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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB/A
(Amendment No. 1)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2003
-----------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to Commission file number: 0-22319
PATIENT INFOSYSTEMS, INC.
-------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 16-1476509
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
46 Prince Street, Rochester, NY 14607
-------------------------------------
(Address of principal executive offices)
(585) 242-7200 (Issuer's telephone number,
including area code)
As of November 3, 2003, 10,956,424 of the Company's common stock, par value $.01
per share, were outstanding.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
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Explanatory Note
This Form 10-QSB/A (Amendment No. 1) is filed to amend Patient Infosystems,
Inc.'s Form 10-QSB for the quarter ended June 30, 2003 to include restated
financial statements as discussed in NOTE 10 of the "Notes to Unaudited
Consolidated Financial Statements", and to amend and restate each item of the
Patient Infosystems, Inc.'s Quarterly Report on Form 10-QSB which has been
affected by the financial statement restatement. The items of the Patient
Infosystems, Inc.'s Form 10-QSB for the quarter ended June 30, 2003 which are
amended and restated in their entireties herein are: Part I, Item1. - Financial
Statements, Part I, Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations, Part I, Item 3 - Controls and Procedures,
Part II, Item 2 - Changes in Securities and Use of Proceeds and Part II, Item
6(a) Exhibit 11. Except as described in this Explanatory Note, this Form
10-QSB/A (Amendment No. 1) does not otherwise modify the disclosures in the
Patient Infosystems Inc.'s Quarterly Report on Form 10-QSB filed with the
Securities and Exchange Commission on August 14, 2003.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------
ASSETS June 30, 2003 December 31, 2002
------------- -----------------
(As restated,
see Note 10)
CURRENT ASSETS:
Cash and cash equivalents $ 225,059 $ 5,011
Accounts receivable 555,030 441,216
Notes receivable 2,250,000 200,000
Prepaid expenses and other current assets 121,907 105,827
---------------------------------------
Total current assets 3,151,996 752,054
Property and equipment, net 223,108 285,747
Intangible assets (net of accumulated amortization of $515,044 and $443,258) 107,679 179,465
---------------------------------------
TOTAL ASSETS $ 3,482,783 $ 1,217,266
=======================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 570,093 $ 379,004
Accrued salaries and wages 225,921 208,752
Borrowings from directors 5,870,516 5,077,500
Borrowings from shareholders 1,143,138 -
Line of credit 3,000,000 -
Accrued expenses 383,351 351,621
Accrued interest 995,265 713,554
Deferred revenue 133,038 157,074
---------------------------------------
Total current liabilities 12,321,322 6,887,505
---------------------------------------
LINE OF CREDIT - 3,000,000
STOCKHOLDERS' DEFICIT:
Preferred stock - $.01 par value: shares authorized: 5,000,000
Series C, 9% cumulative, convertible, issued and outstanding - 100,000 1,000 1,000
Series D, 9% cumulative, convertible, issued and outstanding - 198,128
as of June 30, 2003 1,981 -
Common stock - $.01 par value: shares authorized: 20,000,000
issued and outstanding - 10,956,024 as of December 31, 2002,
10,956,454 as of June 30, 2003 109,564 109,560
Additional paid-in capital 26,900,962 24,132,153
Accumulated deficit (35,852,046) (32,912,952)
---------------------------------------
Total stockholders' deficit (8,838,539) (8,670,239)
---------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,482,783 $ 1,217,266
=======================================
See notes to unaudited consolidated financial statements.
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
----------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
(As Restated, (As Restated,
see Note 10) see Note 10)
REVENUES
Operations Fees $ 650,303 $ 499,085 $ 1,226,106 $ 958,455
Consulting Fees 927,854 30,000 1,297,850 59,538
License Fees 1,880 13,630 3,760 24,050
------------------------------------------------------------
Total revenues 1,580,037 542,715 2,527,716 1,042,043
COSTS AND EXPENSES
Cost of sales 1,184,855 461,726 1,946,457 949,579
Sales and marketing 202,458 175,188 445,061 353,563
General and administrative 296,842 306,498 572,311 656,634
Research and development 33,470 23,786 65,228 47,636
------------------------------------------------------------
Total costs and expenses 1,717,625 967,198 3,029,057 2,007,412
------------------------------------------------------------
OPERATING LOSS (137,588) (424,483) (501,341) (965,369)
OTHER EXPENSE
Financing Costs (713,846) - (713,846) -
Interest expense, net (154,764) (132,036) (296,217) (252,671)
------------------------------------------------------------
NET LOSS (1,006,198) (556,519) (1,511,404) (1,218,040)
CONVERTIBLE PREFERRED STOCK DIVIDENDS (1,489,818) (22,500) (1,512,318) (45,000)
------------------------------------------------------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(2,496,016) $ (579,019) $ (3,023,722) $(1,263,040)
============================================================
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.23) $ (0.05) $ (0.28) $ (0.12)
============================================================
WEIGHTED AVERAGE COMMON SHARES 10,956,103 10,956,024 10,956,064 10,956,024
============================================================
See notes to unaudited consolidated financial statements.
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------------------------------------------------------------------
Six Months Six Months
Ended Ended
June 30, 2003 June 30, 2002
(As Restated,
see Note 10)
OPERATING ACTIVITIES:
Net loss $ (1,511,404) $ (1,218,040)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 160,359 202,946
Amortization of debt discount 713,846 -
Gain on sale of property - (400)
Increase in accounts receivable, net (113,814) (49,292)
Increase in prepaid insurance, expenses and other current assets (16,080) (14,430)
Increase in accounts payable 191,089 1,941
Increase in accrued salaries and wages 17,169 18,004
Increase in accrued expenses 228,815 254,432
Decrease in deferred revenue (24,036) (16,495)
-----------------------------------
Net cash used in operating activities (354,056) (821,334)
-----------------------------------
INVESTING ACTIVITIES:
Notes receivable (2,050,000) -
Property and equipment additions (25,932) (6,412)
Proceeds form the sale of property - 400
-----------------------------------
Net cash used in investing activities (2,075,932) (6,012)
-----------------------------------
FINANCING ACTIVITIES:
Borrowing from directors 1,050,000 855,000
Borrowing from stockholders 1,600,000 -
Excersize of incentive stock options 36 -
-----------------------------------
Net cash provided by financing activities 2,650,036 855,000
-----------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 220,048 27,654
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,011 29,449
-----------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 225,059 $ 57,103
========== ========
Supplemental disclosures of non-cash information
Dividend declared on Convertible Preferred Stock $ 84,626 $ 45,000
========== ========
Beneficial conversion feature of Convertible Preferred Stock $1,427,692
==========
Debt discount associated with borrowing $1,427,692
==========
See notes to unaudited consolidated financial statements.
PATIENT INFOSYSTEMS, INC.
Notes to Unaudited Consolidated Financial Statements for the period ended June
30, 2003
1. The accompanying consolidated financial statements for the three month
periods ended June 30, 2003 and June 30, 2002 are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods. These
unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition
and results of operations contained in the Company's Annual Report on Form
10-K for the year ended December 31, 2002. Certain 2002 amounts have been
reclassified to conform to 2003 presentations. The results of operations
for the six months ended June 30, 2003 are not necessarily indicative of
the results for the entire year ending December 31, 2003.
2. On March 28, 2003, the Company entered into an Amended and Restated Credit
Agreement with Wells Fargo Bank Iowa, N.A., which extended the term of the
$3,000,000 credit facility to January 2, 2004, under substantially the same
terms. Certain directors of the Company guaranteed this extension.
3. The Company borrowed $1,050,000 for working capital from Mr. Pappajohn
during the six month period ended June 30, 2003. On April 10, 2003, the
Company replaced notes in the aggregate principal amount of $500,000 owed
to Mr. Pappajohn with a new note for the principal amount of $900,000,
representing the amount due under the original notes plus an additional
$400,000 borrowed from Mr. Pappajohn for working capital. As of August 15,
2003, a total of $6,127,500 has been borrowed from Mr. Pappajohn and Dr.
Schaffer (both of whom are members of the Company's Board of Directors),
inclusive of $256,985 unamortized debt discount, all of which is secured by
the assets of the Company.
On March 28, 2003, Mr. Pappajohn and Dr. Schaffer signed a letter to the
Company in which they made a commitment to obtain the operating funds that
the Company believes would be sufficient to fund its operations through
December 31, 2003. There can be no assurances given that Mr. Pappajohn or
Dr. Schaffer can raise either the required working capital through the sale
of the Company's securities or that the Company can borrow the additional
amounts needed.
4. On September 23, 2002, the Company signed an agreement to acquire
substantially all the assets of American Care Source (ACS), headquartered
in Dallas, Texas. This Asset Purchase Agreement was amended and restated on
April 10, 2003 and further amended on July 30, 2003 (hereinafter, the
amended and restated Asset Purchase Agreement, as amended, is referred to
as the "Asset Purchase Agreement"). ACS is an ancillary healthcare benefits
management company. It provides a bridge connecting healthcare payers and
the providers of ancillary healthcare services. Ancillary healthcare
services include a broad array of services that supplement or support the
care provided by hospitals and physicians, including the non-physician
services associated with outpatient surgery centers, free-standing
diagnostic imaging centers, home infusion, durable medical equipment,
orthotics and prosthetics, laboratory and many other services. These
ancillary services are provided to patients as benefits under group health
plans and workers' compensation plans. ACS manages the administration of
these ancillary healthcare benefits.
5. On April 10, 2003, the Company entered into a Note and Stock Purchase
Agreement, which the Company intends to amend (the "Note and Stock Purchase
Agreement") with certain investors (the "Investors"), including Mr.
Pappajohn, a member of the Board of Directors of the Company, pursuant to
which the Investors agreed to loan to the Company an aggregate of up to
$3.5 million, $500,000 of which replaces notes payable to Mr. Pappajohn,
which were outstanding at March 31, 2003. In consideration for the loans,
the Company signed a series of promissory notes and intends to issue a
total of 286,182 shares of Series D 9% Cumulative Preferred Stock ("Series
D Preferred Stock") to the Investors, 198,128 of such shares were issued
and outstanding at June 30, 2003. During the quarter ended June 30, 2003,
the Company borrowed $2.5 million under the Note and Stock Purchase
Agreement. The notes bear interest at a rate equal to the prime rate plus
3% per annum and mature on September 30, 2003. The 286,182 shares of Series
D Preferred Stock are convertible into up to 34,341,840 shares of common
stock of the Company, subject to the approval by the stockholders of the
Company of an amendment to the Certificate of Incorporation, authorizing an
increase in the number of outstanding shares of common stock of the Company
necessary to provide for the issuance of common stock upon conversion of
such shares. The 198,128 shares of Series D Preferred Stock outstanding at
June 30, 2003 are convertible into 23,775,360 shares of common stock valued
at $3,328,550. The total value received by the lenders was $5,828,550 in
the combined stock and notes (the "Consideration"). In accordance with APB
Opinion No. 14, a portion of the cash received totaling $1,427,692, is
allocable to equity resulting in a debt discount in the same amount, which
is amortized over the life of the loan. Holders of the Series D Preferred
Stock have the right to elect two members of the Company's Board of
Directors. Upon closing of a private placement of a minimum of $4 million
in value of additional shares of Series D Preferred Stock and after the
closing of the proposed acquisition of ACS, as contemplated by the Asset
Purchase Agreement, any notes issued pursuant to the Note and Stock
Purchase Agreement are convertible into Series D Preferred Stock. The
purpose of the loan from the Investors is to provide funds to the Company
for it to loan to ACS in order to provide working capital for the
operations of ACS.
Simultaneously with the closing of the Note and Stock Purchase Agreement,
the Company and ACS entered into a Credit Agreement subsequently amended on
July 30, 2003 (the "Credit Agreement") pursuant to which the Company agreed
to loan to ACS up to an aggregate of $3.4 million secured by all of the
assets of ACS. As of June 30, 2003, the Company had notes receivable of
$2.25 million from ACS. Patient Infosystems received a warrant to purchase
18,050 shares of common stock of ACS, exercisable only if the Asset
Purchase Agreement with ACS is terminated. Additional warrants to purchase
ACS common stock may be issued depending on the total amount of funds it
borrows from the Company under the Credit Agreement.
6. The calculations for the basic and diluted loss per share were based upon
loss attributable to common stockholders of $2,496,016 and $3,023,722 and a
weighted average number of common shares outstanding of 10,956,103 and
10,956,064 for the three and six month periods ended June 30, 2003
respectively. The calculations for the basic and diluted loss per share
were based upon loss attributable to common stockholders of $579,019 and
$1,263,040 and a weighted average number of common shares outstanding of
10,956,024 for both the three and six month periods ended June 30, 2002
respectively. Options totaling 1,114,040 and 1,115,740 to purchase shares
of common stock were outstanding but not included in the computation of
diluted loss per share for the three and six month periods ended June 30,
2003 and 2002, respectively, because the effect would have been
antidilutive due to the net loss in those periods.
7. The accompanying unaudited 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 unaudited consolidated financial
statements, the Company incurred a net loss for the six month period ended
June 30, 2003 of $1,511,404 and had negative working capital of $9,169,326
and a stockholders' deficit of $8,838,539 at June 30, 2003. These factors,
among others, may indicate that the Company will be unable to continue as a
going concern.
The unaudited 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 ability to continue as a going
concern is dependant upon its ability to generate sufficient cash flow to
meet its obligations. 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.
8. Stock-Based Compensation - In 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This standard
provides alternative methods of transition for voluntary change to the fair
value based method of accounting for stock-based employee compensation.
Additionally, the standard also requires prominent disclosures in the
Company's financial statements about the method of accounting used for
stock-based employee compensation, and the effect of the method used when
reporting financial statements.
The Company accounts for stock-based compensation in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation". As permitted by SFAS
No. 123, the Company continues to measure compensation for such plans using
the intrinsic value based method of accounting, prescribed by Accounting
Principles Board ("APB"), Opinion No. 25, "Accounting for Stock Issued to
Employees." Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the date of
grant for awards consistent with the provisions of SFAS No. 123, the
Company's net loss and net loss per share would have been increased to the
pro forma amounts indicated below:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Net loss attributable to common
shareholders - as reported ($2,496,016) ($579,019) ($3,023,722) ($1,263,040)
Stock Compensation expense ( 30,828) ( 33,565) ( 57,162) ( 67,802)
------------ ---------- ------------ ------------
Net loss - pro forma ($2,526,844) ($612,584) ($3,080,884) ($1,330,842)
Net loss per share - basic
and diluted - as reported ($0.23) ($0.05) ($0.28) ($0.12)
Net loss per share - basic
and diluted - pro forma ($0.23) ($0.06) ($0.28) ($0.12)
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 3.45% as of June 30, 2003 and an expected life of 7 years. The
assumed dividend yield was zero. The Company has used a volatility factor
of 1.75 for the year ended June 30, 2003. For purposes of pro forma
disclosure, the estimated fair value of each option is amortized to expense
over that option's vesting period and only the compensation expense related
to the three and six month periods ended June 30, 2002 and 2003 were used
to adjust the net loss on a pro forma basis.
9. Changes in additional paid in capital for the six month period ended June
30, 2003 were as follows:
Balance as of December 31, 2002 $ 24,132,153
Series C dividends (45,000)
Series D dividends (39,626)
Value of 198,128 shares of Series D issued
Portion of Debt Allocated to Stock 1,427,692
Beneficial Conversion Feature 1,427,692
Par value of Series D shares, par $0.01 (1,981)
Value of 400 shares common stock issued 36
Par value of common issued, par $0.01 (4)
--------------------
$ 26,900,962
====================
10. Subsequent to the issuance of its financial statements for the quarter
ended June 30, 2003, the Company determined that it accounted for the
issuance of preferred stock incorrectly. The Company had accounted for the
issuance of the preferred stock under Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation", and
incorrectly recorded an asset for debt issuance costs of $3,328,550 with a
corresponding increase to equity. Since the preferred stock was issued in
connection with borrowing by the Company, the Company should have accounted
for the issuance of the preferred stock in accordance with Accounting
Principles Board Option No. 14 ("APB No. 14"). Accordingly, a portion of
the borrowing must be allocated to the preferred stock which gives rise to
a debt discount associated with the borrowings. The total borrowings were
$2,500,000 in the second quarter ended June 30, 2003 and the resulting debt
discount and value assigned to the preferred stock totaled $1,427,692. The
debt discount is amortized over the term of the borrowings, which is six
months. Additionally, a beneficial conversion feature has arisen since the
value recorded for the preferred stock, which is convertible into common
stock, totaling $1,427,692 is less than the fair value of the common stock
totaling $3,328,550. While the resulting beneficial conversion feature
totals $1,900,858, the Company can only record a beneficial conversion
equal to the value of the preferred stock recorded, $1,427,692. Such amount
is reflected in the net loss attributable to common stockholders for the
three and six month periods ended June 30, 2003 because the preferred stock
is immediately convertible into the Company's common stock.
The principal effects of the restatement are summarized in the following
table:
As of June 30, 2003:
As Previously
Reported As Restated
Debt issuance costs $ 1,664,275 $ -
Total assets $ 5,147,058 $ 3,482,783
Borrowings from directors $ 6,127,500 $ 5,870,516
Borrowings from shareholders $ 1,600,000 $ 1,143,138
Total current liabilities $ 13,035,168 $ 12,321,322
Additional paid-in capital $ 27,374,128 $ 26,900,962
Accumulated deficit $ (35,374,783) $ (35,852,046)
Total stockholders' deficit $ (7,888,110) $ (8,838,539)
Total liabilities and stockholders' deficit $ 5,147,058 $ 3,482,783
Three Months Ended Six Months Ended
June 30, 2003 June 30, 2003
As reported As Restated As reported As Restated
Financing Costs $(1,664,275) $ (713,846) $(1,664,275) $ (713,846)
Net loss $(1,956,627) $(1,006,198) $(2,461,833) $(1,511,404)
Convertible preferred
stock dividends $ (62,126) $(1,489,818) $ (84,626) $(1,512,318)
Net loss attributable to
common stockholders $(2,018,753) $(2,496,016) $(2,546,459) $(3,023,722)
Net loss per share
basic and diluted $ (0.18) $ (0.23) $ (0.23) $ (0.28)
Item 2. 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 three and six month periods ended June 30, 2003 as
compared to the three and six month periods ended June 30, 2002 and a review of
the Company's financial condition at June 30, 2003 as compared to June 30, 2002
and December 31, 2002. The focus of this review is on the underlying business
reasons for significant changes and trends affecting the revenues, net earnings
and financial condition of the Company. This review should be read in
conjunction with the accompanying unaudited consolidated financial statements.
In an effort to give investors a well-rounded view of the Company's current
condition and future opportunities, this Quarterly Report on Form 10-QSB
includes forecasts by the Company's management about future performance and
results. Because they are forward-looking, these forecasts involve
uncertainties. These uncertainties include the Company's ability to continue its
operations as a result of, among other things, continuing losses, working
capital short falls, uncertainties with respect to sources of capital, risks of
market acceptance of or preference for the Company's systems and services,
competitive forces, the impact of 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 including the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
On May 29, 2002, the Company entered into a Strategic Marketing Partnership
Agreement with USI Administrators, Inc ("CBCA"). The Company and CBCA each gave
the other the non-exclusive right to sell certain products and services. The
supplier of the product or service is paid in accordance with the agreed fee
schedule. The difference between the selling price and the fee schedule, if any,
is the seller's fee entitlement. Either party may terminate the agreement at any
time with 180 days notification.
On September 23, 2002, the Company signed an agreement to acquire
substantially all the assets of American Care Source (ACS), headquartered in
Dallas, Texas. This Asset Purchase Agreement was amended and restated on April
10, 2003 and then again on July 30, 2003 (hereinafter, the amended and restated
Asset Purchase Agreement as amended, is referred to as the "Asset Purchase
Agreement"). ACS is an ancillary healthcare benefits management company. It
provides a bridge connecting healthcare payers and the providers of ancillary
healthcare services. Ancillary healthcare services include a broad array of
services that supplement or support the care provided by hospitals and
physicians, including the non-physician services associated with outpatient
surgery centers, free-standing diagnostic imaging centers, home infusion,
durable medical equipment, orthotics and prosthetics, laboratory and many other
services. These ancillary services are provided to patients as benefits under
group health plans and workers' compensation plans. ACS manages the
administration of these ancillary healthcare benefits.
Under the terms of the Asset Purchase Agreement, the Company will acquire
the assets of ACS in exchange for shares of common stock of the Company equal to
approximately twenty one percent (21%) of the fully diluted outstanding common
stock of the Company, without giving effect to a private placement anticipated
to be completed prior to the closing ot the acquisition in order to provide
working capital. The ACS beneficial ownership of the Company will change
depending of the terms and amount of equity sold in any private placement. The
Asset Purchase Agreement provides for closing the anticipated transaction,
subject to the satisfaction of certain conditions, no later than November 30,
2003. The agreement contains various conditions to closing, some of which may
not be satisfied. Therefore completion of the transaction cannot be assured
until closing. Among the conditions to closing are the following:
o the approval of the stockholders of the Company of certain amendments to
its Certificate of Incorporation;
o the execution by certain shareholders of ACS and the Company of a
Shareholders' Agreement providing for the voting of shares of the Company
in favor of the election of certain individuals to the board of directors
of the Company;
o the execution of agreements by John Pappajohn and Derace Schaffer to hold
all indebtedness of the Company in abeyance until September 30, 2004;
o written documentation that the bank debt of the Company to Wells Fargo Bank
has been renegotiated so as to provide a grace and forbearance period until
December 31, 2003, before any principal payments are required and that John
Pappajohn and Derace Schaffer will remain guarantors of such bank debt if
required by Wells Fargo Bank;
o the private placement of additional equity securities of the Company;
o the execution of a Voting Agreement by each stockholder of the Company
owning more than 10% of the outstanding shares of common stock of the
Company; and
o fulfillment of customary contractual conditions set forth in the Asset
Purchase Agreement.
The Asset Purchase Agreement may be terminated and the acquisition
abandoned at any time prior to the closing date of the transaction under the
following conditions:
o by mutual agreement in writing by the Company and ACS;
o by either the Company or ACS if the other party materially breaches any of
the representations, warranties, covenants or agreements set forth in the
Asset Purchase Agreement at the time of its execution or on the closing
date;
o by either the Company or ACS if the other party fails to perform timely, in
all material aspects the covenants and obligations that it is required to
perform under Asset Purchase Agreement and such party does not obtain in
writing a waiver of such performances; or
o by either the Company or ACS if the closing of the acquisition does not
occur prior to November 30, 2003.
The Company has filed a preliminary proxy statement with the Securities and
Exchange Commission with respect to a meeting of stockholders to obtain approval
of certain amendments to the Company's certificate of incorporation, as well as
approval of an amendment to the Company's stock option plan necessary to
consummate the proposed transaction with ACS.
Results of Operations
Revenues
Revenues consist of revenues from operations, development fees and
licensing fees. Revenues increased to $1,580,037 from $542,715 during the three
months ended June 30, 2003 and 2002, respectively, or 191%. Revenues increased
to $2,527,716 from $1,042,043 during the six months ended June 30, 2003 and
2002, respectively, or 143%.
Three Months Ended Six Months Ended
June 30, June 30,
Revenues 2003 2002 2003 2002
-------- ---- ---- ---- ----
Operations Fees
Consulting $ 927,854 $ 30,000 $ 1,297,850 $ 59,538
Disease and Demand Management 615,842 436,294 1,133,004 832,112
Surveys 27,231 56,341 59,376 104,805
-------------------------------------------------------------------
Total Operations 1,570,927 522,635 2,490,230 996,455
Fees
Development Fees 7,230 6,450 33,726 21,538
Licensing Fees 1,880 13,630 3,760 24,050
-------------------------------------------------------------------
Total Revenues $ 1,580,037 $ 542,715 $ 2,527,716 $ 1,042,043
-------------------------------------------------------------------
Operations fee revenues are the primary source of revenue for the Company
and are generated as the Company provides services to its customers. Operations
fee revenues increased to $1,570,927 for the three months ended June 30, 2003 as
compared to $522,635 for the three months ended June 30, 2002. Operations fee
revenues increased to $2,490,230 for the six months ended June 30, 2003 as
compared to $996,455 for the six months ended June 30, 2002.
The Company's consulting revenue was primarily attributable to assistance
provided to organizations for the development of clinical registries used to
increase effective management of patients with chronic disease. The Company is
supporting the development, including project management and implementation, of
a patient registry for federally qualified health centers, through a national
initiative known as the Health Disparities Collaboratives. The Company
participates in this project as a subcontractor of the Institute for Healthcare
Improvement. While the Company anticipates that it will continue to provide
these and other consulting services, no assurances can be given that the Company
will continue to provide these services at the current levels, or at all, and
revenue recognized during the three and six month periods ended June 30, 2003 is
not necessarily indicative of the results for the entire year ending December
31, 2003.
The increase in the Company's disease and demand management revenue was
primarily attributable to new customers and a joint marketing relationship that
has contributed new sources of revenue net of revenue lost due to the
termination of one customer effective December 31, 2002. The new customers
accounted for increased revenue of $132,485 and $261,445 for the three and six
month periods ended June 30, 2003. Revenues from the joint marketing
relationship increased from $20,893 and $42,100 for the three and six month
periods ended June 30, 2002, respectively, to $238,378 and $344,689 for the same
respective periods of 2003. The Company received revenue of $155,666 and
$213,039 for the three and six month periods ended June 30, 2003, respectively,
from the customer that terminated in 2002 and from which the Company received no
revenue during 2003. In addition, a customer who provided revenue of $129,270
and $316,553 during the three and six month periods ended June 30, 2003,
respectively, elected to terminated services effective June 30, 2003, citing no
disputes with the Company. The Company has identified other possible new
customers, but there can be no assurance that such prospects will contribute
revenue in the near term, or at all.
Development fee revenues were $7,230 and $6,450 for the three month periods
ended June 30, 2003 and 2002, respectively and $33,726 and $21,538 for the six
month periods ended June 30, 2003 and 2002, respectively. The Company received
development revenues from a variety of customers for modification of specific
programs. The Company has completed substantially all services under these
agreements and anticipates primarily receiving development fee revenues in
connection with the enhancement of its existing programs. Development fee
revenues include clinical, technical and operational design and modification of
the Company's programs. The Company anticipates that revenue from development
fees will continue to be low unless the Company enters into new development
agreements.
License fee revenues recognized from the Case Management Support System
were $1,880 and $13,630 for the three month periods ended June 30, 2003 and
2002, respectively and $3,760 and $24,050 for the six month periods ended June
30, 2003 and 2002, respectively. The Company has not entered into any new
licensing agreements for its Case Management Support System and the revenue for
the current period reflects revenue generated exclusively from the existing
agreement.
Costs and Expenses
Cost of sales includes salaries and related benefits, services provided by
third parties, and other expenses associated with the implementation and
delivery of the Company's consulting services, standard and customized
population, demand and disease management programs. Cost of sales for the three
and six month periods ended June 30, 2003 was $1,184,855 and $1,946,457,
respectively, as compared to $461,726 and $949,579 for the three and six month
periods ended June 30, 2002. The increase in these costs was primarily the
result of increased operational activity. The Company's gross margin, being the
percentage of revenues available to offset other costs and expenses after
subtracting the cost of sales was 25% and 23% for the three and six month
periods ended June 30, 2003, respectively, as compared to 15% and 9% for the
same respective periods of 2002. The Company anticipates that revenue must
increase for it to recognize economies of scale adequate to improve its margins.
No assurance can be given that revenues will increase or that, if they do, they
will continue to exceed costs and expenses.
Sales and marketing expenses consist primarily of salaries, related
benefits, travel costs, sales materials and other marketing related expenses.
Sales and marketing expenses for the three and six month periods ended June 30,
2003 were $202,458 and $445,061, respectively, as compared to $175,188 and
$353,563 for the same respective periods of 2002. Spending in this area has
increased due to an increase in sales activity. The Company anticipates
expansion of the Company's sales and marketing staff and expects it will
continue to invest in the sales and marketing process, and that such expenses
related to sales and marketing might increase in future periods.
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 for the three and
six month periods ended June 30, 2003 were $296,842 and $572,311, as compared to
$306,498 and $656,634 for the same respective periods of 2002. These
expenditures have been incurred to maintain the corporate infrastructure
necessary to support anticipated program operations. The decrease in these costs
during the three and six month periods ended June 30, 2003 was primarily due to
the allocation of a portion of staff costs to cost of sales related to
consulting revenue.
Research and development expenses consist primarily of salaries and related
benefits and administrative costs associated with the development of certain
components of the Company's integrated information capture and delivery system,
as well as development of the Company's standardized disease management programs
and the Company's Internet based technology products. Research and development
expenses for the three and six month periods ended June 30, 2003 were $33,470
and $65,228, respectively, as compared to $23,786 and $47,636 for the same
respective periods of 2002.
Financing costs were $713,846 for the three and six month period ended June
30, 2003. This cost relates to the issuance of debt and equity to certain
lenders based on the Note and Stock Purchase Agreement dated April 10, 2003,
pursuant to which the investors agreed to make short term loans to the Company.
The total value received by the lenders was $5,828,550 in the combined stock and
notes (the "Consideration"). In accordance with APB Opinion No. 14, a portion of
the cash received totaling $1,427,692, is allocable to equity resulting in a
debt discount in the same amount, which is amortized over the life of the loan.
Because the term of the Note and Stock Purchase Agreement is approximately six
months ending September 30, 2003, $713,846 was amortized during the three month
period ended June 30, 2003, which represents 50% of the $1,427,692. The
remaining $713,846 will be amortized during the 3 month period ending September
30, 2003. If additional amounts must be borrowed, there may be additional
consideration to the lenders and additional financing costs associated with such
loans.
The Company recorded net interest expense of $154,764 and $296,217 for the
three and six month periods ended June 30, 2003, respectively, as compared to
$132,036 and $252,671 for the same respective periods of 2002, principally due
to the net increase of interest expense on debt.
Income (loss)
The Company had a net loss attributable to the common stockholders after
preferred stock dividends and a beneficial conversion feature associated with
the Series D Preferred Stock issued, of $2,496,016 and $3,023,722 for the three
and six month periods ended June 30, 2003, respectively, with a net loss per
share of $0.23 and $0.28 per share for the same respective periods. The loss
includes $713,846 in financing cost and $1,427,692 for the beneficial conversion
feature. Without these costs, the Company had a net loss attributable to the
common shareholders after preferred stock dividends, of $354,478 and $882,184
for the three and six month periods ended June 30, 2003, respectively, as
compared to $579,019 and $1,263,040 for the three and six month periods ended
June 30, 2002. This represents a net loss per common share of $0.03 and $0.08
for the three and six month periods ended June 30, 2003, which is comparable to
the net loss of $0.05 and $0.12 per common share shown for the same respective
periods of 2002.
Liquidity and Capital Resources
At June 30, 2003, the Company had a working capital deficit of $9,169,326
as compared to $6,135,451 at December 31, 2002. Through June 30, 2003, these
amounts reflect the effects of the Company's continuing losses as well as
increased borrowings, $3,000,000 of which was classified as a long-term
liability at December 31, 2002 but is classified as a current liability at June
30, 2003. Since its inception, the Company has primarily funded its operations,
working capital needs and capital expenditures from the sale of equity
securities or the incurrence of debt.
On March 28, 2003, the Company entered into an Amended and Restated Credit
Agreement with Wells Fargo Bank Iowa, N.A., which extended the term of the
Company's $3,000,000 credit facility to January 2, 2004, under substantially the
same terms. Certain directors of the Company guaranteed this extension.
The Company borrowed $1,050,000 for working capital from Mr. Pappajohn
during the six month period ended June 30, 2003. On April 10, 2003, the Company
replaced notes in the aggregate principal amount of $500,000 owed to Mr.
Pappajohn with a new note for the principal amount of $900,000, representing the
amount due under the original notes plus an additional $400,000 borrowed from
Mr. Pappajohn for working capital. As of August 15, 2003, a total of $6,127,500
has been borrowed from Mr. Pappajohn and Dr. Schaffer (both of whom are members
of the Company's Board of Directors), all of which is secured by the assets of
the Company.
On March 28, 2003, Mr. Pappajohn and Dr. Schaffer signed a letter to the
Company in which they made a commitment to obtain the operating funds that the
Company believes would be sufficient to fund its operations through December 31,
2003. There can be no assurances given that Mr. Pappajohn or Dr. Schaffer can
raise either the required working capital through the sale of the Company's
securities or that the Company can borrow the additional amounts needed.
On April 10, 2003, the Company entered into a Note and Stock Purchase
Agreement, which the Company intends to amend (the "Note and Stock Purchase
Agreement") with certain investors (the "Investors"), including Mr. Pappajohn, a
member of the Board of Directors of the Company, pursuant to which the Investors
agreed to loan to the Company an aggregate of up to $3.5 million, $500,000 of
which replaces notes payable to Mr. Pappajohn, which were outstanding at March
31, 2003. In consideration for the loans, the Company signed a series of
promissory notes and intends to issue a total of 286,182 shares of Series D 9%
Cumulative Preferred Stock ("Series D Preferred Stock") to the Investors,
198,128 of such shares were issued and outstanding at June 30, 2003. During the
quarter ended June 30, 2003, the Company borrowed $2.5 million under the Note
and Stock Purchase Agreement. The notes bear interest at a rate equal to the
prime rate plus 3% per annum and mature on September 30, 2003. The 286,182
shares of Series D Preferred Stock are convertible into up to 34,341,840 shares
of common stock of the Company, subject to the approval by the stockholders of
the Company of an amendment to the Certificate of Incorporation, authorizing an
increase in the number of outstanding shares of common stock of the Company
necessary to provide for the issuance of common stock upon conversion of such
shares. The 198,128 shares of Series D Preferred Stock outstanding at June 30,
2003 are convertible into 23,775,360 shares of common stock valued at
$3,328,550. The total value received by the lenders was $5,828,550 in the
combined stock and notes (the "Consideration"). In accordance with APB Opinion
No. 14, a portion of the cash received totaling $1,427,692, is allocable to
equity resulting in a debt discount in the same amount, which is amortized over
the life of the loan. Holders of the Series D Preferred Stock have the right to
elect two members of the Company's Board of Directors. Upon closing of a private
placement of a minimum of $4 million in value of additional shares of Series D
Preferred Stock and after the closing of the proposed acquisition of ACS, as
contemplated by the Asset Purchase Agreement, any notes issued pursuant to the
Note and Stock Purchase Agreement are convertible into Series D Preferred Stock.
The purpose of the loan from the Investors is to provide funds to the Company
for it to loan to ACS in order to provide working capital for the operations of
ACS.
Simultaneously with the closing of the Note and Stock Purchase Agreement,
the Company and ACS entered into a Credit Agreement subsequently amended on July
30, 2003 (the "Credit Agreement") pursuant to which the Company agreed to loan
to ACS up to an aggregate of $3.4 million secured by all of the assets of ACS.
As of June 30, 2003, the Company had notes receivable of $2.25 million from ACS.
Patient Infosystems received a warrant to purchase 18,050 shares of common stock
of ACS, exercisable only if the Asset Purchase Agreement with ACS is terminated.
Additional warrants to purchase ACS common stock may be issued depending on the
total amount of funds it borrows from the Company under the Credit Agreement.
The Company has expended substantial funds to establish its operational
capabilities and infrastructure. The Company's cash has been steadily depleted
as a result of operating losses. The Company anticipates that its losses will
continue and, but for the continuing loans from Mr. Pappajohn, the Company has
no available cash to continue operations. Accordingly, the Company has been
required to seek cash to maintain its operations. The Company is continuing its
efforts to raise additional funds privately, which may involve the sale of
convertible preferred stock or further debt securities. No assurance can be
given that the Company will successfully raise the necessary funds. Any
additional financing, which includes the issuance of additional securities of
the Company, may be dilutive to the Company's existing stockholders. If the
Company is unable to raise additional funds, it will be required to cease
operations.
Inflation
Inflation did not have a significant impact on the Company's costs during
the three and six month periods ended June 30, 2003 and 2002. The Company
continues to monitor the impact of inflation in order to minimize its effects
through pricing strategies, productivity improvements and cost reductions.
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. These
uncertainties include the Company's ability to continue its operations as a
result of, among other things, continuing losses, working capital short falls,
uncertainties with respect to sources of capital, risks of market acceptance of
or preference for the Company's systems and services, competitive forces, the
impact of, 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 including the Company's Annual Report on
Form 10-K for the year ended December 31, 2002. The Company has no obligation to
publicly release the result of any revisions, which may be made to any
forward-looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statements.
Item 3. Controls and Procedures.
Our management, with the participation of our Chief Executive Officer and
Vice President, Financial Planning, has evaluated the effectiveness of our
disclosure controls and procedure as of June 30, 2003. Based upon this
evaluation, our Chief Executive Officer and Vice President, Financial Planning
concluded that our disclosure controls and procedures are effective for the
recording, processing, summarizing and reporting the information the Company is
required to disclose in the reports it files under the Securities Exchange Act
of 1934, within the time periods specified in the SEC's rules and forms. Such
evaluation did not identify any change in our internal control over financial
reporting that occurred during the quarter ended June 30, 2003 that has
materially affected, or is reasonably likely to materally affect, our internal
control over financial reporting.
In light of our determination in November 2003 that it was necessary to
restate our previously released consolidated financial statements for the three
and six month periods ended June 30, 2003, our management directed that steps be
taken to enhance the operation and effectiveness of our internal controls and
procedures to ensure that we apply the proper accounting treatment to our
lending transactions.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Borrowing from directors
On April 10, 2003, the Company entered into a Note and Stock Purchase
Agreement, which the Company intends to amend (the "Note and Stock Purchase
Agreement") with certain investors (the "Investors"), including Mr. Pappajohn, a
member of the Board of Directors of the Company, pursuant to which the Investors
agreed to loan to the Company an aggregate of up to $3.5 million, $500,000 of
which replaces notes payable to Mr. Pappajohn, which were outstanding at March
31, 2003. In consideration for the loans, the Company signed a series of
promissory notes and intends to issue a total of 286,182 shares of Series D 9%
Cumulative Preferred Stock ("Series D Preferred Stock") to the Investors,
198,128 of such shares were issued and outstanding at June 30, 2003. During the
quarter ended June 30, 2003, the Company borrowed $2.5 million under the Note
and Stock Purchase Agreement. The notes bear interest at a rate equal to the
prime rate plus 3% per annum and mature on September 30, 2003. The 286,182
shares of Series D Preferred Stock are convertible into up to 34,341,840 shares
of common stock of the Company, subject to the approval by the stockholders of
the Company of an amendment to the Certificate of Incorporation, authorizing an
increase in the number of outstanding shares of common stock of the Company
necessary to provide for the issuance of common stock upon conversion of such
shares. The 198,128 shares of Series D Preferred Stock outstanding at June 30,
2003 are convertible into 23,775,360 shares of common stock valued at
$3,328,550. The total value received by the lenders was $5,828,550 in the
combined stock and notes (the "Consideration"). In accordance with APB Opinion
No. 14, a portion of the cash received totaling $1,427,692, is allocable to
equity resulting in a debt discount in the same amount, which is amortized over
the life of the loan. Holders of the Series D Preferred Stock have the right to
elect two members of the Company's Board of Directors. Upon closing of a private
placement of a minimum of $4 million in value of additional shares of Series D
Preferred Stock and after the closing of the proposed acquisition of ACS, as
contemplated by the Asset Purchase Agreement, any notes issued pursuant to the
Note and Stock Purchase Agreement are convertible into Series D Preferred Stock.
The purpose of the loan from the Investors is to provide funds to the Company
for it to loan to ACS in order to provide working capital for the operations of
ACS. See "Liquidity and Capital Resources".
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K:
On April 17, 2003, the Company filed a current report on Form 8-K reporting
that the Company issued a press release announcing the financial results for the
fiscal year ended December 31, 2002.
On April 23, 2003, the Company filed a current report on Form 8-K reporting
that the Company issued a press release announcing that the Company entered into
an Amended and Restated Agreement for the Purchase and Sale of Assets among
Patient Infosystems, Inc. and American Caresource Corporation.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PATIENT INFOSYSTEMS, INC.
Date: November 4, 2003 /s/Roger L. Chaufournier
------------------------------ -----------------------------------
Roger L. Chaufournier
Director, President and
Chief Executive Officer
(authorized officer)
Date: November 4, 2003 /s/Kent A. Tapper
------------------------------ -----------------------------------
Kent A. Tapper
Vice President, Financial Planning
(principal accounting officer)
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
11 Statements of Computation of Per Share Earnings.
99.1 Exhibit 31.1 -- Certification of Roger Chaufournier required by Rule
13a-14(a) or Rule 15d-14(a)
99.2 Exhibit 31.2 -- Certification of Kent Tapper required by Rule 13a-14(a) or
Rule 15d-14(a)
99.3 Exhibit 32.1 -- Certification of Roger Chaufournier and Kent Tapper
required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
Exhibit 11.
Statement of Computation of Per Share Earnings
PATIENT INFOSYSTEMS, INC.
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
(As restated, (As restated,
see Note 10) see Note 10)
Net loss $ (1,006,198) $ (556,519) $ (1,511,404) $ (1,218,040)
Convertible preferred Stock dividends (1,489,818) (22,500) (1,512,318) (45,000)
----------- -------- ----------- --------
Net loss attributable to
Common Stockholders $ (2,496,016) $ (579,019) $ (3,023,722) $ (1,263,040)
------------- ----------- ------------- -------------
Weighted average common shares 10,956,103 10,956,024 10,956,064 10,956,024
----------- ----------- ----------- -----------
Net loss per share - Basic and diluted $ (0.23) $ (0.05) $ (0.28) $ (0.12)
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