--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 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)
As of November 13, 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]
--------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
PATIENT INFOSYSTEMS INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
ASSETS September 30, 2003 December 31, 2002
------------------ -----------------
CURRENT ASSETS:
Cash and cash equivalents $ 747,405 $ 5,011
Accounts receivable 156,776 441,216
Notes receivable 3,100,000 200,000
Prepaid expenses and other current assets 186,499 105,827
--------------------------------------
Total current assets 4,190,680 752,054
Property and equipment, net 184,618 285,747
Intangible assets (net of accumulated amortization of $550,937 and $443,258) 71,786 179,465
--------------------------------------
TOTAL ASSETS $ 4,447,084 $ 1,217,266
======================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 644,091 $ 379,004
Accrued salaries and wages 389,489 208,752
Borrowings from directors 6,330,648 5,077,500
Borrowings from shareholders 1,815,447 -
Line of credit 3,000,000 -
Accrued expenses 454,665 351,621
Accrued interest 1,169,762 713,554
Deferred revenue 146,760 157,074
--------------------------------------
Total current liabilities 13,950,862 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 - 286,182
as of September 30, 2003 2,862 -
Common stock - $.01 par value: shares authorized:
20,000,000; issued and outstanding - 10,956,024 as of December 31, 2002 and
10,956,454 as of September 30, 2003 109,564 109,560
Additional paid-in capital 28,022,144 24,132,153
Accumulated deficit (37,639,348) (32,912,952)
--------------------------------------
Total stockholders' deficit (9,503,778) (8,670,239)
--------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 4,447,084 $ 1,217,266
======================================
See notes to unaudited consolidated financial statements.
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
REVENUES
Operations Fees $ 499,506 $ 521,220 $ 1,725,611 $ 1,477,176
Consulting Fees 928,306 63,000 2,226,157 122,538
Licensing Fees 1880 1880 5,640 28,430
---------------------------------------------------------------
Total revenues 1,429,692 586,100 3,957,408 1,628,144
---------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales 1,107,776 467,162 3,054,233 1,416,741
Sales and marketing 230,606 192,533 675,667 546,096
General and administrative 341,526 238,184 913,836 894,819
Research and development 35,060 26,242 100,288 73,878
---------------------------------------------------------------
Total costs and expenses 1,714,968 924,121 4,744,024 2,931,534
---------------------------------------------------------------
OPERATING LOSS (285,276) (338,021) (786,616) (1,303,390)
OTHER EXPENSE
Amortization of debt discount (754,101) - (1,467,947) -
Interest expense, net (151,262) (136,126) (447,479) (388,797)
---------------------------------------------------------------
NET LOSS (1,190,639) (474,147) (2,702,042) (1,692,187)
---------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK DIVIDENDS (667,924) (22,500) (2,180,241) (67,500)
---------------------------------------------------------------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (1,858,563) $ (496,647) $ (4,882,283) $ (1,759,687)
===============================================================
NET LOSS PER SHARE - BASIC
AND DILUTED $ (0.17) $ (0.05) $ (0.45) $ (0.16)
===============================================================
WEIGHTED AVERAGE COMMON SHARES 10,956,424 10,956,024 10,956,185 10,956,024
===============================================================
See notes to unaudited consolidated financial statements.
PATIENT INFOSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
---------------------------------------------------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended
September 30, 2003 September 30, 2002
OPERATING ACTIVITIES:
Net loss $ (2,702,042) $ (1,692,187)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 236,552 292,642
Amortization of debt discount 1,467,947 -
Gain on sale of property - (400)
Decrease (increase) in accounts receivable, net 284,440 (11,233)
Increase in prepaid insurance, expenses and other current assets (80,672) (6,932)
Increase in accounts payable 265,087 5,349
Increase in accrued salaries and wages 180,737 61,088
Increase in accrued expenses 403,365 261,201
Decrease in deferred revenue (10,314) (21,576)
----------------------------------------
Net cash provided by (used in) operating activities 45,100 (1,112,048)
----------------------------------------
INVESTING ACTIVITIES:
Property and equipment additions (27,744) (7,060)
Proceeds form the sale of property - 400
Notes receivable (2,900,000) -
----------------------------------------
Net cash used in investing activities (2,927,744) (6,660)
----------------------------------------
FINANCING ACTIVITIES:
Borrowing from directors, net 1,500,000 660,000
Borrowing from stockholders 2,125,002 -
Line of credit borrowings - 500,000
Exercise of incentive stock options 36 -
----------------------------------------
Net cash provided by financing activities 3,625,038 1,160,000
----------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 742,394 41,292
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,011 29,449
----------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 747,405 $ 70,741
========================================
Supplemental disclosures of non-cash information
Dividend declared on convertible preferred stock $ 155,887 $ 67,500
========================================
Beneficial conversion feature of convertible preferred stock $ 2,024,354
=================
Debt discount associated with borrowing $ 2,024,354
=================
See notes to unaudited consolidated financial statements.
PATIENT INFOSYSTEMS, INC.
Notes to Unaudited Consolidated Financial Statements for the period ended
September 30, 2003
1. The accompanying consolidated financial statements for the three month
periods ended September 30, 2003 and September 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 nine months ended September 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 $1,500,000 for working capital from Mr. Pappajohn
during the nine month period ended September 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 November
13, 2003, a total of $6,577,500 has been borrowed from Mr. Pappajohn and
Dr. Schaffer (both of whom are members of the Company's Board of
Directors), inclusive of $246,852 of 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 and October 8, 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 amended on September 11, 2003 (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 issued a
total of 286,182 shares of Series D 9% Cumulative Preferred Stock ("Series
D Preferred Stock") to the Investors. The notes that were outstanding at
June 30, 2003 totaling $2,5 million (the "Original Notes") were replaced
with new notes of equal value. Except for the maturity date of November 30,
2003, the replacement notes have substantially the same terms as the
Original Notes. During the quarter ended September 30, 2003, the Company
borrowed $1 million under the Note and Stock Purchase Agreement, resulting
in a total borrowings of $3.5 million at September 30, 2003 and the Note
and Stock Purchase Agreement. All the notes bear interest at a rate equal
to the prime rate plus 3% per annum and mature on November 30, 2003. The
286,182 shares of Series D Preferred Stock are convertible into up to
34,341,840 shares of common stock valued at $4,807,858. The total value
received by the lenders for borrowings was $8,307,858. In accordance with
APB Opinion No. 14, a portion of the cash received totaling $596,662 and
$2,024,354 for the three and nine month periods ended September 30, 2003,
respectively, is allocable to equity resulting in a debt discount in those
same amounts, 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 September 30, 2003, the Company had notes receivable
of $3.1 million from ACS. Patient Infosystems received warrants to purchase
26,344 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 $1,858,563 and $4,882,283 and a
weighted average number of common shares outstanding of 10,956,424 and
10,956,185 for the three and nine month periods ended September 30, 2003,
respectively. The calculations for the basic and diluted loss per share
were based upon loss attributable to common stockholders of $496,647 and
$1,759,687 and a weighted average number of common shares outstanding of
10,956,024 for both the three and nine month periods ended September 30,
2002, respectively. Options totaling 1,114,040 and 1,115,140 to purchase
shares of common stock were outstanding but not included in the computation
of diluted loss per share for the three and nine month periods ended
September 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 nine month period ended
September 30, 2003 of $4,882,283 and had negative working capital of
$9,760,182 and a stockholders' deficit of $9,503,778 at September 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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss attributable to common
shareholders - as reported ($1,858,563) ($496,647) ($4,882,283) ($1,759,687)
Stock compensation expense (30,961) (31,693) (88,123) (99,495)
-----------------------------------------------------------
Net loss - pro forma ($1,889,524) ($528,340) ($4,970,406) ($1,859,182)
Net loss per share - basic
and diluted - as reported ($0.17) ($0.05) ($0.45) ($0.16)
Net loss per share - basic
and diluted - pro forma ($0.17) ($0.05) ($0.45) ($0.17)
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 3.75% as of September 30, 2003 and an expected life of 7 years.
The assumed dividend yield was zero. The Company has used a volatility
factor of 1.56 for the year ended September 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 nine month periods ended September 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 nine month period ended
September 30, 2003 were as follows:
Balance as of December 31, 2002 $ 24,132,153
Series C dividends (67,500)
Series D dividends (88,387)
Value of 286,182 shares of Series D issued
Portion of debt allocated to stock 2,021,492
Beneficial conversion feature 2,024,354
Value of 400 shares common stock issued 32
-------------
$ 28,022,144
=============
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 nine month periods ended September 30, 2003
as compared to the three and nine month periods ended September 30, 2002 and a
review of the Company's financial condition at September 30, 2003 as compared to
September 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 an 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 subsequently amended on July 30, 2003 and October 8, 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 sixteen percent (16%) 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 of 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
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 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; or
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;
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, among other things, certain amendments to the Company's certificate of
incorporation 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 $1,429,692 from $586,100 during the three
months ended September 30, 2003 and 2002, respectively, or 144%. Revenues
increased to $3,957,408 from $1,628,144 during the nine months ended September
30, 2003 and 2002, respectively, or 143%.
Three Months Ended Nine Months Ended
September 30, September 30,
Revenues 2003 2002 2003 2002
-------- ---- ---- ---- ----
Operations Fees
Consulting $ 928,306 $ 63,000 $ 2,226,157 $ 122,538
Disease and demand management 467,726 472,892 1,600,730 1,302,505
Surveys 24,701 42,428 84,077 147,233
Development Fees 7,079 5,900 40,804 27,438
Licensing Fees 1,880 1,880 5,640 28,430
------------------------------ --------------------------------
Total Revenues $ 1,429,692 $ 586,100 $ 3,957,408 $ 1,628,144
------------------------------ --------------------------------
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 nine month periods ended September 30,
2003 is not necessarily indicative of the results for the entire year ending
December 31, 2003.
The changes 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 two customers. The new customers accounted for increased revenue
of $125,307 and $386,153 for the three and nine month periods ended September
30, 2003. Revenues from the joint marketing relationship increased from $24,955
and $67,055 for the three and nine month periods ended September 30, 2002,
respectively, to $226,999 and $571,688 for the same respective periods of 2003.
The Company received revenue of $1,200 and $317,753 as compared to $330,157 and
$859,730 for the three and nine month periods ended September 30, 2003 and 2002,
respectively, from terminated service agreements. 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 $7,079 and $5,900 for the three month periods
ended September 30, 2003 and 2002, respectively and $40,804 and $27,438 for the
nine month periods ended September 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 for the three month periods ended September 30, 2003 and 2002 and
$5,640 and $28,430 for the nine month periods ended September 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 nine month periods ended September 30, 2003 was $1,107,776 and $3,054,233,
respectively, as compared to $467,162 and $1,416,741 for the three and nine
month periods ended September 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 23% for the three and nine
month periods ended September 30, 2003 as compared to 20% and 13% 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 nine month periods ended
September 30, 2003 were $230,606 and $675,667, respectively, as compared to
$192,533 and $546,096 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
nine month periods ended September 30, 2003 were $341,526 and $913,836, as
compared to $238,184 and $894,819 for the same respective periods of 2002. These
expenditures have been incurred to maintain the corporate infrastructure
necessary to support anticipated program operations. The increase in these
expenses is due primarily to reversing a $114,953 accrued expense as a result of
a renegotiated vendor contract during August of 2002.
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 nine month periods ended September 30, 2003 were
$35,060 and $100,288, respectively, as compared to $26,242 and $73,878 for the
same respective periods of 2002.
Amortization of debt discount was $754,101 and $1,467,947 for the three and
nine month periods ended September 30, 2003, respectively. This cost relates to
the issuance of equity to, and incurrence of debt from, certain lenders pursuant
to the Note and Stock Purchase Agreement dated April 10, 2003 and as amended on
September 11, 2003, pursuant to which the lenders agreed to make short term
loans to the Company. The total value received by the lenders from the Company
under the Note and Stock Purchase Agreement as amended was $8,307,858. In
accordance with APB Opinion No. 14, a portion of the cash received totaling
$1,427,692 and 596,662 for the quarters ended June 30 and September 30, 2003,
respectively, is allocable to equity resulting in a debt discount in those same
amounts, which is amortized over the life of the loan. As of September 30, 2003,
the Company had amortized $1,467,947 of the total debt discount of $2,024,354.
The remaining $556,407 will be amortized over the two month period ending
November 30, 2003. If additional amounts must be borrowed, there may be
additional consideration to the lenders and additional financing costs
associated with such loans, which may increase financing costs and may cause the
life the life of this intangible asset to be adjusted.
The Company recorded net interest expense of $151,262 and $447,479 for the
three and nine month periods ended September 30, 2003, respectively, as compared
to $136,126 and $388,797 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, of $1,858,563 and $4,882,283 for the three and nine
month periods ended September 30, 2003, respectively, with a net loss per share
of $0.17 and $0.45 per share for the same respective periods. Without the
financing cost of $754,101 and $1,467,947 and the beneficial conversion feature
of $596,662 and $2,024,354 for the three and nine month periods ended September
30, 2003, respectively, the Company had a net loss attributable to the common
shareholders after preferred stock dividends, of $507,800 and $1,389,982 for the
three and nine month periods ended September 30, 2003, respectively, as compared
to $496,647 and $1,759,687 for the three and nine month periods ended September
30, 2002. This represents a net loss per common share of $0.05 and $0.13 for the
three and nine month periods ended September 30, 2003, compared to the net loss
of $0.05 and $0.16 per common share shown for the same respective periods of
2002.
Liquidity and Capital Resources
At September 30, 2003, the Company had a working capital deficit of
$9,760,182 as compared to $6,135,451 at December 31, 2002. Through September 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
September 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 $1,500,000 for working capital from Mr. Pappajohn
during the nine month period ended September 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 November 13, 2003, a total of
$6,577,500 has been borrowed from Mr. Pappajohn and Dr. Schaffer (both of whom
are members of the Company's Board of Directors), inclusive of $246,852 of
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.
On April 10, 2003, the Company entered into a Note and Stock Purchase
Agreement, which the Company amended on September 11, 2003 (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 issued a total of 286,182 shares of
Series D 9% Cumulative Preferred Stock ("Series D Preferred Stock") to the
Investors. The notes that were outstanding at June 30, 2003 totaling $2.5
million (the "Original Notes") were replaced with new notes of equal value.
Except for the maturity date of November 30, 2003, the replacement notes have
substantially the same terms as the Original Notes. During the quarter ended
September 30, 2003, the Company borrowed $1 million under the Note and Stock
Purchase Agreement, resulting in total borrowings of $3.5 million at September
30, 2003 and the Note and Stock Purchase Agreement. All the notes bear interest
at a rate equal to the prime rate plus 3% per annum and mature on November 30,
2003. The 286,182 shares of Series D Preferred Stock are convertible into
34,341,840 shares of common stock of the Company, valued at $4,807,858. The
total value received by the lenders for borrowings was $8,307,858. In accordance
with APB Opinion No. 14, a portion of the cash received totaling $596,662 and
$2,024,354 for the three and nine month periods ended September 30, 2003,
respectively, is allocable to equity resulting in a debt discount in those same
amounts, 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 September 30, 2003, the Company had notes receivable of $3.1 million from
ACS. Patient Infosystems received warrants to purchase 26,344 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 nine month periods ended September 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 September 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 September 30, 2003 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
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 amended on September 11, 2003 (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 issued a total of 286,182 shares of
Series D 9% Cumulative Preferred Stock ("Series D Preferred Stock") to the
Investors. The notes that were outstanding at June 30, 2003 totaling $2.5
million (the "Original Notes") were replaced with new notes of equal value.
Except for the maturity date of November 30, 2003, the replacement notes have
substantially the same terms as the Original Notes. All the notes bear interest
at a rate equal to the prime rate plus 3% per annum and mature on November 30,
2003. The 286,182 shares of Series D Preferred Stock are convertible into
34,341,840 shares of common stock of the Company, valued at $4,807,858. During
the quarter ended September 30, 2003, the Company borrowed $1 million under the
Note and Stock Purchase Agreement, resulting in total borrowings of $3.5 million
at September 30, 2003 and the Note and Stock Purchase Agreement. The total value
received by the lenders for borrowings was $8,307,858. In accordance with APB
Opinion No. 14, a portion of the cash received totaling $596,662 and $2,024,354
for the three and nine month periods ended September 30, 2003, respectively, is
allocable to equity resulting in a debt discount in those same amounts, 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:
None.
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 13, 2003 /s/Roger L. Chaufournier
------------------------------ ------------------------------
Roger L. Chaufournier
Director, President and
Chief Executive Officer
(authorized officer)
Date: November 13, 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.
10.67Amendment No1 to the Amended and Restated Agreement for the Purchase and
Sale of Assets dated as of July 30, 2003 between Patient Infosystems and
American Caresource Corporation.
10.68Amendment No1 to the Note and Stock Purchase Agreement dated as of
September 11, 2003 between Patient Infosystems and a group of investors.
10.69Amendment No1 to the Credit Agreement dated as of July 30, 2003 between
Patient Infosystems and American Caresource Corporation.
10.70Amendment No2 to the Amended and Restated Agreement for the Purchase and
Sale of Assets dated as of October 8, 2003 between Patient Infosystems and
American Caresource Corporation.
31.1 Certification of Roger Chaufournier required by Rule 13a-14(a) or Rule
15d-14(a)
31.2 Certification of Kent Tapper required by Rule 13a-14(a) or Rule 15d-14(a)
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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss $ (1,190,639) $ (474,147) $ (2,702,042) $ (1,692,187)
Convertible preferred Stock dividends (667,924) (22,500) (2,180,241) (67,500)
------------------------------- --------------------------------
Net loss attributable to
Common Stockholders $ (1,858,563) $ (496,647) $ (4,882,283) $ (1,759,687)
------------------------------- --------------------------------
Weighted average common shares 10,956,424 10,956,024 10,956,185 10,956,024
------------------------------- --------------------------------
Net loss per share - Basic and diluted $ (0.17) $ (0.05) $ (0.45) $ (0.16)
=============================== ================================