------------------------------------------------------------------------------------------
2003 2002 2001
REVENUES $ 5,687,293 $ 2,355,677 $ 1,586,443
------------------- ------------------ -------------------
COSTS AND EXPENSES:
Cost of revenue 4,162,759 1,914,464 2,420,151
Sales and marketing 893,833 746,353 813,975
General and administrative 1,125,926 1,282,683 2,028,804
Research and development 131,782 105,614 190,731
------------------- ------------------ -------------------
Total costs and expenses 6,314,300 4,049,114 5,453,661
------------------- ------------------ -------------------
OPERATING LOSS (627,007) (1,693,437) (3,867,218)
Amortization of debt discount (2,143,120) - -
Other expense, net (607,834) (530,924) (598,087)
------------------- ------------------ -------------------
NET LOSS (3,377,961) (2,224,361) (4,465,305)
CONVERTIBLE PREFERRED STOCK DIVIDENDS (7,671,557) (90,000) (90,000)
------------------- ------------------ -------------------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (11,049,518) $ (2,314,361) $ (4,555,305)
=================== ================== ===================
NET LOSS PER SHARE - BASIC
AND DILUTED $ (3.25) $ (2.36) $ (5.17)
=================== ================== ===================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 3,399,616 979,668 880,875
See notes to consolidated financial statements.
F-3
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
-------------------------------------------------------------------------------------------------------------------------------
Additional Total
Common Stock Preferred Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity(Deficit)
------------ ---------- --------- -------- ------------ -------------- -------------
Balance at December 31, 2000 8,220,202 $ 82,202 100,000 $ 1,000 $23,951,103 $(26,223,286) $ (2,188,981)
Compensation expense related to
issuance of stock 2,319,156 23,191 - - 329,482 - 352,673
Debt issuance costs in the form
stock warrants - - - - 35,735 - 35,735
Immaculate exercise of stock warrants 416,666 4,167 - - (4,167) - -
Dividends on
Series C Convertible Preferred Stock - - - - (90,000) - (90,000)
Net loss for the year ended
December 31, 2001 - - - - - (4,465,305) (4,465,305)
------------ ---------- --------- -------- ------------ -------------- -------------
Balance at December 31, 2001 10,956,024 109,560 100,000 1,000 24,222,153 (30,688,591) (6,355,878)
Dividends on
Series C Convertible Preferred Stock - - - - (90,000) - (90,000)
Net loss for the year ended
December 31, 2002 - - - - - (2,224,361) (2,224,361)
------------ ---------- --------- -------- ------------ -------------- -------------
Balance at December 31, 2002 10,956,024 109,560 100,000 1,000 24,132,153 (32,912,952) (8,670,239)
Exercise of stock options 400 4 - - 32 - 36
Give effect to 1 for 12 reverse split of
common stock (10,043,389) (100,434) - - 100,434 - -
Issuance of common stock 4,047,319 40,474 - - 6,759,023 - 6,799,497
Issuance of Series D Preferred - - 830,100 8,301 7,419,999 - 7,428,300
Beneficial Conversion on Series D issuance - - - - 7,428,300 (7,428,300) -
Dividends on
Series C Convertible Preferred Stock - - - - (90,000) - (90,000)
Series D Convertible Preferred Stock - - - - (153,257) - (153,257)
Net loss for the year ended
December 31, 2003 - - - - - (3,377,961) (3,377,961)
------------ ---------- --------- -------- ------------ -------------- -------------
Balance at December 31, 2003 4,960,354 $ 49,604 930,100 $ 9,301 $45,596,684 $(43,719,213) $ 1,936,376
============ ========== ========= ======== ============ ============== =============
See notes to consolidated financial statements.
F-4
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
----------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
OPERATING :
Net loss $ (3,377,961) $ (2,224,361) $ (4,465,305)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 310,433 374,099 695,369
Amortization of debt discount 2,143,120 - -
Gain on sale of property - (400) 4,772
Noncash interest income (129,499) - -
Loss on investments - - 200,000
Compensation expense related to issuance of stock warrants and options - - 352,673
Decrease (increase) in accounts receivable 156,393 (167,425) 137,645
(Increase) decrease in prepaid expenses and other current assets (34,960) (17,378) 77,718
Increase (decrease) in accounts payable 172,084 267,986 (122,527)
Increase in accrued salaries and wages 40,025 32,134 460
Increase (decrease) in accrued expenses 19,007 (215,584) 198,745
Increase in accrued interest 645,832 431,024 232,429
Increase (decrease) in deferred revenue 179,524 33,934 (38,821)
-------------- --------------- -----------------
Net cash provided by (used in) operating activities 123,998 (1,485,971) (2,726,842)
-------------- --------------- -----------------
INVESTING:
Property and equipment additions (34,185) (8,867) (9,240)
Proceeds from sale of property and equipment - 400 800
Increase in notes receivable - (200,000) -
Acquisition of American Caresource, net of cash acquired of $1,710 (3,348,290) - -
Acquisition expenses (173,719) - -
-------------- --------------- -----------------
Net cash used in investing activities (3,556,194) (208,467) (8,440)
-------------- --------------- -----------------
FINANCING:
Exercise of stock options 36 - -
Borrowings from directors 150,000 1,170,000 2,736,500
Borrowings from shareholders 3,675,000 - -
Proceeds from line of credit - 500,000 -
-------------- --------------- -----------------
Net cash provided by financing activities 3,825,036 1,670,000 2,736,500
-------------- --------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 392,840 (24,438) 1,218
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,011 29,449 28,231
-------------- --------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 397,851 $ 5,011 $ 29,449
-------------- --------------- -----------------
Supplemental disclosures of cash flow information
Cash paid for interest expense $ 97,559 $ 102,856 $ 169,490
============== =============== =================
See notes to consolidated financial statements.
F-5
PATIENT INFOSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Patient Infosystems, Inc. (the "Company") designs and
develops health care information systems and services to manage, collect
and analyze patient-related information to improve patient compliance with
prescribed treatment protocols. Through its various patient compliance
programs for disease state management, the Company provides important
benefits for the patient, the health care provider and the payor.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Patient Infosystems Canada, Inc., which
ceased operations in January 2001 and American Caresource Holdings, Inc.
which was created in December 2003. Significant intercompany transactions
and balances have been eliminated in consolidation.
Acquisition - On December 31, 2003, the Company acquired substantially all
the assets and liabilities of American Caresource Corporation for a total
purchase price of $5,732,116. The purchase consideration included (a)
1,100,000 shares of common stock valued at $1,848,000; (b) $3,679,499 of
notes and accrued interest owed the Company by American Caresource
Corporation that was extinguished by the business combination and (c)
$204,617 of direct expenses associated with the acquisition. The common
stock issued in the transaction was valued at $1.68 per share based upon
the measurement date for this transaction of April 14, 2003, which is the
date the terms of the proposed transaction were agreed upon and announced
to the public.
Information related to the acquisition is as follows:
Purchase price $ 5,732,116
================
Purchase allocation:
Current assets $ 504,087
Property and equipment 152,480
Identifiable intangible assets 462,000
Current liabilities, excluding current
portion of long-term debt (2,033,915)
Long-term debt (334,412)
Goodwill 6,981,876
---------------
$ 5,732,116
This acquisition has been accounted for using the purchase method of
accounting and accordingly, the results of the operations of this
acquisition have been included in the consolidated financial statements
from the date of the acquisition. Since the acquisition occurred at the
close of business on December 31, 2003, there are no operating results
reflected in the accompanying 2003 consolidated statement of operations.
The allocation of the purchase price to identifiable intangible assets and
goodwill has not been finalized, and any required adjustments will be
recorded as necessary in 2004.
F-6
The following unaudited pro forma summary presents the Company's
consolidated results of operations for 2003 and 2002 as if the acquisition
had been consummated at January 1, 2002. The pro forma consolidated results
of operations include certain pro forma adjustments, including the
amortization of identifiable intangible assets and interest on certain
debt.
December 31,
2003 2002
--------------------- ---------------------
Revenue $ 14,851,682 $ 11,996,817
Operational costs (18,882,522) (17,936,490)
Other costs (2,490,533) (166,707)
--------------------- ---------------------
Net loss (6,521,373) (6,106,380)
Dividends and beneficial conversions (837,090) (8,265,390)
--------------------- ---------------------
Net loss attributable to common shareholders $ (7,358,463) $(14,371,770)
===================== =====================
Net loss per share (using 3,399,616 weighted average
shares outstanding at December 31, 2003. $ (2.16) $ (4.23)
===================== =====================
The pro forma results are not necessarily indicative of those that would
have occurred had the acquisition taken place at the beginning of the
periods presented.
Going Concern - The accompanying consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business. As shown in the accompanying consolidated financial statements,
the Company incurred a net loss for 2003 of $3,377,961 and had negative
working capital of $2,808,649 at December 31, 2003. These factors, among
others, may indicate that the Company will be unable to continue as a going
concern for a reasonable period of time.
The consolidated financial statements do not include any adjustments
relating to the recoverability of assets and classification of liabilities
that might be necessary should the Company be unable to continue as a going
concern. The Company's continuation as a going concern is dependant upon
its ability to generate sufficient cash flow to meet its obligations, to
obtain additional financing and, ultimately, to attain successful
operations.
Management is currently assessing the Company's operating structure for the
purpose of reducing ongoing expenses, increasing sources of revenue and is
negotiating the terms of additional debt or equity financing. The recently
completed acquisition of American Caresource Corporation is being
integrated into the operation of the Company. Opportunities to expand the
existing customer relationships of both organizations to include the
services of both organizations are being assessed by management. Management
believes that the access to capital will provide the newly acquired entity
the stability needed to begin a period of growth. In addition, successes in
outcomes from disease management programs are being leveraged in an attempt
to increase revenues from sales.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
amounts could differ from those estimates.
Fair Value of Financial Instruments - The Company's financial instruments
consist primarily of cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses, borrowings from directors, a line of
credit and long-term debt. The fair value of instruments is determined by
reference to various market data and other valuation techniques, as
appropriate. Unless otherwise disclosed, the fair value of short-term
financial instruments approximates their recorded values due to the
short-term nature of the instruments. Based on the borrowing rates
currently available to the Company for bank loans with similar terms and
average maturities, the fair value of long-term debt approximates its
carrying value.
F-7
Revenue Recognition and Deferred Revenue - The Company's principal source
of revenue to date has been from contracts with various pharmaceutical
companies and managed care organizations for the development and operation
of disease management programs for chronic diseases, disease management
programs and other health care information system applications. Deferred
revenue represents amounts billed in advance of delivery under these
contracts.
Development Contracts - The Company's program enhancements consist of
specific changes or modifications to existing products requested by
customers and are short-term in nature. Therefore, revenue is recognized
upon delivery of the enhancement.
Program Operations - The Company's program operation contracts call for a
per-enrolled patient fee to be paid by the customer for a series of program
services as defined in the contract. The timing of customer payments varies
by contract, but typically occurs in advance of the associated services
being provided. Revenues from program operations are recognized ratably as
the program services are delivered.
Licenses - Revenue derived from software license fees is recognized when
the criteria established by Statement of Position 97-2, Software Revenue
Recognition, is satisfied. License fees associated with hosting
arrangements (e.g., arrangements that include the right of the customer to
use the software stored on the Company's hardware), are recognized ratably
over the hosting period when such fees are fixed and determinable. Hosting
fees with payment terms extending past one year are recognized as payments
become due.
Cash and Cash Equivalents - Cash and cash equivalents include all highly
liquid debt instruments with original maturities of three months or less.
Concentrations of Credit Risk - Financial instruments, which potentially
subject the Company to concentration of credit risk, consist principally of
cash and cash equivalents and accounts receivable. The Company places its
cash and cash equivalents with high credit quality institutions.
The Company's current contracts are concentrated in a small number of
customers, consequently, the loss of any one of its customers could have a
material adverse effect on the Company and its operations. During the years
ended December 31, 2003, 2002 and 2001, approximately $3,635,661 (64%),
$1,680,475 (71%), and $1,027,931 (65%), respectively, of the Company's
revenues arose from contracts with three customers. At December 31, 2003
and 2002, accounts receivable included balances of $151,688 and $317,046,
respectively, from contracts with these customers.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from 3 to 10 years.
Asset Impairment - The Company regularly assesses all of its long lived
assets for impairment and recognizes a loss when the carrying value of an
asset exceeds its fair value. The Company determined that no impairment
loss of long lived assets need be recognized for applicable assets in 2003,
2002 and 2001.
Intangible Assets - Intangible assets at December 31, 2002 represent a
purchased software asset of the Company's web based services that is being
amortized over 4 years using the straight-line method. This asset balance
at December 31, 2003 totaled $35,893. At December 31, 2003, intangible
assets also includes, among other things, a customer list and relationships
acquired from American Caresource Corporation on December 31, 2003 totaling
$462,000.
Research and Development - Research and development costs are expensed as
incurred.
Income Taxes - Deferred income tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and net operating loss and tax credit
carryforwards.
F-8
Net Loss Per Share - The calculations for the basic and diluted loss per
share were based on net loss attributable to common stockholders of
$11,049,518, $2,314,361 and $4,555,305 and a weighted average number of
common shares outstanding, including convertible preferred shares, of
3,399,616, 979,668 and 880,875 for the years ended December 31, 2003, 2002
and 2001 after giving effect to the 1 for 12 reverse stock split approved
by the Company's stockholders on December 31, 2003, respectively. All per
share information included in the consolidated financial statements and the
footnotes thereto have been restated for effect of the 1 for 12 reverse
stock split. The computation of fully diluted loss per share for 2003, 2002
and 2001 did not include 101,160, 92,928 and 103,128 shares of common
stock, respectively, which consist of outstanding convertible preferred
shares, options and warrants because the effect would be antidilutive due
to the net loss in those years.
The calculation of the Company's net loss per share for the years ended
December 31, 2003, 2002 and 2001 is as follows:
2003 2002 2001
---- ---- ----
Net loss per share - basic and diluted
Net loss attributable to common stockholders $(11,049,518) $(2,314,361) $(4,555,305)
----------------- ----------------- ----------------
Actual weighted average common shares outstanding 924,109 913,002 814,209
Weighted average preferred shares outstanding
convertible into common shares 2,475,507 66,666 66,666
----------------- ----------------- ----------------
Total weighted average common shares outstanding 3,399,616 979,668 880,875
----------------- ----------------- ----------------
Net loss per share - basic and diluted $ (3.25) $ (2.36) $ (5.17)
================= ================= ================
Retirement Plan - The Company has a retirement plan that qualifies under
Section 401(k) of the Internal Revenue Code. This retirement plan allows
eligible employees to contribute a portion of their income on a pretax
basis to the plan, subject to the limitations specified under the Internal
Revenue Code. The Company's annual contribution to the plan is at the
discretion of the Board of Directors. The Company made no contributions to
this plan in 2003, 2002 and 2001.
New Accounting Pronouncements - In January 2003, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 requires disclosure about
variable interest entities for which it is reasonably possible that the
Company will be required to consolidate or disclose information when the
Interpretation becomes effective. The Company has determined that it does
not have any variable interest entities which would require consolidation
in accordance with FIN 46.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity, ("SFAS No. 150"). SFAS No. 150 establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). The adoption of
SFAS No. 150 in 2003 did not have an effect on the Company's consolidated
financial statements.
F-9
Stock-Based Compensation - In 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This standard
provides alternative methods of transition for voluntary change to the fair
value based method of accounting for stock-based employee compensation.
Additionally, the standard also requires prominent disclosures in the
Company's financial statements about the method of accounting used for
stock-based employee compensation, and the effect of the method used when
reporting financial statements.
The Company accounts for stock-based compensation in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation". As permitted by SFAS
No. 123, the Company continues to measure compensation for such plans using
the intrinsic value based method of accounting, prescribed by Accounting
Principles Board ("APB"), Opinion No. 25, "Accounting for Stock Issued to
Employees." Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the date of
grant for awards consistent with the provisions of SFAS No. 123, the
Company's net loss and net loss per share would have been increased to the
pro forma amounts indicated below:
2003 2002 2001
---- ---- ----
Net loss attributable to common
shareholders - as reported $ (11,049,518) $ (2,314,361) $ (4,555,305)
Stock compensation expense (118,257) (136,306) (210,471)
----------------- --------------- ---------------
Net loss - pro forma $ (11,167,775) $ (2,450,667) $ (4,765,776)
================= =============== ===============
Net loss per share - basic
and diluted - as reported $ (3.25) $ (2.36) $ (5.17)
================= =============== ===============
Net loss per share - basic
and diluted - pro forma $ (3.29) $ (2.50) $ (5.41)
================= =============== ===============
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model using assumed risk-free interest
rates of 3.79% for the year ended December 31, 2003, 3.63% for the year
ended December 31, 2002 and 4.86% for the year ended December 31, 2001 and
an expected life of 7 years. The assumed dividend yield was zero. The
Company has used a volatility factor of .98 for the year ended December 31,
2003, 1.78 for the year ended December 31, 2002 and 1.24 for the year ended
December 31, 2001. For purposes of pro forma disclosure, the estimated fair
value of each option is amortized to expense over that option's vesting
period.
F-10
Consolidated Statements of Cash Flows - Supplemental noncash investing and
financing activities for the years ended December 31, 2003, 2002 and 2001
are as follows:
2003 2002 2001
Common stock activities:
Borrowings from directors converted into
common stock $4,482,500 $ - $ -
Accrued interest converted into common stock 438,099 - -
Common stock issued in acquisition 1,848,000 - -
Common stock issued for acquisition expenses 30,898 - -
------------- ------------ ------------
Total of noncash common stock activities $6,799,497 $ - $ -
============= ============ ============
Preferred stock activities:
Borrowings from directors converted to
preferred stock $ 745,000 $ - $ -
Borrowings from shareholders converted into
preferred stock 3,675,000 - -
Accrued interest converted into preferred
stock 865,180 - -
Issuance of preferred stock in connection
with issuance of debt 2,143,120 - -
------------- ------------ ------------
Total noncash preferred stock activities $7,428,300 $ - $ -
============= ============ ============
Dividends declared on Series C & D Convertible
Preferred Stock $ 243,257 $ 90,000 $ 90,000
============= ============ ============
Value of beneficial conversion feature on Series
D Convertible Preferred Stock recognized as
a dividend $7,428,300 $ - $ -
============= ============ ============
Segments - Prior to the American Caresource Corporation acquisition, the
Company operated in one segment. As a result of the acquisition, the
Company anticipates that it will operate in two segments. Accordingly, the
required segment information will be disclosed commencing in 2004.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
2003 2002
Computer software $ 686,792 $ 665,286
Computer equipment 1,514,547 1,168,445
Telephone equipment 365,204 362,887
Leasehold improvements 64,897 41,504
Office furniture and equipment 395,720 354,329
------------- -----------
3,027,160 2,592,451
Less accumulated depreciation 2,721,609 2,306,705
------------- -----------
Property and equipment, net $ 305,551 $ 285,746
------------- -----------
F-11
3. Debt
Line of Credit - At December 31, 2003, the Company has borrowings
outstanding totaling $3,000,000 under a line of credit, which is the
maximum amount available under the line of credit. The amount borrowed is
due and payable on July 31, 2005. Interest is due and payable at maturity
at a floating rate based upon LIBOR plus 1.75% (effective LIBOR rate at
December 23, 2003 was 1.2%). There is a commitment fee of 0.25% per annum
on the average daily unused amount of the line of credit to be paid
quarterly in arrears. The line of credit is secured by substantially all of
the Company's assets and is guaranteed by Dr. Schaffer and Mr. Pappajohn,
directors of the Company. In consideration for their guarantees, in
February 2004, the Company granted to Dr. Schaffer and Mr. Pappajohn
warrants to purchase an aggregate of 47,500 shares of Series D Convertible
Preferred Stock, convertible into 475,000 shares of the Company's common
stock for $10.00 per preferred share.
At December 31, 2002, the Company's borrowings outstanding under the line
of credit totaled $3,000,000. This line of credit was amended during 2003,
the amended terms of which are described in the preceding paragraph.
Borrowings from directors - Prior to December 31, 2003, the Company had
borrowings from Mr. Pappajohn and Dr. Schaffer. At December 31, 2002, such
borrowings totaled $5,077,500. The Company borrowed an additional $150,000
from these directors during 2003.
On December 31, 2003, the Company converted $4,482,500 in debt and $438,099
of accrued interest owed to Mr. Pappajohn and Dr. Schaffer into common
stock by issuing 2,928,986 shares of the Company's common stock using a
value of $1.68 per common share. Additionally on December 31, 2003, Mr.
Pappajohn agreed to convert his remaining debt of $745,000 and accrued
interest of $711,110 into 145,611 shares of the Company's Series D
Convertible Preferred Stock at a price of $10.00 per preferred share. See
Note 5.
F-12
Long-Term Debt - Long-term debt, which was acquired from American
Caresource Corporation, consists of the following at December 31, 2003:
Unsecured non-interest bearing note to a stockholder, payable in monthly
installments of $10,127, matured in December 2003 $ 40,507
Unsecured non-interest bearing obligation to a stockholder, payable in
monthly installments of $5,000, maturing in April 2004 15,732
Unsecured loan at index rate plus 2.5% (6.5%) to a stockholder, due on demand
30,478
19% obligation assumed and due an individual in connection with the purchase
of certain assets, payable in monthly installments of $2,000, matured in
December 2003 11,577
5% unsecured note payable to a client, with principal and interest maturing
in March 2004 165,000
Other 7,610
Capital lease obligations (see Note 7) 63,508
------------
Total debt 334,412
Less current portion (294,117)
------------
Total long-term debt $ 40,295
============
Scheduled payments in each of the next four years are as follows:
Year ended December 31,
------------------------ --------------
2004 $ 294,117
2005 21,360
2006 12,748
2007 6,187
------------------------ --------------
Total $ 334,412
==============
F-13
4. INCOME TAXES
There was no income tax expense for the years ended December 31, 2003, 2002
and 2001.
Income tax expense for the years ended December 31 differed from the U.S.
federal income tax rate of 34% as a result of the following:
2003 2002 2001
Computed "expected" tax benefit $ (1,148,507) $ (756,283) $ (1,518,203)
Change in the valuation allowance
for deferred tax assets 487,000 885,000 1,795,000
Amortization of debt discount is not deductible 728,660 - -
State and local income taxes at statutory rates,
net of federal income tax benefit (73,350) (133,462) (267,918)
Other, net 6,197 4,745 (8,879)
-------------- -------------- --------------
$ - $ - $ -
-------------- -------------- --------------
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax
liabilities at December 31, are presented below.
Deferred income tax assets: 2003 2002
Accounts receivable, principally due
to allowance for doubtful accounts $ 21,000 $ 22,000
Deferred revenue 135,000 63,000
Compensation 53,000 40,000
Net operating loss carryforwards 13,053,000 12,698,000
Tax credit carryforwards 75,000 75,000
Amortization of intangibles 153,000 112,000
Other 36,000 36,000
------------- --------------
Total gross deferred income tax assets 13,526,000 13,046,000
Less valuation allowance (13,461,000) (12,974,000)
------------- --------------
Net deferred income tax assets 65,000 72,000
------------- --------------
Deferred income tax liabilities:
Property and equipment, principally due to
differences in depreciation and amortization (9,000) (30,000)
Other (56,000) (42,000)
------------- --------------
Total gross deferred income tax liability (65,000) (72,000)
------------- --------------
Net deferred income taxes $ - $ -
------------- --------------
Management of the Company has evaluated the available evidence about future
taxable income and other possible sources of realization of deferred tax
assets. The valuation allowance reduces deferred tax assets to zero, which
represents management's best estimate of the amount of such deferred tax
assets that more likely than not will be realized.
F-14
At December 31, 2003 the Company has net operating loss carryforwards of
approximately $32,684,000, which are available to offset future taxable
income, if any, which begin to expire in 2010. The Company also has
investment tax credit carryforwards for federal income tax purposes of
approximately $75,000, which are available to reduce future federal income
taxes, if any, which begin to expire in 2010. These loss and tax credit
carryforwards may be subject to limitation by certain sections of the
Internal Revenue Code relating to ownership changes.
5. PREFERRED STOCK
On March 31, 2000, the Company completed a private placement of 100,000
shares of newly issued Series C 9% Cumulative Convertible Preferred Stock
("Series C Preferred Stock"), raising $1,000,000 in total proceeds. These
shares can be converted at any time by the holder into common stock at a
rate of 8 shares of common stock to 1 share of Series C Preferred Stock. In
2003, this rate changed to 10 shares of common stock to 1 share of Series C
Preferred Stock. Each share of Series C Preferred Stock has voting rights
equivalent to 10 shares of common stock. As of December 31, 2003, the
Company has accrued $337,500 in dividends since inception, which was
payable to the Series C stockholders.
During 2003 the Company issued a total of 301,582 shares of Series D 9%
Cumulative Convertible Preferred Stock ("Series D Preferred Stock") in
connection with certain borrowings during 2003. In accordance with APB
Opinion No. 14, a portion of the cash received totaling $2,143,120 was
allocated to the preferred stock resulting in a debt discount in the same
amount, which was fully amortized by December 31, 2003. Additionally, a
beneficial conversion feature has arisen since the value recorded for the
preferred stock, which is convertible into common stock, is less than the
fair market value of the common stock totaling $5,177,458. While the
resulting beneficial conversion feature totals $3,034,338, the Company can
only record a beneficial conversion equal to the value of the preferred
stock recorded, $2,143,120. Such amount is reflected in the net loss
attributable to the common stockholders for the year ended December 31,
2003 because the preferred stock is immediately convertible into the
Company's common stock. As of December 31, 2003, the Company has accrued
$153,257 in dividends since inception, which was payable to the Series D
stockholders.
On December 31, 2003, $5,285,180 of debt and accrued interest was converted
into 528,518 shares of Series D Preferred Stock at a price of $10.00 per
share. Because the effective purchase price per common share was $1.00 per
share while the fair market value on December 31, 2003 was $2.40 per share,
there is a beneficial conversion feature of these Series D Convertible
Preferred shares totaling $7,399,252. While the resulting beneficial
conversion feature totals $7,399,252, the Company can only record a
beneficial conversion equal to the value of the preferred stock recorded,
$5,285,180. Such amount is reflected in the net loss attributable to the
common stockholders for the year ended December 31, 2003 because the
preferred stock is immediately convertible into the Company's common stock.
6. STOCK OPTIONS AND WARRANTS
The Company has an Employee Stock Option Plan (the "Stock Option Plan") for
the benefit of certain employees, non-employee directors, and key advisors.
On December 31, 2003, the stockholders approved an amendment to the Stock
Option Plan that increased its authorized shares from 1,680,000 shares on a
pre-split basis to 3,500,000 shares after giving effect to the 1 for 12
reverse stock split and increase in the Company's overall authorized
capital. On May 2, 2000, the Company filed a Form S-8 registering 1,680,000
of the Stock Option Plan shares, the Company plans to file an amended Form
S-8 which will register the full 3,500,000 shares now authorized. Stock
options granted under the Stock Option Plan may be of two types: (1)
incentive stock options and (2) nonqualified stock options. The option
price of such grants shall be determined by a Committee of the Board of
Directors (the "Committee"), but shall not be less than the estimated fair
market value of the common stock at the date the option is granted. The
Committee shall fix the terms of the grants with no option term lasting
longer than ten years. The ability to exercise such options shall be
determined by the Committee when the options are granted. Generally,
outstanding options vest at the rate of 20% per year. During 2001, some
grants had a portion of the options vest immediately with the balance of
the options vesting at a rate of 20% per year.
F-15
A summary of stock option activity follows:
Outstanding Weighted-Average
Options Exercise Price
Options outstanding at December 31, 2000 701,880 $ 1.28
Options granted during the year ended December 31, 2001
(weighted average fair value of $0.18) 536,500 $ 0.19
Options forfeited by holders during the year
ended December 31, 2001 (40,840) $ 1.83
Options outstanding at December 31, 2001 1,197,540 $ 0.77
Options forfeited by holders during the year
ended December 31, 2002 (82,400) $ 0.86
-----------
Options outstanding at December 31, 2002 1,115,140 $ 0.76
Options granted during the year ended December 31, 2003
(weighted average fair value of $0.20) 100,000 $ 0.20
Options forfeited by holders during the year
ended December 31, 2003 (700) $ 0.09
Options exercised during the year ended December 31, 2003 (400) $ 0.09
-----------
Options outstanding at December 31, 2003
before giving effect to the 1 for 12 reverse stock split 1,214,040 $ 0.78
===========
Options outstanding at December 31, 2003
after giving effect to the 1 for 12 reverse stock split 101,160 $ 9.36
===========
Options exercisable at December 31, 2003 70,565 $ 8.54
===========
Options available for grant at December 31, 2003 3,376,917
===========
F-16
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2003, after giving effect to the 1 for
12 reverse stock split:
Options Outstanding Options Exercisable
------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
$1.08 - $11.99 65,747 5.73 $ 3.48 51,449 $ 3.47
$12.00 - $23.99 17,250 4.88 $15.20 7,917 $ 17.65
$22.00 - $33.00 18,163 5.55 $25.24 11,199 $ 25.40
-------------- -------------
101,160 70,565
============== =============
7. COMMITMENTS
The Company leases an automobile, certain equipment and other office space
under non-cancelable lease agreements, which expire at various dates
through April 2008.
Rent expense for office space for the years ended December 31, 2003, 2002
and 2001 was $139,256, $95,508 and $136,045, respectively.
At December 31, 2003 minimum annual lease payments for operating and
capital leases are as follows:
Leases
Years ending December 31, Capital Operating
--------------------------------- --------- -----------
2004 $ 28,467 $ 386,839
2005 24,362 324,993
2006 14,036 308,783
2007 7,040 304,951
2008 - 110,888
Less amount representing interest (10,397)
--------------------------------- --------- -----------
Net present value of
minimum lease payments $ 63,508 $1,436,454
F-17
8. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of the unaudited interim results of operations
by quarter:
First Second Third Fourth
-------------------------------------------------------------------------------------------
Year ended December 31, 2003:
Revenues $ 947,679 $ 1,580,037 $ 1,429,692 $ 1,729,885
Gross margin 186,077 395,182 321,916 621,359
Net loss (505,206) (1,006,198) (1,190,639) (675,918)
Net loss attributable to common shareholders (527,706) (2,496,016) (1,858,563) (6,167,233)
Net loss per common share (0.54) (0.70) (0.45) (1.26)
Year ended December 31, 2002:
Revenues $ 499,328 $ 542,716 $ 586,100 $ 727,533
Gross margin 11,475 80,990 118,938 229,810
Net loss (661,521) (556,519) (474,147) (532,174)
Net loss attributable to common shareholders (684,021) (579,019) (496,647) (554,674)
Net loss per common share (0.70) (0.59) (0.51) (0.57)
F-18
Schedule II
Patient InfoSystems, Inc.
Valuation and Qualifying Accounts
For the Years Ended December 31, 2003, 2002 and 2001
Balance at Balance at
Beginning End of
of Year Additions Deductions Year
Allowance for Doubtful Accounts:
2003 $ 55,000 $ 92 $ 2,951 $ 52,141
2002 $ 37,217 $ 59,117 $ 41,334 $ 55,000
2001 $ 48,122 $ 15,447 $ 26,352 $ 37,217
Deferred Tax Assets Valuation
Allowance:
2003 $ 12,974,000 $ 487,000 - $ 13,461,000
2002 $ 12,089,000 $ 885,000 - $ 12,974,000
2001 $ 10,294,000 $ 1,795,000 - $ 12,089,000
S-1