Item 1. Description of Business.
General
Patient Infosystems, Inc. (the "Company" or "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. The Company's principal executive offices are located at 46 Prince Street, Rochester, New York 14607 and its telephone number is 716-242-7200.
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, the Company has evolved to offer a comprehensive portfolio of products and services designed to improve patient clinical outcomes and quality of life, reduce health care costs, and facilitate patient-provider-payor communication. The Company has three major product lines.
1) Population Management. Systems to collect, analyze, and report data about an overall target patient population. These systems utilize telephone, Internet, electronic or print media as input sources and may be used for risk identification and stratification, obtaining information on care quality and patient/member satisfaction, and the provision of patient and provider education.
2) Disease Management. Patient-centered disease management and case management support systems designed to improve patient compliance with prescribed treatment protocols and to improve the process of patient management outside the traditional "office visit". The system utilizes trained telephone operators and computerized interactive voice response technology to communicate via telephone and gather relevant information directly from the patient. This data is subsequently automatically transmitted via electronic or print media to health care payors, providers and patients, as appropriate. These services are also available via the Internet.
3) Demand Management. Services to facilitate the appropriate deployment of costly health care resources. These systems provide enrolled patients with 24-hour access to a registered nurse for management of their care between episodes of medical intervention.
The Company markets its services to a broad range of clients: pharmaceutical and medical equipment and device manufacturers; pharmacy benefit managers ("PBMs"); health care payors, such as managed care organizations ("MCOs"), insurance companies, and employer groups; and health care providers, including integrated delivery networks ("IDN's").
During its first two years of operations, the Company emphasized the development of disease management programs, which accounted for a substantial portion of its revenue through 1997. However, since 1998, the Company has devoted resources to the development of other applications of its technology platform, including demand management, patient surveys, outcomes analysis and Internet-based capabilities. These additional products account for 62% of the total revenue of the Company during the 12-month period ended December 31, 2000.
Recent Developments
In September 2000, the Company executed a letter of intent to acquire substantially all the assets of Health Data Solutions and its affiliate, American Care Source (collectively known as "HDS"). Negotiations with HDS ended in January 2001, with the parties failing to reach mutually acceptable terms for the proposed acquisition, but resolving to enter into a marketing agreement. On March 6, 2001, the Company and HDS entered into a Strategic Partnership and Marketing Agreement establishing the terms under which both companies may offer their combined products and services to their respective clients. While no assurances can be given that the Company will generate new revenues from this relationship, the Company will use this relationship to validate strategic marketing initiatives.
Information Capture, Delivery and Analysis Technologies Utilizing the Internet
The Company's technology platform integrates an advanced voice recognition telephone system, high-speed data processing and analysis capability, demand publishing and information distribution capabilities and behavior modification-based compliance algorithms with a real time Internet on-line communication system. The system utilizes trained telephone operators and computerized interactive voice response technology to communicate via telephone directly with the patient at home as well as with payors and providers in order to gather and deliver relevant patient data. In order to minimize costly live operator interaction, a computer initiates each call to the patient, which call is automatically transferred to an operator and finally routed to an automated speech application. Patients respond to the recorded speech application by speaking normally. This approach is designed to enable a wider variety of possible responses than is achievable via telephone key pad. Depending on the patient's response, situation-specific algorithms are applied to modify future questions and thus help customize the collection of data.
The Company's system analyzes and prepares the captured data for automatic delivery to the payor, provider and patient using the Internet and demand publishing capabilities. The Company's Internet capabilities enable the Company's systems to interface on a real-time basis with patients, payors and providers. Demand publishing technology enables the creation of highly individualized reports by inserting stored graphic images and text that can be customized for race, gender and age. These reports are also customized to the patient's specific situation, and the system utilizes the information received during contacts with the patient to further customize the content of the report. The data relevant to the separate report for health care providers is formatted in a customized report to be automatically transmitted via mail, fax or on-line.
Each contact with a patient contributes to the establishment of a longitudinal database, which can be analyzed to provide information about treatment modalities for patients, providers and payors. The Company's system is designed to analyze patient compliance to prescribed treatment regimens and gather additional clinical information so that improvements in such regimens can be developed.
Internet Capabilities
In 1999, the Company acquired substantially all the assets of HealthDesk Corporation ("HealthDesk"), a consumer healthcare software company that focuses on general health and chronic disease management through ongoing targeted support for patients, families and caregivers. The acquired assets include HealthDesk OnLine and HealthDesk OnLine for Diabetes, which are both accessible through the Internet and on CD-ROM. The Company also acquired HealthDesk's Care Team Connect product, which is accessible over the Internet and provides a communication mechanism between patients and their caregivers. The Company uses the core technologies associated with these products to support the Company's other programs, which include the case management support system, disease management, demand management, patient surveys and clinical studies.
Integrated Disease Management System
The Company's primary application of its integrated information capture and delivery technology is its integrated disease management system. This system is designed to provide caregivers with the ability to monitor, on a cost-effective basis, patient condition and behavior while the patient is between physician consultations. The Company believes that this system will permit caregivers to improve patient compliance and, as a consequence, improve patient outcomes.
The Company's disease management programs are developed for targeted diseases on both a customized or standardized basis. The Company's disease management system has four major components.
First, using a panel of medical and clinical experts, the Company develops a disease-specific patient intervention and compliance program that includes a template for the integration of each patient's history, current medical status and treatment protocol. The panel identifies guidelines for generally accepted treatment protocols and diagnostic interventions for particular diseases and then uses these guidelines to determine what information is to be gathered from the patient.
Second, when a patient is enrolled, a patient history is obtained, including the histories of the chronic illness, medications, and surgical procedures as well as other information deemed relevant by the disease-specific compliance program. This information is included in the Company's database for each patient and is used to create customized reports for distribution to the patient's health care provider and payor as well as the patient.
Third, the Company establishes periodic telephone contacts with each patient to monitor the patient's compliance with prescribed therapies as well as the patient's treatment progress. Contacts are made in accordance with a designated patient contact schedule, which is established for each disease management program. The frequency varies depending upon the disease under management and the goal of the applicable treatment.
Fourth, the data gathered from the patient during each contact is processed and stored in the Company's database. Using the information obtained from patient contacts and other available information regarding the patient and his or her treatment, such as physician records and pharmacy information, personalized reports are prepared, typically following each patient contact, for evaluation by the patient, the patient's health care provider and, on a routine basis, payors.
The Company's disease management programs are further supported by the Company's demand publishing technology. This technology enables the Company to provide personalized behavior modification and educational materials to patients in addition to individual patient reports, which may include pictures, diagrams and informative discussions relating to the treatment course intended to modify or reinforce certain behaviors. At the same time, individual patient reports are provided to the health care provider. These reports are more factual in nature and contain the relevant clinical and behavioral information that has been gathered. On a routine basis, the Company can provide summary information to the patient's health care payor with respect to patient progress and activity.
Patient Infosystems Products
The Company's product offerings fall into four major categories:
o "CareSense" disease management and compliance programs o "ForeQuest" patient survey programs o "Nurse 411" demand management programs o Internet-based products and services
"CareSense" disease management and compliance programs
The Company develops customized disease management and risk assessment programs in conjunction with a number of customers, as well as standardized disease management programs for a variety of customers. Each of the Company's customer agreements for its customized programs traditionally provides for some form of development fees to be paid to the Company upon the achievement of certain milestones. In addition, the agreements for customized disease management programs may provide for some form of exclusivity period, during which the Company is prohibited from engaging or participating in other projects involving the specific disease target that is the subject of that program. The exclusivity periods extend until, in general, a certain date or certain period following the achievement of a specified milestone in the development or implementation of the program. As the Company's products have matured, development fees have declined and the need to grant exclusivity has decreased. The Company enrolled its first patients in a disease management program in October 1996, and has enrolled more than 473,000 patients in those programs through the end of 2000. The Company and its customers have had limited success in sustaining enrollment of substantial numbers of patients.
Traditionally the Company's customer agreements, which are typically terminable without cause by either party, require payment to the Company of operational fees. The amount of the program operational fee varies with the length, complexity and frequency of patient contacts as dictated by the respective program protocols. Patient enrollment in each of the Company's programs will depend upon the identification and referral by the Company's customers of patients to the Company's system, which will vary from program to program.
The Company's "CareSense" programs are:
Asthma
The Company has developed disease management programs for asthmatic patients that have been marketed to payors and other participants in the health care industry, and such programs have been provided to patients since 1997. Through January 2001, the Company has had approximately 15,000 patients participate in these programs through separate service agreements with nine different health care companies
Congestive Heart Failure
The Company has services agreements with Bristol-Myers and Astra-Zeneca to develop, implement and operate disease management programs to aid in the treatment of patients suffering from congestive heart failure. The Company has completed the development of the program in the English and Spanish languages. These programs have been provided to patients since 1997, and through January 2001, the Company has had approximately 12,200 patients participate in the programs.
Diabetes
The Company has developed disease management programs for diabetic patients that have been marketed to payors and other participants in the health care industry. Bristol-Myers, along with four other entities, have retained the Company to provide disease management programs for patients who are suffering from diabetes and are enrolled in health care programs for which these companies provide services. These programs have been provided to patients since 1997, and through January 2001, the Company has had approximately 5,500 patients participate in these programs.
Secondary Cardiovascular Disease
The Company has entered into a services agreement with Bristol-Myers to develop, implement and operate a disease management program relating to the prevention of cardiovascular sequelae in patients who have recently experienced certain cardiovascular illnesses or treatments such as angina, cardiac bypass surgery or myocardial infarction. The Company has completed the development of this program in both the English and Spanish languages. This program has been provided to patients since 1997, and through January 2001, the Company has had approximately 500 patients participate in this program.
Hypertension
The Company has developed a compliance program for patients with hypertension that has been marketed to payors and other participants in the health care industry. Bristol-Myers and RxAmerica have each retained the Company to provide this compliance program for patients who are suffering from hypertension and are enrolled in health care programs for which these companies provide services. Through January 2001, approximately 830 patients have participated in this program.
Depression
The Company has entered into a services agreement with RxAmerica to develop and operate a disease management program to utilize a clinically accepted tool to assess changes in severity of depression in relation to compliance with therapeutic regimens, and to support patients in achieving a high level of compliance. Patients are expected to be enrolled in this program beginning in May 2001.
Additional Disease Targets
The Company has identified additional opportunities in large chronic disease markets, including the treatment of chronic obstructive pulmonary disease, cancer, osteoporosis, arthritis, HIV infection and high-risk pregnancy. Each of these targets has been identified as having characteristics that make them attractive candidates for the Company's programs. The Company is currently involved in discussions with customers for the development of programs in a variety of these areas.
Pharmaceutical and Medical Equipment Support Programs
The Company has delivered custom programs sold to pharmaceutical and medical device manufacturers that are intended to add value to their direct to consumer marketing efforts. The Company has been retained by Bristol-Myers, Astra-Zeneca, Janssen and Abbott to develop and operate programs that support specific products in the areas of diabetes, anxiety, prostatis and others. As of January 2001, approximately 31,000 patients have participated in these programs. In October, 2000, the Company was retained by Urologix, Inc. to develop and operate a Prostate Care Center to provide telephonic and Internet support for their direct to consumer advertising campaign. Approximately 700 men have participated in this program during its pilot phase since December 2000.
"Nurse 411" demand management programs
Demand management involves assisting providers in evaluating patient treatment needs to identify those patients who may not require immediate or intensive services. The goal of demand management is to reduce the need for and use of costly, often clinically unnecessary, medical services and arbitrary managed-care interventions while improving the overall quality of life of patients. The Company believes that its system can be used to provide automated or semi-automated demand management services. During 2000, the parent company of Kentucky Medicaid (CHA HMO), a customer of the Company since 1997, made a strategic decision to leave the Medicaid market sector. The Company continues to provide and expand service to CHA HMO for commercial insurance. The Company is currently providing demand management to approximately 100,000 enrollees for CHA HMO, Inc., Health Right and McClellan Air Force Base.
"ForeQuest" patient survey programs
Organizations in many different areas of the health care industry survey users regarding their products and services for a variety of reasons including regulatory, marketing and research purposes. The Company's information systems, with their ability to proactively contact patients in a cost-efficient manner, may be used for this type of application. The Company has developed a series of automated surveys ranging from general health to disease specific instruments. The product line includes surveys for NCQA, CAHPS; reminder surveys for HEDIS measures; SF-12; child health questionnaire; patient satisfaction; asthma; diabetes; back pain; depression; maternity; and the Pra Plus for elderly populations. Through January 2001, approximately 408,000 patients have participated in these survey programs.
Internet-based products and services
The Company's Case Management Support System ("CMSS") is an Internet-based software product that is used by case management organizations. The customer's case managers access the system using an approved browser and Internet Service Provider ("ISP") connection. (Browser and ISP are not supplied by Patient Infosystems.) The system enables care managers to effectively interface with, and utilize, Patient Infosystems' "CareSense" and "ForeQuest" intervention programs for patient care planning and implementation improves case managers efficiency and productivity. Additionally, the CMSS provides the case management organization's management with a reporting tool and a case distribution and documentation tool that can be used to better monitor and manage case management activity. Patient Infosystems licenses it's CMSS software and operating system to customers who agree to an initial license fee plus ongoing user and support fees. Through January 2001, the Company has sold two CMSS contracts that have two-year and four-year terms respectively.
Other Applications of the Integrated Information Capture and Delivery Technology
Outcomes Analysis
The Company expects to utilize information gathered from patients enrolled in its programs to serve two purposes. First, information regarding treatment results, success of the compliance program and patient reaction to differing treatments or compliance protocols may be used by the Company to further improve each disease-specific compliance program. Second, this information may be used by payors, pharmaceutical companies and health care providers to assist in the development of improved treatment modalities. The Company has developed analytical methodologies using database management and information technologies. The Company intends to use these data analysis technologies to predict the best treatment methodologies for patients.
Clinical Studies
Many pharmaceutical companies and contract research organizations are seeking more economical, efficient and reliable methods for compiling and analyzing clinical data in conducting clinical trials. Furthermore, many drug development protocols have begun to emphasize subjective criteria and outcomes information. The Company believes that its system will allow it to develop programs tailored to the measurement of outcomes data relating to the conduct of later stage clinical trials. The Company believes that its system can also assist pharmaceutical companies in studying and documenting the efficacy of approved products in order to provide ongoing information to the Food and Drug Administration or for marketing purposes.
Case Management
Patients who are prescribed complex or high-cost treatment regimens may require a higher level of monitoring, interaction, care planning and reassessment than patients with less complicated treatment regimens. The Company believes that its system is capable of providing these enhanced services to such patients to eliminate or minimize the unnecessary costs and medical attention that result from a patient's lack of compliance with a prescribed treatment regimen.
Sales and Marketing
Through 1997, the Company's efforts focused primarily on the development of disease management programs. Beginning in 1998, the Company began aggressively marketing the other services that its technology platform can provide including demand management, patient surveys, pharmaceutical support programs and outcomes analysis. The Company markets its integrated disease management system to organizations within the health care industry that are involved in the treatment of disease or payment of medical services for patients who require complex or long-term medical therapies. These industry organizations include five distinct groups: pharmaceutical and medical equipment manufacturers, health care providers, pharmacy benefits managers, health care payors and employer groups. As of July 2000, the Company has also entered into an agreement with USI Administrators, Inc., USI Care Management, Inc., York HealthNet (collectively known as "USI"), one of the country's largest third party administrators (TPA's), to co-market its products and services to USI's potential employer client base. A similar agreement has been executed with Health Data Solutions, a company that provides claims processing services and ancillary network referral services to provider networks, managed care organizations, and TPA's. The Company currently employs a sales and marketing staff of two persons to market the Company's systems. In addition, the senior members of the Company's management are actively engaged in marketing the Company's programs.
The Company has conducted patient surveys and clinical studies designed to document the clinical and cost benefits that result from the application of its integrated information capture and delivery system. The results of these studies are being used to supplement the Company's marketing efforts. The Company intends to continue to promote the benefits of its products through publication in clinical journals and presentations at scientific conferences referencing the favorable near term-results of these studies. To date, these studies have pertained to the Company's asthma and diabetes programs.
Research and Development
Research and development expenses consist primarily of salaries and related benefits and administrative costs allocated to the Company's research and development personnel. These personnel are actively involved in the conversion of the Company's technology platform to a fully web-enabled design. Research and development costs have decreased as the Company has completed the development of its primary disease management programs. The Company anticipates that research and development expenses will increase slightly in future periods as an internal process to update these products has recently been initiated.
The development and maintenance of the telecommunications and computer publishing systems through which the Company operates its integrated information capture and delivery system is a major component of its business. The communications and information technology industries are subject to rapid and significant technological change, and the ability of the Company to operate and compete is dependent in significant part on its ability to update and enhance its system continuously. In order to do so, the Company must be able to utilize effectively its research and development capabilities and implement new technology in order to enhance its systems. At the same time, the Company must not jeopardize its ability to contact patients and to process and publish patient information or adapt to customer preferences or needs. There can be no assurance that the Company will be able to develop and implement technological changes to its system. The Company maintains a significant investment in its technology, and therefore is subject to the risk of technological obsolescence. If the Company's technology were rendered obsolete, the Company's business and operating results would be materially adversely affected.
RISK FACTORS
An investment in the Company's Common Stock is speculative in nature and involves a high degree of risk. No investment in the Company's 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, Qualified Auditors' Opinion;
The Company has never earned profits and has been dependent upon its initial public offering and private placements of its equity securities, through which the Company has raised over $20 million to date, to fund its working capital requirements. The Company incurred an operating loss of approximately $6 million for the year ended December 31, 2000 and had an approximate $3.89 million deficit in working capital at December 31, 2000. The Company has had to seek private financing repeatedly in order to continue its operations. Although the Company has secured limited working capital through debt, it anticipates, based on currently proposed plans and assumptions relating to its operations that, with available resources, the Company's contemplated cash requirements will be satisfied for no more than March 2001. Since September 2000, the Company's operations have been supported substantially by loans from certain directors of the Company. Although such directors have continued to make such loans, they are not obligated to do so and may stop at any time. The Company is seeking additional capital. If it is unable to identify additional sources of capital, the Company will be required to cease operations. As a result of the above, the Independent Auditors' Report on the Company's consolidated financial statements appearing at Item 8 includes an emphasis paragraph indicating that the Company's recurring losses from operations 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.
History of Operating Losses; Limited Patient Enrollment
The Company has incurred losses in every quarter since its inception in February 1995. The Company's ability to operate profitably is dependent upon its ability to develop and market its products in an economically successful manner. To date, the Company has been unable to do so. No assurances can be given that the Company will be able to generate revenues or ever operate profitably in the future.
The Company's 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. There can be no assurance that the Company will achieve recurring revenue or profitability on a consistent basis or at all.
In October 1996 the Company began enrolling patients in its first disease management program and only began substantial patient contacts during 1998. The Company currently has patients enrolled in five of its disease-specific programs. Through February 2001, an aggregate of approximately 650,000 persons have been enrolled in Company programs. However, the Company has never been able to enroll a sufficient number of patients to cover the cost of its programs. The participation of patients in the Company's programs has been limited by several factors, including the limited ability of clients to provide the Company with accurate information with respect to the specific patient populations, including coding errors that necessitated extensive labor-intensive data processing prior to program implementation. In addition, the Company has encountered resistance from patients and other sources of information to the Company's systems.
Resignations of Certain Officers and Directors; New Management
In January 2000, the Company accepted the resignations of Dr. David Nash, a director of the Company and A. Neal Westermeyer, Chief Operating Officer of the Company. In March 2000, the Company accepted the resignation of John V. Crisan, Chief Financial Officer and a director of the Company and Donald A. Carlberg, President, Chief Executive Officer and a director of the Company. In March 2001, Dr. Barbara McNeil, a director of the Company, resigned effective April 15th 2001. None of the foregoing individuals cited any dispute with the Company and all such individuals indicated that their reasons for departing from the Company were personal.
In March 2000, the Company appointed Roger L. Chaufournier as President, Chief Executive Officer and director of the Company and appointed Kent Tapper as Interim Chief Financial Officer. In August 2000, Christine St. Andre was appointed Chief Operating Officer of the Company.
No assurance can be given that the Company's current or future members of management will be able to operate the business of the Company effectively.
Terminability of Agreements; Exclusivity Provisions
The Company's 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 addition, the Company has agreed not to engage or participate in any project other than those under development for Bristol-Myers that involve the development or implementation of a program similar to those developed for Bristol-Myers for specified time periods (the "Exclusivity Periods"). In general, at the completion of the Exclusivity Periods, Bristol-Myers has the right to negotiate an exclusive arrangement for these disease management programs provided that a specified minimum number of patients have enrolled in the programs or that it agrees to pay an exclusivity fee. Bristol-Myers has the further right, in the event exclusive arrangements cannot be negotiated, to match any bona fide offers made to the Company for disease management programs for these categories of patients for a period of time from the conclusion of the Exclusivity Periods. These exclusivity provisions could restrict the Company's ability to market its services to other customers. In general, customer contracts may include significant performance criteria and implementation schedules for the Company. 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 the Company's health information system, the Company 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 the Company's 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 the Company's system, especially in the health care industry, in which the containment of costs is emphasized. Because of the subjective nature of patient compliance, the Company 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 the Company's 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 the Company's strategies will result in market acceptance for its services or that a market for the Company's services will develop or not be limited.
Unpredictability of Patient Behavior May Affect Success of Programs
The ability of the Company to monitor and modify patient behavior and to provide information to health care providers and payors, and consequently the success of the Company's disease management system, is dependent upon the accuracy of information received from patients. The Company has not taken and does not expect that it will take, specific measures to determine the accuracy of information provided to the Company by patients regarding their medical histories. No assurance can be given that the information provided to the Company 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 the Company to validate or confirm any such information. In the event that patients enrolled in the Company's programs provide inaccurate information to a significant degree, the Company would be materially and adversely affected. Furthermore, there can be no assurance that patient interventions by the Company will be successful in modifying patient behavior, improving patient health or reducing costs in any given case. Many potential customers may seek data from the Company with respect to the results of its programs prior to retaining it to develop new disease management or other health information programs. The Company's 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. Competitors vary in size and in scope and breadth of products and services offered, and the Company competes with various companies in each of its disease target markets. Many of the Company's competitors have significantly greater financial, technical, product development and marketing resources than the Company. 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 the Company intends to compete. In addition, with sufficient financial and other resources, many of these competitors may provide services similar to those of the Company without substantial barriers. The Company does not possess any patents with respect to its integrated information capture and delivery system.
The Company's 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. The Company also competes against other companies that provide statistical and data management services, including clinical trial services to pharmaceutical companies.
The Company 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, the Company 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 the Company.
Substantial Fluctuation in Quarterly Operating Results
The Company's 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, the Company's 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 the Company 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 the Company.
Quality Control
The Company 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 the Company's 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.
Government Regulation
The health care industry, including the current and proposed business of the Company, 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 the Company 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 the Company 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. There can be no assurance, however, that the Company's operations will not be challenged as constituting the unlicensed practice of medicine. If such a challenge were made successfully in any state, the Company 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 the Company.
The Company is subject to state laws governing the confidentiality of patient information. A variety of statutes and regulations exist safeguarding 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. The Company 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 requires 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 wrongful disclosure of individually identifiable health information, imprisonment. The Secretary is in the process of promulgating and publishing proposed rules addressing the standards, however, no final rules have been adopted to date. Final rules may be adopted during 2001. Although the Company intends to comply with all applicable laws and regulations regarding medical information privacy, failure to do so could have an adverse effect on the Company's business.
The Company 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, the Company 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. The Company is unable to predict what government regulations, if any, affecting its business may be promulgated in the future. The Company's 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 the Company 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 the Company's programs. The Company 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 the Company's programs. The failure of the Company to maintain adequate price levels could have a material adverse effect on the Company.
Significant Customer Concentration
During 2000, a significant customer ceased operation of services supplied by the Company, which had a material adverse effect on the results of operations. As of December 31, 2000, the Company now has more customers than it did at December 31, 1999. While the customer base is more diverse there is still a significant concentration of the Company's business in a small number of customers, with several of the Company's most significant contracts being with CHA Health, Astra Zeneca, Bristol-Myers and Independence Blue Cross. The Company expects that its sales 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 the Company and its operations. There can be no assurance that customers will maintain their agreements with the Company, enroll a sufficient number of patients in the programs developed by the Company for the Company to achieve or maintain profitability, or that customers will renew their contracts upon expiration or on terms favorable to the Company.
Dependence on Customers for Marketing and Patient Enrollment
The Company has limited financial, personnel and other resources to undertake extensive marketing activities. One element of the Company's 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, the Company, 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 the Company's customers. The Company 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, the Company's revenue may be insufficient to support its activities.
Control of the Company
The Company is controlled by the executive officers, directors and certain stockholders of the Company who beneficially own in the aggregate approximately 65% of the outstanding Common Stock. As a result of such ownership, these stockholders, in the event they act in concert, will have control over the management policies of the Company and all matters requiring approval by the stockholders of the Company, including the election of directors.
Potential Liability and Insurance
The Company will provide information to health care providers and managed care organizations upon which determinations affecting medical care will be made, and it could share in potential liabilities for resulting adverse medical consequences to patients. In addition, the Company could have potential legal liability in the event it fails to record or disseminate correctly patient information. The Company maintains an errors and omissions insurance policy with coverage of $5 million in the aggregate and per occurrence. Although the Company 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 the Company's procedures for limiting liability have been or will be effective, that the Company will not be subject to litigation that may adversely affect the Company's 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 the Company will cover, as to scope or amount, any claims that may be made against the Company.
Intellectual Property
The Company considers its methodologies, processes and know-how to be proprietary. The Company seeks to protect its proprietary information through confidentiality agreements with its employees. The Company's policy is to have employees enter into confidentiality agreements containing provisions prohibiting the disclosure of confidential information to anyone outside the Company, requiring employees to acknowledge, and, if requested, assist in confirming the Company's ownership of any new ideas, developments, discoveries or inventions conceived during employment, and requiring assignment to the Company of proprietary rights to such matters that are related to the Company's business.
Employees
As of February 28, 2001, the Company had 54 full and part-time employees.
Financial Information
For financial information concerning the Company, see the financial statements and the notes thereto included elsewhere herein.
Item 2.
Item 2. Description of Properties.
The Company's executive and corporate offices are located in Rochester, New York in approximately 7,000 square feet of leased office space under an operating lease that expires on December 31, 2001.
The Company believes its plants and facilities are suitable and adequate, and have sufficient productive capacity, to meet its current needs.
Item 3.
Item 3. Legal Proceedings.
Neither the Company nor any of its subsidiaries is a party to any material legal proceedings.
Item 4.
Item 4. Submission of Matters To A Vote Of Security Holders.
No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 2000.
PART II
Item 5.
Item 5. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters.
(a) Market Information
The following table sets forth, for the periods indicated, the range of the high and low closing sale price for the Company's Common Stock. The Company's stock was traded on the NASDAQ National Market until September 14, 2000 and is now traded on the OTC Bulletin Board market.
(b) Holders
The approximate record number of holders of the Company's common stock as of February 28, 2000 is 69. However, the Company believes that there are in excess of 750 beneficial holders of Common Stock of the Company.
(c) Dividends
The Company is paying 9% cumulative dividends on its Series C Convertible Preferred Stock that was issued March 31, 2000. The Company anticipates payment of dividends on this class of stock annually and expects that it may be required to pay additional dividends on any classes of preferred stock that may be issued to raise working capital.
(d) Recent sales of unregistered securities
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"), raising $1,000,000 in total proceeds. The shares were sold to four accredited investors, under an exemption from registration pursuant to Rule 506 of the Securities Act of 1933. 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 8 shares of Common Stock to 1 share of Series C Preferred Stock. Each Series C share has voting rights equivalent to 8 shares of Common Stock (800,000 shares). John Pappajohn and Derace Schaffer, members of the Board of Directors of the Company, purchased 50,000 and 25,000 shares of Series C Stock respectively. The proceeds from this issuance have been used to support the Company's operations.
Between August 20, 2000 and December 31, 2000 the Company borrowed $1,171,000 from Messers. Pappajohn and Schaffer in the form of demand notes intended to be secured by the assets of the Company. The Company anticipates that it will need to borrow additional funds before it can secure capital through the issuance of additional securities. From January 1, 2001 through March 31, 2001, an additional $660,000 has been borrowed from Mr. Pappajohn under substantially the same terms. The Company's current directors have no obligation to continue to provide funds. There can be no assurances given that the Company can borrow the additional amounts needed or that the Company can sell additional securities.
Item 6.
Item 6. Selected Financial Data.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management's discussion and analysis provides a review of the Company's operating results for the years ended December 31, 2000, 1999 and 1998, and its financial condition at December 31, 2000. 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 the Company. This review should be read in conjunction with the accompanying consolidated financial statements.
In an effort to give investors a well-rounded view of the Company's current condition and future opportunities, this Annual Report on Form 10-K includes forecasts by the Company's 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 the Company's 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 the Company's filings with the Securities and Exchange Commission.
Overview
The Company was formed on February 22, 1995. Although the Company has completed the development of its integrated information capture and delivery system and has developed several disease management programs for specific diseases, the Company is continuing to refine its products for additional applications. In October 1996 the Company began enrolling patients in its first disease management program and began substantial patient contacts during 1998. Also in 1998, the Company expanded its products offered to include demand management and health related surveys. The Company currently has patients enrolled in more than 20 of its disease-specific, demand management or survey programs. Through February 2001, an aggregate of over 650,000 persons have been enrolled or participated in Company programs. However, the Company has never been able to enroll a sufficient number of patients to cover the cost of its programs. The enrollment of patients in the Company's programs has been limited by several factors, including the limited ability of clients to provide the Company with accurate information with respect to the specific patient populations, including coding errors that necessitated extensive labor-intensive data processing prior to program implementation. In addition, the Company has encountered resistance from sources of information largely due to uncertainty concerning legal liability for patient confidential information.
In response to these market dynamics, the Company has taken several tactical and strategic steps including, formal designation of internal personnel at customer sites to assist clients with implementation; closer integration of Company systems personnel with clients to facilitate accurate data transfers; promotion of a broader product line to enable clients to enter the Company's disease management programs through a variety of channels and providing the customers access and control over their patient's confidential information though targeted use of Internet technology. The Company's demand management services and automated surveys (general health and disease-specific), can provide mechanisms for enrollment to the Company's disease management programs. The Company 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 the Company's efforts will succeed in increasing patient enrollment in Company programs.
The Company has entered into services 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, and (vii) 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. 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 the Company has had limited enrollment of patients in its programs, the Company's operations revenue has been, and may continue to be limited. During 1999 and 2000, the Company has committed increased resources to developing strategic upgrades of its information and telecommunications technologies to leverage the emerging capabilities of the Internet. Moreover, as the Company has completed the development of its primary disease management programs, it anticipates that development revenue will continue to be minimal unless and until the Company enters into new development agreements. The Company's program development contracts typically require payment from the customer at the time that the contract is executed, with additional payments made as certain development milestones are met. Development contract revenue is recognized on a percentage of completion basis, in accordance with the ratio of total development cost incurred to the estimated total development costs for the entire project. Losses, if any, related to program development will be recognized in full as identified. The Company's contracts typically call for a fee to be paid by the customer for each patient enrolled for a series of program services, pay for those services incrementally as they are delivered or pay 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. The Company has not capitalized any costs related to the development of software for use in its programs since all of such software has been developed for internal use.
Revenues from Operations, which includes fees received by the Company for operating its programs is the most significant source of the Company's revenues. The Company is continuing to devote significant marketing efforts to increasing the number of programs that are in operation as well as development resources to expand its products that include licensing of Internet-based technology. Nevertheless, the Company is still supporting a substantial infrastructure in maintaining the capacity necessary to deliver its services and to offer its services to new customers. Therefore, the Company will be required to increase substantially the number of patient contacts and management programs to cover the costs necessary to maintain the capability to service its customers. In that the Company began substantial patient contacts during 1998 and has still, to this date, increased contacts at a relatively slow rate, the Company is continually examining its costing structures to determine the levels that will be necessary to achieve profitability.
During the latter part of 2000, the Company made reductions in cost through structural changes in its operation: closing of two facilities, closure of a third facility as of February 28, 2001, and a reduction of staff from 120 to 54 persons. These changes have reduced the Company's loss before depreciation and amortization from about $1.8 million for the 3-month period ended December 31, 1999 to approximately $0.9 million for the same period of 2000. Some cost savings from actions taken in November and December of 2000 will not be realized until after January 1, 2001.
The sales cycle for the Company's programs may be extensive from initial contact to contract execution. During these periods, the Company may expend substantial time, effort and funds to prepare a contract proposal and negotiate the contract. The Company may be unable to consummate a commercial relationship after the expenditure of such time, effort and financial resources.
In February 1999, the Company, through a wholly-owned subsidiary, Patient Infosystems Acquisition Corp., acquired substantially all of the assets of HealthDesk Corporation, a consumer healthcare software company, primarily engaged in the business of designing and developing Internet-based products in the healthcare, wellness and disease management industries for $761,463. The Company obtained funds for the HealthDesk acquisition from its available cash. The assets that were acquired by the Company included inventory, intellectual property, hardware and software. In August 2000, the Company's board of directors approved a merger of Patient Infosystems Acquisition Corp. into the Company.
During 2000, the Company felt the pressure of severe working capital shortfalls. The Company's available cash had been reduced to a level that substantially limits its operations. Although the Company established lines of credit in the amount of $2.5 million, raised $1 million in equity and issued an additional $1.17 million in demand notes, the Company is continuing to incur losses and must identify substantial additional capital to sustain its operations. The Company's operations are currently being funded by loans being made on a monthly basis by a director of the Company. This director is not obligated to continue to loan the company additional funds and may stop at any time. In such instance, if the Company is unable to identify any additional sources of capital, it will likely be forced to cease operations. As a result of the above, the Independent Auditors' Report on the Company's consolidated financial statements appearing at Item 8 includes an emphasis paragraph indicating that the Company's recurring losses from operations raise substantial doubt about the Company's 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.
In December 1999, the Company established a credit facility with Norwest Bank Iowa, National Association, now Wells Fargo Bank, ("Norwest") for $1.5 million (the "Original Line of Credit"). The Original Line of Credit is guaranteed by two of the Company's directors: John Pappajohn and Derace L. Schaffer (the "Original Guarantees"). In March 2000, the Original Line of Credit was increased to a total of $2.5 million (the "line of Credit") and also guaranteed by Messrs. Pappajohn and Schaffer (the "Additional Guarantees").
Interest under the Line of Credit is the prime rate of interest established by Norwest or, at the Company's election, the LIBOR Rate Option. The principal and any unpaid interest under the line of Credit are due and payable on March 31, 2002. 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 beginning June 30, 2001. In conjunction with the Line of Credit, the Company granted to Norwest a security interest in all of the Company's assets.
In consideration of the Original Guarantees, the Company granted to each of Messers. Pappajohn and Schaffer warrants to purchase 187,500 shares of the Company's Common Stock at an exercise price of $1.5625 per share, which was the closing price of the Company's Common Stock on December 28, 1999. In consideration of the Additional Guarantees, the Company intends to grant to each of Messers. Pappajohn and Schaffer warrants to purchase 125,000 shares of the Company's Common Stock at an exercise price of $2.375 per share, which was the closing price of the Company's Common Stock on March 21, 2000.
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"), raising $1,000,000 in total proceeds. These shares can be converted into Common Stock at a rate of 8 shares of Common Stock to 1 share of Series C Preferred Stock. Each Series C share has voting rights equivalent to 8 shares of Common Stock (800,000 shares). Messers Pappajohn and Schaffer purchased 50,000 and 25,000 shares of Series C Stock, respectively. The proceeds from this issuance have been used to support the Company's operations.
Between August 20, 2000 and December 31, 2000 the Company borrowed $1,171,000 from Messers. Pappajohn and Schaffer in the form of demand notes intended to be secured by the assets of the Company. The Company anticipates that it will need to borrow additional funds before it can secure additional capital through the issuance of additional securities. Between January 1, 2001 and March 31, 2001, an additional $660,000 has been borrowed from Mr. Pappajohn under substantially the same terms. The Company's current directors have no obligation to continue to provide funds. There can be no assurances given that the Company can borrow the additional amounts needed or that the Company can sell additional securities.
In September 2000, the Company executed a letter of intent to acquire substantially all the assets of Health Data Solutions and its affiliate, American Care Source (collectively known as "HDS"). Negotiations with HDS ended in January 2001, with the parties failing to reach mutually acceptable terms for the proposed acquisition, but resolving to enter into a marketing agreement. On March 6, 2001, the Company and HDS entered into a Strategic Partnership and Marketing Agreement establishing the terms under which both companies may offer their combined products and services to their respective clients. While no assurances can be given that the Company will generate new revenues from this relationship, the Company will use this relationship to validate strategic marketing initiatives.
Results of Operations
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues
Revenues are comprised of revenues from operations fees, development fees and licensing fees. Revenues decreased 39.7% from $3,545,207 for the year ended December 31, 1999 to $2,139,262 for the year ended December 31, 2000. A summary of these revenues by category, is as follows for the years ended December 31:
Revenues from operations fees decreased 40.6% from $3,270,900 for the year ended December 31, 1999 to $1,941,810 for the year ended December 31, 2000. Operations revenues are generated as the Company 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 decreased significantly in 2000 due to termination of Medicare by two of the Company's key customers and completion of two pharma projects.
Revenues from development fees decreased 64.1% from $227,307 for the year ended December 31, 1999 to $81,626 for the year ended December 31, 2000. In 1999, the Company received development revenues from a variety of customers for creation of or modification to specific programs. The Company has completed substantially all services under these agreements and is primarily receiving revenues in connection with the enhancement of its existing programs. Development revenues include clinical, technical and operational design or modification of the Company's primary disease management programs. Development revenues have declined from year to year since the year ended December 31, 1997, as the Company reduced the amount of development work it has performed for its customers. The Company anticipates that revenue from development fees will continue to decline unless the Company enters into new development agreements.
Revenues from licensing fees increased 146.4% from $47,000 for the year ended December 31, 1999 to $115,826 for the year ended December 31, 2000. Licensing revenue represents amounts that the Company 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 the Company's Internet-based Case Management Support System product line. The Company had licensing fees of $115,826 from the sale of its Internet-based products in 2000.
Costs and Expenses
Cost of sales includes salaries and related benefits, services provided by third parties, and other expenses associated with the development of the Company's customized disease state management programs, as well as the operation of each of its disease state management programs.
Cost of sales decreased 22.8% from $5,614,128 for the year ended December 31, 1999 to $4,332,048 for the year ended December 31, 2000. The decrease in these costs primarily reflects a decreased level of program development and operational activities.
Sales and marketing expenses decreased 57.2% from $2,445,425 for the year ended December 31, 1999 to $1,047,511 for the year ended December 31, 2000. These costs consist primarily of salaries, related benefits and travel costs, sales materials and other marketing related expenses. Decreased spending in this area is attributable to the Company's efforts to reduce costs and to its limited available capital, resulting in a smaller sales and marketing staff during the year ended December 31, 2000. It is anticipated that the Company will need to invest heavily in the sales and marketing process in future periods if funds are available. To the extent that the Company has limited funds available for sales and marketing, 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 the Company. General and administrative expenses increased 21% from $1,885,566 for the year ended December 31, 1999 to $2,282,026 for the year ended December 31, 2000. The increase in these costs was caused by the amortization of $664,750 in debt issuance costs related to funding operations and the addition of required administrative personnel. Without the debt issuance cost, general and administrative expense would have decreased 14.2% from $1,885,566 for the year ended December 31, 1999 to $1,617,276 for the year ended December 31, 2000. The Company expects that general and administrative expenses will decrease in future periods as expense controls and infrastructure reductions are implemented.
Research and development expenses consist primarily of salaries and related benefits and administrative costs allocated to the Company's 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 68.4% from $967,365 for the year ended December 31, 1999 to $305,543 for the year ended December 31, 2000. The decrease in research and development expenses reflects the transition of the Company's investment into Internet technology during 1999 into operational systems during 2000.
Other Income/Expense is comprised of interest income and losses on investments. The net totals are as follows for the years ended December 31:
Interest expense is due to debt. Interest income is generated primarily from cash balances and short-term money market investments. Interest decreased to an expense of $190,997 for the year ended December 31, 2000 from an income of $166,164 for the year ended December 31, 1999. The decrease in interest income reflects the use by the Company of its available cash and increased borrowings required to fund operations.
The loss in investments for the year ended December 31, 2000 includes variations in Canadian currency ("CN$") for PATI Canada and the sale or insurance recovery of certain fixed assets of the Company. The financial records of PATI Canada, a wholly owned subsidiary, are maintained in United States Dollars ("US$"). Receivables or accruals which are CN$ are booked in equivalent US$ at an exchange rate for the month the transaction is booked. If there is a difference between the exchange rate at the time of a cash receipt or payment of the accrued expense, the differential is realized as an investment gain or loss. In June 2000, the Company consolidated operational locations and sold or abandoned certain fixed assets which were no longer required resulting in a loss, net of an insurance recovery, of $12,643.
For the year ended December 31, 2000, the Company declared $617,500 in dividends on convertible 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"), raising $1,000,000 in total proceeds. These shares can be converted into Common Stock at a rate of 8 shares of Common Stock to 1 share of Series C Preferred Stock. Each Series C share has voting rights equivalent to 8 shares of Common Stock (800,000 shares). The proceeds from this issuance have been used to support the Company's operations.
The fair market value of the Company's Common Stock at the time of issuance of Series C Stock was $1.9375 per share. The Series C Preferred Stock is convertible as a price equal to $1.25 per share of Common Stock resulting in a discount, or beneficial conversion feature, of $0.6875 per share. The incremental fair value of $550,000 for the 100,000 shares of Series C Preferred issued is deemed to be the equivalent of a preferred stock dividend. The Company recorded the deemed dividend at the date of issuance by offsetting charges and credits to additional paid in capital of $550,000, without any effect on total stockholders' equity. In addition, the Company has accrued $67,500 in dividend expense, which will become payable to the Series C stockholders on March 31, 2001.
The Company had a net loss attributable to common stockholders of $6,656,706 for the year ended December 31, 2000, compared to $7,618,174 for the year ended December 31, 1999. This represents a loss of $.82 per share for 2000 and $.95 for 1999.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues
Revenues are comprised of revenues from operations fees, development fees and licensing fees. Revenues increased 51% from $2,344,072 for the year ended December 31, 1998 to $3,545,207 for the year ended December 31, 1999. A summary of these revenues by category is as follows for the years ended December 31:
Revenues from operations fees increased 136% from $1,385,720 for the year ended December 31, 1998 to $3,270,900 for the year ended December 31, 1999. Operations revenues are generated as the Company provides services to its customers for their disease-specific programs. Operations revenues increased significantly in 1999, as the Company continued to increase the membership levels in the Company's disease management programs and demand management programs.
Revenues from development fees decreased 67% from $689,157 for the year ended December 31, 1998 to $227,307 for the year ended December 31, 1999. The Company received $689,157 in development revenues for the year ended December 31, 1998, related almost entirely to fees from Bristol-Myers ("BMS") for the development of disease state management agreements. In 1999, the Company received development revenues from a variety of other customers (including BMS) related to other disease-specific programs. The Company has completed substantially all services under these agreements and is currently receiving revenues in connection with the development of only three programs. Development revenues include clinical, technical and operational design or modification of the Company's primary disease management programs. Development revenues have declined from year to year since the year ended December 31, 1997, as the Company reduced the amount of development work it has performed for its customers. The Company anticipates that revenue from development fees will continue to decline unless the Company enters into new development agreements.
Revenues from licensing fees decreased 83% from $269,195 for the year ended December 31, 1998 to $47,000 for the year ended December 31, 1999. Licensing revenue represents amounts that the Company 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 but not limited to, the Company's Internet-based Case Management Support System product line or its standardized asthma and diabetes programs. The Company had licensing fees of $47,000 from the sale of its Internet-based products in 1999.
The Company also provides other services to customers in the healthcare industry that involve new applications of its information capture and delivery system. These services include patient surveys, health risk assessments, patient satisfaction surveys, physician education programs and marketing support functions.
Costs and Expenses
Cost of sales include salaries and related benefits, services provided by third parties, and other expenses associated with the development of the Company's customized disease state management programs, as well as the operation of each of its disease state management programs.
Cost of sales increased 40% from $4,011,710 for the year ended December 31, 1998 to $5,614,128 for the year ended December 31, 1999. The increase in these costs primarily reflects an increased level of program development and operational activities, as well as the Company's creation of the capacity necessary to handle anticipated increases in the number of individuals to whom the Company provides services.
Sales and marketing expenses increased 27% from $1,929,525 for the year ended December 31, 1998 to $2,445,425 for the year ended December 31, 1999. These costs consist primarily of salaries, related benefits and travel costs, sales materials and other marketing related expenses. Increased spending in this area is attributable to the Company's efforts to expand its sales and marketing staff during the year ended December 31, 1999. It is anticipated that the Company will continue to invest heavily in the sales and marketing process in future periods, though at somewhat lower levels.
General and administrative expenses include the costs of corporate operations, finance and accounting, human resources and other general operating expenses of the Company. General and administrative expenses increased 27% from $1,490,210 for the year ended December 31, 1998 to $1,885,566 for the year ended December 31, 1999. These expenditures were incurred to develop the corporate infrastructure necessary to support anticipated program development and operations growth. The increase in these costs was caused by an increase in the Company's level of business activity and the addition of required administrative personnel. The Company expects that general and administrative expenses will decrease in future periods as expense controls and infrastructure reductions are implemented.
Research and development expenses consist primarily of salaries and related benefits and administrative costs allocated to the Company's 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 increased 224% from $298,686 for the year ended December 31, 1998 to $967,365 for the year ended December 31, 1999. The increase in research and development expenses reflects the Company's acquisition of Healthdesk in February 1999, which became the Company's Internet Technology development group devoting most of its efforts to the development of the Company's Internet-based software products.
Other Income/Expense is comprised of interest income and losses on investments. The net totals are as follows for the years ended December 31:
Interest income is generated primarily from cash balances and short-term money market investments. Interest income decreased to $166,164 for the year ended December 31, 1999 from $556,592 for the year ended December 31, 1998. The decrease in interest income reflects the use by the Company of its available cash and the reduction of proceeds that can earn interest.
Losses on investments are associated with two unrelated investments by the Company: (1) Patient Infosystems Canada, Inc. ("PATI Canada") and (2) the Pulse Group. At the end of 1998, the Company entered into a joint venture agreement with MacLean Hunter Publishing Limited to market and sell, on an exclusive basis in Canada, products and services developed by the Company and to jointly manage, finance and operate the business entity PATI Canada. The venture was dedicated to the development of a commercially viable business built around the sale, marketing and service of the Company's products and services in Canada. The loss of $167,063 reported for 1999 represents the Company's share of the loss incurred by the venture. On October 1, 1999, the Company acquired 100% control of the venture and the results of operations from that day forward are included in the Company's consolidated financial statements. The Company's 1997 investment in the Pulse Group was deemed to be no longer realizable as of June 30, 1999, and the initial total investment of $250,000 was recorded as an investment loss.
The Company had a net loss of $7,618,174 for the year ended December 31, 1999, compared to $4,829,467 for the year ended December 31, 1998. This represents a loss of $.95 per share for 1999 and $.60 for 1998.
Liquidity and Capital Resources
At December 31, 2000 the Company had a working capital deficit of $1,375,391 as compared to working capital of $414,132 at December 31, 1999. Also at December 31, 2000, the Company had a stockholders' deficit of $2,188,981. Through December 31, 2000 these amounts reflect the effects of the Company's continuing losses, issuance of demand notes totaling $1,171,000 due to directors of the Company and long term borrowings of $2,500,000 against its line of credit. The Company has never earned profits and since its inception, the Company has primarily funded its operations, working capital needs and capital expenditures from the sale of equity securities. The Company is currently maintaining it operations only through the receipt of continuing loans from one of its directors. If these loans or additional funds are not available, the Company would likely be required to cease operations.
In December 1999, the Company established a credit facility for $1,500,000 guaranteed by Derace Schaffer and John Pappajohn, two directors of the Company. In consideration for their guarantees, the Company granted to Dr. Schaffer and Mr. Pappajohn warrants to purchase an aggregate of 375,000 shares of common stock for $1.5625 per share. In March 2000, the facility was increased by $1,000,000 under substantially the same terms, also guaranteed by the same Board members. Additional warrants to purchase an aggregate of 250,000 shares of Common Stock for $2.325 per share, were granted to Dr. Derace Schaffer and Mr. John Pappajohn for their guarantee of this additional line of credit.
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"), raising $1,000,000 in total proceeds. Messers Pappajohn and Schaffer purchased 50,000 and 25,000 shares of Series C Stock respectively. The proceeds from this issuance have been used to support the Company's operations.
The Company has expended significant amounts to expand its operational capabilities including increasing its administrative and technical costs. While the Company has curtailed its spending levels in recent months, to the extent that revenues do not increase substantially, the Company's losses will continue and its available capital will diminish further. The Company's operations are currently being funded by loans being made on a monthly basis by a director of the Company. This director is not obligated to continue to loan the company additional funds and may stop at any time. In such instance, if the Company is unable to identify any additional sources of capital, it will likely be forced to cease operations. As a result of the above, the Independent Auditors' Report on the Company's consolidated financial statements appearing at Item 8 includes an emphasis paragraph indicating that the Company's recurring losses from operations raise substantial doubt about the Company's 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 2000 were $16,404, as compared to expenditures of $433,598 during 1999 and $594,663 during 1998. The expenditures during these periods represented the purchase of the significant technology platform components of the integrated information capture and delivery systems as well as purchases required to support the Company's growth in employees during those periods.
Nasdaq Listing Status
The Company's securities were delisted from the Nasdaq National Stock Market effective September 14, 2000. The Company's securities were immediately eligible to trade on the OTC Bulletin Board.
Inflation
Inflation did not have a significant impact on the Company's costs during 2000, 1999 or 1998. The Company 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 June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". In June 2000, the FASB issued SFAS No. 138, which amends certain provisions of SFAS 133 to clarify areas causing difficulties in implementation. SFAS No. 133, as amended, requires the Company to recognize all derivatives on the consolidated balance sheet at fair value. Derivatives that are not hedges of underlying transaction must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has completed the process of evaluating the impact of SFAS No. 133, as amended. The Company has not identified any derivatives that meet the criteria for a derivative instrument and does not participate in any hedging activities. As a result, there was no effect on the Company's consolidated financial position, results of operations or cash flows resulting from the adoption of SFAS No. 133, as amended, during the first quarter of 2001.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in the Financial Statements", which provides guidance on the recognition, presentation and disclosure of revenue in financial statements files with the SEC. The Company's adoption of SAB No. 101 during the fourth quarter of 2000 did not impact the Company's consolidated financial position, results of operations or cash flows.
In September 2000, the Financial Accounting Standards Board issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," which supercedes SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This standard is effective for transfers occurring after March 31, 2001, with certain disclosure requirements effective for the year ending December 31, 2000. The Company does not believe the adoption of this standard will have a significant impact on the Company's condensed consolidated financial position, results of operations or cash flows.
Year 2000 Issues
The Company suffered no ill effects from Year 2000 related technological issues.
Forward-Looking Statements
When used in this and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer of the Company, 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 the Company of any such expressions made by a third party with respect to the Company) are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company 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. The Company 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.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in interest rates, primarily in its cash transactions. The Company is exposed to changes in foreign currency exchange rates through receivables and expense accruals of its Canadian subsidiary. A discussion of the Company's accounting policies for financial instruments is included in the Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements. While the Company's current international operations are limited to Canada, it does not invest its cash in foreign currency instruments nor does it maintain cash in Canada except to facilitate inter-country transactions. The balances the Company has in cash or cash equivalents are generally available without legal restrictions to fund ordinary business operations. The Company historically invested excess operating cash in certificates of deposit and U.S. government bonds and other bonds that are subject to changes in short-term interest rates. The Company currently has no such investments. The Company made purchases of available-for-sale securities of $0 in 2000 and $21,073 in 1999.
Item 8.
Item 8. Financial Statements And Supplemental Data
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 subsidiary as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in Item 14. 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 subsidiary at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 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 9 to the consolidated financial statements, the Company's recurring losses from operations and stockholders' deficit raise substantial doubt about its ability to continue as a going concern. Management's plans concerning this matter are also described in Note 9. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Deloitte & Touche LLP Rochester, New York January 26, 2001 (March 28, 2001 as to Note 3)
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999
See notes to consolidated financial statements.
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
See notes to consolidated financial statements.
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
See notes to consolidated financial statements.
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
See notes to consolidated financial statements.
PATIENT INFOSYSTEMS, INC.
NOTES TO consolidated FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. BUSINESS AND 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 subsidiary, Patient Infosystems Canada, Inc. (see Note 8). Significant intercompany transactions and balances have been eliminated in consolidation.
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 of cash and cash equivalents, notes and the line of credit. 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 instruments approximates their recorded values due to the short-term nature of the instruments.
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. Revenue is recorded when billed, amounts not yet paid in are carried on the Consolidated Balance Sheet as Accounts Receivable net of an allowance for bad debt.
Development Contracts - The Company's program development contracts typically require payment from the customer at the time that the contract is executed, with additional payments made as certain development milestones are met. Development contract revenue is recognized on a percentage of completion basis, in accordance with the ratio of total development cost incurred to the estimated total development costs for the entire project. Losses, if any, are recognized in full as identified.
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 operates in only one business segment and its 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, 2000, 1999 and 1998, approximately $1,030,139 (48%), $1,200,841 (34%) and $626,697 (28%) respectively, of the Company's revenues arose from contracts with two customers. At December 31, 2000 and 1999, accounts receivable included balances of $164,920 and $68,088, 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.
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 need be recognized for applicable assets in 2000, 1999 or 1998.
Intangible Assets - Intangible assets represent the intellectual property (i.e.: tradenames, trademarks, licenses and brandnames) acquired from HealthDesk Corporation (see Note 8) which was being amortized over 15 years using the straight-line method. As a result of a further evaluation of this asset, it has been decided to alter the amortization based upon a remaining life of 4 years starting April 1, 2000. Accordingly, the Company recorded additional amortization expense in 2000 which had an impact of $76,543 on losses net of tax and $0.01 net loss per share basic and diluted for the year ended December 31, 2000.
Debt Issuance Costs - Debt issuance costs are amortized, using the straight-line method over the term of the line of credit.
Research and Development - Research and development costs consist principally of compensation and benefits paid to Company employees. All 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.
Net Loss Per Share - The calculations for the basic and diluted loss per share were based on loss available to common stockholders of $(6,656,706), $(7,618,174) and $(4,829,467) and a weighted average number of common shares outstanding of 8,135,635, 8,032,533 and 8,018,398 for the years ended December 31, 2000, 1999 and 1998 respectively. Options and warrants to purchase 852,272, 15,120 and 23,400 shares of common stock were outstanding but not included in the computation of diluted loss per share in 2000, 1999 and 1998, respectively, because the effect would be antidilutive due to the net loss in those years.
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 1% to 15% of their income on a pretax basis to the plan. 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 2000, 1999 and 1998.
Accumulated Other Comprehensive Income - Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. Items considered comprehensive income include foreign currency items, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. The Company's components of comprehensive income include net loss, foreign currency translation adjustments and for 1998, unrealized gains and losses on investments.
Statement of Financial Accounting Standards ("SFAS") No. 133 and 138 - In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". In June 2000, the FASB issued SFAS No. 138, which amends certain provisions of SFAS 133 to clarify areas causing difficulties in implementation. SFAS No. 133, as amended, requires the Company to recognize all derivatives on the consolidated balance sheet at fair value. Derivatives that are not hedges of underlying transaction must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has completed the process of evaluating the impact of SFAS No. 133, as amended. The Company has not identified any derivatives that meet the criteria for a derivative instrument and does not participate in any hedging activities. As a result, there was no effect on the Company's consolidated financial position, results of operations or cash flows resulting from the adoption of SFAS No. 133, as amended, during the first quarter of 2001.
Staff Accounting Bulletin ("SAB") No. 101 - In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in the Financial Statements", which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The Company's adoption of SAB No. 101 during the fourth quarter of 2000 did not impact the Company's consolidated financial position, results of operations or cash flows.
Statement of Financial Accounting Standards ("SFAS") No. 140 - In September 2000, the Financial Accounting Standards Board issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," which supercedes SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This standard is effective for transfers occurring after March 31, 2001, with certain disclosure requirements effective for the year ending December 31, 2000. The Company does not believe the adoption of this standard will have a significant impact on the Company's condensed consolidated financial position, results of operations or cash flows.
Reclassifications - Certain prior years amounts have been reclassified to conform with 2000 presentations.
2. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at December 31:
3. Debt
Line of Credit - In December 1999, the Company established a credit facility for $1,500,000 guaranteed by Derace Schaffer and John Pappajohn, two directors of the Company. In consideration for their guarantees, the Company granted to Dr. Schaffer and Mr. Pappajohn warrants to purchase an aggregate of 375,000 shares of common stock for $1.5625 per share. In March 2000, the facility was increased by $1,000,000 under substantially the same terms and also guaranteed by the same Board members resulting in a total amount due of $2,500,000 as of December 31, 2000. Additional warrants to purchase an aggregate of 250,000 shares of Common Stock for $2.325 per share, were granted to Dr. Schaffer and Mr. Pappajohn for their guarantee of this additional line of credit. The warrants are included in the debt issuance costs in the consolidated balance sheets. The value ascribed to the warrants granted in 1999 and 2000 were calculated based on the application of the Black Scholes option pricing model which incorporates current stock price, expected stock price volatility, expected interest rates, and the expected holding period of the warrant.
On March, 28 2001 this line of credit was amended and is due and payable on March 31, 2002. Accordingly, the amount outstanding at December 31, 2000 is reported as a long-term liability. Interest is due and payable at note maturity at a floating rate based upon LIBOR plus 1.75% (effective rate at December 31, 2001 was 8.18813%). 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 beginning June 30, 2001. The line of credit is secured by substantially all of the Company's assets.
Borrowings from directors - Between August 20, 2000 and December 31, 2000, the Company borrowed $823,500 from Mr. Pappajohn. Proceeds from these loans were used to support the Company's operations. The interest on these loans is 9.5% per year. The Company has borrowed an additional $660,000 from Mr. Pappajohn subsequent to January 1, 2001.
Between September 4, 2000 and December 31, 2000, the Company borrowed $347,500 from Dr. Schaffer. Proceeds from these loans were used to support the Company's operations. The interest on these loans is 9.5% per year.
The loans from Mr. Pappajohn and Dr. Schaffer are demand notes which total $1,171,000 as of December 31, 2000 and are secured by the assets of the Company.
4. INCOME TAXES
Income tax expense for the years ended December 31, 2000, 1999 and 1998 were: $13,422, $36,361 and $43,701, respectively. These amounts represent state and local income taxes only and are included in general and administrative expenses.
Income tax expense (benefit) for the years ended December 31 differed from the U.S. federal income tax rate of 34% as a result of the following:
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.
At December 31, 2000 the Company has net operating loss carryforwards for federal income tax purposes of approximately $25,900,500, which are available to offset future federal taxable income, if any, through 2019. 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, through 2019.
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"), raising $1,000,000 in total proceeds. These shares can be converted into Common Stock at a rate of 8 shares of Common Stock to 1 share of Series C Preferred Stock. Each Series C share has voting rights equivalent to 8 shares of Common Stock (800,000 shares).
The fair market value of the Company's Common Stock at the time of issuance of Series C Stock was $1.9375 per share. The Series C Preferred Stock is convertible as a price equal to $1.25 per share of Common Stock resulting in a discount, or beneficial conversion feature, of $0.6875 per share. The incremental fair value of $550,000 for the 100,000 shares of Series C Preferred issued is deemed to be the equivalent of a preferred stock dividend. The Company recorded the deemed dividend at the date of issuance by offsetting charges and credits to additional paid in capital of $550,000, without any effect on total stockholders' equity. In addition, the Company has accrued $67,500 in dividend expense, which will become payable to the Series C stockholders on March 31, 2001.
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. The Company has adopted the disclosures-only provision of SFAS No. 123, "Accounting for Stock-Based Compensation". No compensation cost has been recognized for the Stock Option Plan as it relates to employees since the exercise price of the options on the date of grant approximated fair market value. Had compensation cost for the Company's stock option plan 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:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model using an assumed risk-free interest rates of 5.28% for the year ended December 31, 2000, 5.89% for year ended December 31, 1999 and 5.32% for year ended December 31, 1998 and an expected life of 7 years. The Company has used a volatility factor of 1.33 for the year ended December 31, 2000, .74 for year ended December 31, 1999 and .94 for year ended December 31, 1998. For purposes of pro forma disclosure, the estimated fair value of each option is amortized to expense over that option's vesting period.
The Stock Option Plan authorizes 1,680,000 shares of common stock to be issued. On May 2, 2000, the Company filed a Form S-8 registering all the Stock Option Plan shares. 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. All of the currently outstanding options vest at the rate of 20% per year.
A summary of stock option activity follows:
The following table summarizes information concerning outstanding and exercisable options at December 31, 2000:
The Company also has outstanding stock purchase warrants entitling the holders to purchase a total of 625,000 shares of common stock at a price of $1.868 per share (weighted average exercise price). At December 31, 2000, all of these warrants are currently vested.
7. COMMITMENTS
The Company leases office space for its operating facilities under operating lease agreements that expire at varying dates through August 2002. Rent expense under these operating leases for the years ended December 31, 2000, 1999 and 1998 was $189,648, $302,194 and $210,375 respectively.
At December 31, 2000, future minimum lease payments under these leases are summarized as follows:
On January 24, 2001, the Company entered into a Lease Termination Agreement on the leased office space in Paoli, PA, which becomes effective February 28, 2001. This reduces the future obligation for 2001 to $142,704 and 2002 to $4,800 for a total 3-year commitment of $147,504.
8. ACQUISITIONS
On February 28, 1999, the Company, through its newly formed, wholly-owned subsidiary, Patient Infosystems Acquisition Corp., acquired substantially all the assets of HealthDesk Corporation, a consumer healthcare software company primarily engaged in the business of designing and developing Internet-based products in the healthcare, wellness and disease management industries. The acquired assets include inventory, intellectual property, hardware and software. The consideration paid for the transaction was $761,463 in cash. The results of operations of HealthDesk Corporation for the full year of 1999 are not material to the Company's consolidated financial statements.
The following unaudited pro forma results of operations for the year ended December 31, 1998 have been prepared as if an acquisition of HealthDesk Corporation had occurred as of the beginning of 1998:
The pro forma combined results do not purport to be indicative of results that would have occurred had the asset acquisition been in effect for the period presented, nor do they purport to be indicative of the results that will be obtained in the future.
On November 12, 1998, the Company entered into a joint venture agreement with MacLean Hunter Publishing Limited to market and sell, on an exclusive basis in Canada, products and services developed by the Company and to jointly manage, finance and operate the business entity Patient Infosystems Canada, Inc. ("PATI-CN"), which is dedicated to the development of a commercially viable business built around the sale, marketing and service of the Company's products and services.
On October 1, 1999, the Company entered into a "Share Purchase Agreement" with Rogers Publishing Limited ("ROGERS", formerly called Maclean Hunter Publishing Limited) to purchase ROGERS' 50% share in PATI-CN for the sum of $1.00 Canadian funds. Additionally, ROGERS reimbursed PATI-CN $41,149 Canadian funds for expenses charged to PATI-CN by ROGERS prior to October 1, 1999. As of October 1, 1999, PATI-CN became a wholly-owned subsidiary of the Company. The results of operations of PATI-CN for the full year of 1998 and 1999 are not material to the Company's consolidated financial statements.
9. 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 2000 of $6,039,206 and had a stockholders' deficit of $2,188,981 at December 31, 2000. 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 and, ultimately, to attain profitability. 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.
10. Subsequent Event
11. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of the unaudited interim results of operations by quarter:
PART III
Item 10.
Item 10. 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, 2000.
Item 11.
Item 11. Executive Compensation.
Director Compensation
Incorporated by reference to the Company's Proxy Statement for 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, 2000.
Executive Compensation
Incorporated by reference to the Company's Proxy Statement for 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, 2000.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the Company's Proxy Statement for 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, 2000.
Item 13.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference to the Company's Proxy Statement for 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, 2000. PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements:
The financial statements of the Company are included in Part II, Item 8.
(2) Financial Statement Schedules:
Schedule II Valuation and Qualifying Accounts
All other financial statements schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements.
(b) Reports on Form 8 - K:
No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 2000.
(c) Exhibits:
Exhibit# Description of Exhibits
(3) Articles of Incorporation and By-Laws:
Certificate of Incorporation Incorporated herein by reference from Exhibit 3.1 on Form S-1 Registration Statement of the Company, filed with the Commission on December 17, 1996.
By-Laws Incorporated herein by reference from Exhibit 3.3 on Form S-1 Registration Statement of the Company, filed with the Commission on December 17, 1996.
(4) Instruments defining the rights of holders, incl. Indentures:
Patient Infosystems, Inc. Amended and Restated Stock Option Plan
Incorporated herein by reference from Exhibit 4.1 on Form S-8 Registration Statement of the Company, filed with the Commission on May 2, 2000.
4.4 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. - dated April 28, 2000.
(10) Material contracts:
10.15 Asset Purchase Agreement dated as of September 29, 1998 among Patient Infosystems Acquisition Corp., the Company and HealthDesk Corporation. Incorporated herein by reference from Exhibit 10.15 on Form 10-K 1998 Annual Report of the Company, filed with the Commission on April 13, 1999.
10.16 Amendment to Asset Purchase Agreement dated as of December 1, 1998 among Patient Infosystems Acquisition Corp., the Company and HealthDesk Corporation. Incorporated herein by reference from Exhibit 10.16 on Form 10-K 1998 Annual Report of the Company, filed with the Commission on April 13, 1999.
10.17 Second Amendment to Asset Purchase Agreement dated as of February 1, 1999 among Patient Infosystems Acquisition Corp., the Company and HealthDesk Corporation. Incorporated herein by reference from Exhibit 10.17 on Form 10-K 1998 Annual Report of the Company, filed with the Commission on April 13, 1999.
10.19 Consulting Agreement dated as of March 8, 1999 between the Company and John V. Crisan. Incorporated herein by reference from Exhibit 10.19 on Form 10-K 1998 Annual Report of the Company, filed with the Commission on April 13, 1999.
10.20 Lease Agreement dated as of February 22, 1995 between the Company and Conifer Prince Street Associates. Incorporated herein by reference from Exhibit 10.20 on Form 10-K 1998 Annual Report of the Company, filed with the Commission on April 13, 1999.
10.21 First Addendum to Lease Agreement dated as of August 22, 1995 between the Company and Conifer Prince Street Associates. Incorporated herein by reference from Exhibit 10.21 on Form 10-K 1998 Annual Report of the Company, filed with the Commission on April 13, 1999.
10.22 Second Addendum to Lease Agreement dated as of November 17, 1995 between the Company and Conifer Prince Street Associates. Incorporated herein by reference from Exhibit 10.22 on Form 10-K 1998 Annual Report of the Company, filed with the Commission on April 13, 1999.
10.23 Third Addendum to Lease Agreement dated as of March 28, 1996 between the Company and Conifer Prince Street Associates. Incorporated herein by reference from Exhibit 10.23 on Form 10-K 1998 Annual Report of the Company, filed with the Commission on April 13, 1999.
10.24 Fourth Addendum to Lease Agreement dated as of October 29, 1996 between the Company and Conifer Prince Street Associates. Incorporated herein by reference from Exhibit 10.24 on Form 10-K 1998 Annual Report of the Company, filed with the Commission on April 13, 1999.
10.25 Fifth Addendum to Lease Agreement dated as of November 30, 1996 between the Company and Conifer Prince Street Associates. Incorporated herein by reference from Exhibit 10.25 on Form 10-K 1998 Annual Report of the Company, filed with the Commission on April 13, 1999.
10.26 Sixth Addendum to Lease Agreement dated as of November 24, 1997 between the Company and Conifer Prince Street Associates. Incorporated herein by reference from Exhibit 10.26 on Form 10-K 1998 Annual Report of the Company, filed with the Commission on April 13, 1999.
10.30 Seventh Addendum to Lease Agreement dated as of June 16, 1999 between the Company and Conifer Prince Street Associates. Incorporated herein by reference from Exhibit 10.30 on Form 10-K 1999 Annual Report of the Company, filed with the Commission on March 31, 2000.
10.31 Lease Agreement dated as of July 2, 1999 between the Company and Cadena Properties Limited. Incorporated herein by reference from Exhibit 10.31 on Form 10-K 1999 Annual Report of the Company, filed with the Commission on March 31, 2000.
10.32 Lease Agreement dated as of August 1, 1999 between the Company and Michele M. Hoey and John E. Hoey. Incorporated herein by reference from Exhibit 10.32 on Form 10-K 1999 Annual Report of the Company, filed with the Commission on March 31, 2000.
10.33 Revolving Note dated as of December 23, 1999 between the Company and Norwest Bank Iowa, National Association. Incorporated herein by reference from Exhibit 10.33 on Form 10-K 1999 Annual Report of the Company, filed with the Commission on March 31, 2000.
10.34 Credit Agreement dated as of December 23, 1999 between the Company and Norwest Bank Iowa, National Association. Incorporated herein by reference from Exhibit 10.34 on Form 10-K 1999 Annual Report of the Company, filed with the Commission on March 31, 2000.
10.35 Security Agreement dated as of December 23, 1999 between the Company and Norwest Bank Iowa, National Association. Incorporated herein by reference from Exhibit 10.35 on Form 10-K 1999 Annual Report of the Company, filed with the Commission on March 31, 2000.
10.36 Arbitration Agreement dated as of December 23, 1999 between the Company and Norwest Bank Iowa, National Association. Incorporated herein by reference from Exhibit 10.36 on Form 10-K 1999 Annual Report of the Company, filed with the Commission on March 31, 2000.
10.37 Financing Statement executed by the Company and Norwest Bank Iowa, National Association. Incorporated herein by reference from Exhibit 10.37 on Form 10-K 1999 Annual Report of the Company, filed with the Commission on March 31, 2000.
10.38 First Amendment to Credit Agreement dated as of March 21, 2000 between the Company and Norwest Bank Iowa, National Association. Incorporated herein by reference from Exhibit 10.38 on Form 10-K 1999 Annual Report of the Company, filed with the Commission on March 31, 2000.
10.39 Note Modification Agreement dated as of March 21, 2000 between the Company and Norwest Bank Iowa, National Association. Incorporated herein by reference from Exhibit 10.39 on Form 10-K 1999 Annual Report of the Company, filed with the Commission on March 31, 2000.
10.41 Form of Subscription Agreement - Dated on or about March 31, 2000 between the Company 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 the Company 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 the Company and Conifer Prince Street Associates.
10.44 Termination of Lease Agreement - Dated of January 24, 2001 between the Company and Michele M. Hoey and John E. Hoey.
10.45 Amended and Restated Credit Agreement - dated as of March 28, 2001 between the Company and Wells Fargo Bank Iowa, National Association.
10.46 Revolving Note - dated as of March 28, 2001 between the Company 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.
(21) Subsidiaries
EXHIBIT 21 Subsidiaries
All other exhibits are omitted because they are not applicable or the required information is shown elsewhere in this Annual Report on Form 10-K.
Schedule II
Patient InfoSystems, Inc. Valuation and Qualifying Accounts For the Years Ended December 31, 2000, 1999 and 1998
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 April 2, 2001 ----------------------------------- ------------- Roger L. Chaufournier Date Director, President, and Chief Executive Officer
Pursuant to the requirements the Securities and 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 April 2, 2001 ----------------------------------- ------------- Roger L. Chaufournier Date Director, President and Chief Executive Officer (Principal Executive Officer)
By: /s/ Kent A. Tapper April 2, 2001 ----------------------------------- ------------- Kent A. Tapper Date Vice President Financial Planning (Principal Financial and Accounting Officer)
By: /s/ Derace L. Schaffer, M.D. April 2, 2001 ----------------------------------- ------------- Derace L. Schaffer, M.D. Date Chairman of the Board
By: /s/ John Pappajohn April 2, 2001 ----------------------------------- ------------- John Pappajohn Date Director
By: /s/ Barbara J. McNeil, M.D., Ph.D. April 2, 2001 ----------------------------------- ------------- Barbara J. McNeil, M.D., Ph.D. Date Director
By: /s/ Carl F. Kohrt, Ph.D. April 2, 2001 ----------------------------------- ------------- Carl F. Kohrt, Ph.D. Date Director