Item 1. Description of Business.
General
Patient Infosystems, Inc. (the "Company" or "Patient Infosystems") was incorporated in the State of Delaware on February 22, 1995 under the name DSMI Corp., changed its name to Disease State Management, Inc. on October 13, 1995, and then changed its name to Patient Infosystems, Inc. on June 28, 1996. The Company's principal executive offices are located at 46 Prince Street, Rochester, New York 14607 and its telephone number is 716-242-7200.
Patient Infosystems provides patient-centered health care information systems and services to manage, collect and analyze information to improve patient compliance with prescribed treatment protocols, to improve the process of off-site patient management and to enhance patient and provider information. The Company's technology platform integrates an advanced voice recognition telephone system, high speed data processing and analysis capability, and demand publishing and information distribution capabilities, utilizing the Internet and Internet technologies. The system utilizes trained telephone operators and computerized interactive voice response technology and behavior modification based treatment to communicate via telephone directly with the patient at home in order to gather relevant patient data. This data is subsequently evaluated and automatically transmitted via computer generated reports to health care payors, providers and patients, with these reports being tailored to the specific needs of each recipient. The Company markets its services to pharmaceutical manufacturers, pharmacy benefit managers ("PBMs") and health care payors, such as managed care organizations ("MCOs"), integrated delivery networks ("IDNs") and insurance companies and health care providers, to collect data outside of the physician office and institutional setting to enhance compliance by patients with prescribed treatment protocols. The Company`s systems may also be used to address the full spectrum of health care information needs with respect to care quality, patient satisfaction and patient and provider education.
During its first two years of operations, the Company emphasized the development of disease management programs, which accounted for a substantial portion of its revenue during 1997. However, during 1997 and 1998, the Company devoted increased resources to the development of other applications of its technology platform, including demand management, patient surveys and outcomes analysis.
Information Capture, Delivery and Analysis Technologies Utilizing the Internet
The Company's technology platform integrates an advanced voice recognition telephone system, high speed data processing and analysis capability, demand publishing and information distribution capabilities and behavior modification based compliance algorithms with a real time Internet on-line communication system . The system utilizes trained telephone operators and computerized interactive voice response technology to communicate via telephone directly with the patient at home as well as with payors and providers in order to gather and deliver relevant patient data. In order to minimize costly live operator interaction, a computer initiates each call to the patient, which call is automatically transferred to an operator and finally routed to an automated speech application. Patients respond to the recorded speech application by speaking normally. This approach is designed to enable a wider variety of possible responses than is achievable via telephone key pad. Depending on the patient's response, situation-specific algorithms are applied to modify future questions and thus help customize the collection of data.
The Company's system analyzes and prepares the captured data for automatic delivery to the payor, provider and patient using the Internet and demand publishing capabilities. The Company's new Internet capabilities acquired with the HealthDesk purchase enables the Company's systems to interface on a real time basis with patients, payors and providers. Demand publishing technology enables the creation of highly individualized reports by inserting stored graphic images and text which can be customized for race, gender and age. These reports are also customized to the patient's specific situation, and the system utilizes the information received during contacts with the patient to further customize the content of the report. The data relevant to the separate report for health care providers is formatted in a customized report to be automatically transmitted via mail, fax or on-line.
Each contact with a patient contributes to the establishment of a longitudinal data base which can be analyzed to provide information about treatment modalities for patients, providers and payors. The Company's system is designed to analyze patient compliance to prescribed treatment regimens and gather additional clinical information so that improvements in such regimens can be developed.
Internet Capabilities
On February 26, 1999, the Company, through its newly formed, wholly-owned subsidiary, Patient Infosytems Acquisition Corp., acquired substantially all the assets of HealthDesk Corporation ("HealthDesk"), a consumer healthcare software company that focuses on general health and chronic disease management through ongoing targeted support for patients, families and caregivers. The acquired assets include HealthDesk OnLine and HealthDesk OnLine for Diabetes, which are both accessible through the Internet and on CD-ROM. The Company also acquired HealthDesk's Care Team Connect product, which is accessible over the Internet and provides a communication mechanism between patients and their caregivers. The Company uses the core technologies associated with these products to support the Company's other programs which include disease management, case management, demand management, patient surveys and clinical studies. (See Note 10 to financial statements)
Integrated Disease State Management System
The Company's first application of its integrated information capture and delivery technology is its integrated disease state management system. This system is designed to provide caregivers with the ability to monitor, on a cost-effective basis, patient condition and behavior while the patient is between physician consultations. The Company believes that this will permit caregivers to improve patient compliance and, as a consequence, improve patient outcomes.
The Company's disease state management system has three primary components. First, using a panel of recognized medical and clinical experts, the Company develops a disease-specific patient intervention and compliance program that includes a template for the integration of each patient's history, current medical status and treatment protocol. If the program is being developed on a custom basis for a particular customer, the program is developed in consultation with the customer's clinical staff and consultants. Second, the Company establishes periodic telephone contacts with each patient to monitor the patient's compliance with prescribed therapies as well as the patient's treatment progress. Third, using the information obtained from patient contacts and other available information regarding the patient and his or her treatment, such as physician records and pharmacy information, personalized reports are prepared, typically following each patient contact, for evaluation by the patient, the patient's health care provider and, on a routine basis, payors.
Development of Disease-Specific Protocols
The Company's disease-specific compliance programs are developed for targeted diseases either on a customized or standardized basis. The Company retains an internal clinical staff and panels of independent medical and clinical experts to identify guidelines of generally accepted treatment protocols and diagnostic interventions for particular diseases. These guidelines serve as a template for information to be gathered from each patient. If the program is being developed on a custom basis for a particular customer, the program is developed in consultation with the customer's clinical staff and consultants. In addition, the Company's internal clinical staff conducts research of available databases and gathers information provided by medical experts, insurance providers, governmental agencies, Medicare and Medicaid and other sources to develop with the medical experts the disease-specific program structure. The resulting compliance protocols are designed to enable the Company to gather the necessary patient information to determine the extent of a patient's compliance with his or her prescribed treatment, the effectiveness of treatment and the progress of the patient's disease. As the Company's database of disease-specific treatments expands, the Company intends to use that data to modify, update and enhance its own disease state management compliance programs and assist health care providers in improving treatment protocols.
Patient Enrollment
When a patient is enrolled in one of the Company's disease state management programs a patient history is obtained, including the histories of the chronic illness, medications, and surgical procedures as well as other information deemed relevant by the disease-specific compliance program. This information is included in the Company's database for each patient and is used to create customized reports for distribution to each of the patient's health care provider and payor as well as the patient. The patient report can include information on the prescribed treatment of the patient's disease as well as the use of the program and social support services to improve compliance with the patient's treatment regimen. In addition, the Company's demand publishing technology provides personalized behavior modification and educational materials for the patient. The health care provider report contains the relevant clinical and behavioral information gathered from the patient.
The Company has found patient enrollment to be one of the particularly challenging components to establishing effective programs. Although the Company has completed the development of several disease management programs, the Company's customers have been able to provide only limited patients to enroll in the programs. To the extent that the Company's revenue is dependent upon the number of contacts it is able to achieve, it will be required to work closely with its customers to develop methods to increase patient enrollment.
Patient Contacts
In accordance with a designated patient contact schedule, a patient will periodically receive telephone calls from a live operator who, after confirming the identity of the patient, will transfer the patient to an automated system that will ask specific questions determined in accordance with the disease-specific compliance program and provide information and motivational feedback. Patient contact schedules are established for each disease state management program, with the frequency of patient contact varying with the disease under management and the goal of the applicable treatment and occurring as often as daily or as infrequently as on a quarterly basis. The data gathered from the patient during each contact is processed and stored in the Company's database.
The compliance program takes into account patient responses to treatment follow-up questions and initiates specific courses of action which can include positive reinforcement messages, confirmation of prescription instructions and scheduled callbacks to remind the patient of the need to take prescribed medication. In addition, questions to be asked in future calls are modified based upon the patient's responses during previous calls.
The Company's disease state management system captures and processes the information obtained from the patient during the contact and integrates this information with the other data maintained by the Company, including prior patient responses, patient medical history, treatments administered to date and the mandated treatment protocols for the disease. This system automatically prepares distinct reports using the Company's demand publishing technologies for the patient and for the physician or other caregiver. Each report is tailored for the particular requirements of each recipient. The patient's report, for example, may include pictures, diagrams and informative discussions relating to the treatment course intended to modify or reinforce certain behaviors. The physician's report would likely be more factual and direct and summarize the clinical and behavioral information that has been gathered.
On a routine basis the Company will provide data to the patient's health care payor with respect to that patient's progress. The Company will be able to include information from various data sources in these reports for the purpose of providing additional information with respect to a patient. For example, the Company may be able to interact with the pharmacy services division of a payor to determine the renewal frequency of prescriptions, which provides an indication of whether a patient is taking his or her medication. In addition, the system provides the flexibility to allow other information from physicians' reports and hospital tests to be included in the periodic reports.
Compliance Assistance
The Company assists payors and health care providers in monitoring patient compliance and works with health care providers to develop compliance and education programs that can be implemented through the Company's system. The Company's publishing technology enables production of patient-specific compliance and education literature that is customized for an individual patient. Once this literature is prepared it may be delivered to a patient by mail, facsimile or on-line. In addition, the Company can implement a variety of procedures including medication reminders via wireless two-way communication and more frequent telephone communications for non-compliant patients or patients with more difficult treatment regimens. The Company can provide additional support services, such as an 800 number that will provide recorded information with respect to a variety of patient education topics or other support messages.
Patient Infosystems Programs
The Company is developing customized disease state management and risk assessment programs in conjunction with a number of customers, as well as standardized disease state management programs in the areas of asthma, diabetes and hypertension. Each of the Company's customer agreements for its customized programs provide for development fees to be paid to the Company upon the achievement of certain milestones. In addition, the agreements for customized disease state management programs may provide for some form of exclusivity period, during which the Company is prohibited from engaging or participating in other projects involving the specific disease target that is the subject of that program. The exclusivity periods extend until, in general, a certain date or certain period (ranging from eight to 24 months) following the achievement of a specified milestone in the development or implementation of the program. The Company enrolled its first patients in a disease state management program in October 1996, and has less than 20,000 patients currently enrolled in those programs.
All of the Company's customer agreements, which are typically terminable without cause by either party, require payment to the Company of operational fees per enrolled patient. The amount of the per patient program operational fee varies with the length, complexity and frequency of patient contacts as dictated by the respective program protocols. Patient enrollment in each of the Company's programs will depend upon the identification and referral by the Company's customers of patients to the Company's system which will vary from program to program.
The Company has developed or is developing programs in the following areas:
Asthma
The Company has developed a disease state management program for asthmatic patients that has been marketed to payors and other participants in the health care industry, and such program has been provided to patients since January 1997. Through February 1999, the Company has had approximately 4,100 interventions with patients participating in these programs. American HomePatient, Inc. ("American HomePatient"), Centra Healthcare Administrative Services, Inc. ("Centra"), Harris Methodist Health Plan ("Harris Methodist") and Health Alliance, a Division of Astra Pharma Inc. ("Health Alliance") have retained the Company to provide disease state management programs for patients who are suffering from asthma and are enrolled in health care programs for which these companies provide services.
Congestive Heart Failure
The Company has a services agreement with Bristol-Myers to develop, implement and operate a disease state management program to aid in the treatment of patients suffering from congestive heart failure. The Company has completed the development of the program in congestive heart failure in the English language, and is currently developing the program in the Spanish language. This program has been provided to patients since April 1997, and through February 1999, the Company has had approximately 9,900 interventions with patients participating in this program.
Diabetes
The Company has developed a disease state management program for diabetic patients that has been marketed to payors and other participants in the health care industry. Bristol-Myers, Centra and Health Resources have retained the Company to provide this disease state management program for patients who are suffering from diabetes and are enrolled in health care programs for which these companies provide services. These programs have been provided to patients since August of 1997, and through February 1999, the Company has had approximately 2,600 interventions with patients participating in these programs.
Secondary Cardiovascular Disease
The Company has entered into a services agreement with Bristol-Myers to develop, implement and operate a disease state management program relating to the prevention of cardiovascular sequelae in patients who have recently experienced certain cardiovascular illnesses or treatments such as angina, cardiac bypass surgery or myocardial infarction. The Company has completed the development of this program in the English language and is continuing to develop the program in the Spanish language. This program has been provided to patients since January 1997, and through February 1999, the Company has had 115 interventions with patients participating in this program.
Hypertension
The Company has completed the development of a compliance program for patients with hypertension that has been marketed to payors and other participants in the health care industry. Bristol-Myers has retained the Company to provide this compliance program for patients who are suffering from hypertension and are enrolled in health care programs for which these companies provide services. Patients are currently being enrolled into this program.
Additional Disease Targets
The Company has identified additional opportunities in large chronic disease markets, including in the treatment of, chronic obstructive pulmonary disease, depression, cancer, osteoporosis, arthritis, HIV infection and high risk pregnancy. Each of these targets has been identified as having characteristics which make them attractive candidates for the Company's programs. The Company is currently involved in discussions with customers for the development of programs in a variety of these areas.
Significant Customer Concentration
The Company's current contracts are concentrated in a small number of customers, with several of the Company's most significant contracts being with Bristol-Myers and Aetna U.S. HealthCare. The Company expects that its sales of services will be concentrated in a small number of customers for the foreseeable future. Consequently, the loss of any one of its customers could have a material adverse effect on the Company and its operations. There can be no assurance that customers will maintain their agreements with the Company, enroll a sufficient number of patients in the programs developed by the Company for the Company to achieve or maintain profitability, or that customers will renew their contracts upon expiration or on terms favorable to the Company.
Other Applications of the Integrated Information Capture and Delivery Technology
Demand Management
Demand management involves assisting providers in evaluating patient treatment needs to identify those patients who may not require immediate or intensive services. The goal of demand management is to reduce the need for and use of costly, often clinically unnecessary, medical services and arbitrary managed-care interventions while improving the overall quality of life of patients. The Company believes that its system can be used to provide automated or semi-automated demand management services. The Company is currently providing demand management to approximately 150,000 patients for Kentucky Medicaid, CHA HMO, Inc. and Managed Care Assistance Corporation.
Outcomes Analysis
The Company intends to utilize information gathered from patients enrolled in its programs to serve two purposes. First, information regarding treatment results, success of the compliance program and patient reaction to differing treatments or compliance protocols may be used by the Company to further improve each disease-specific compliance program. Second, this information may be used by payors, pharmaceutical companies and health care providers to assist in the development of improved treatment modalities. The Company has developed analytical methodologies using database management and information technologies. The Company intends to use these data analysis technologies to predict the best treatment methodologies for patients.
Clinical Studies
Many pharmaceutical companies and contract research organizations are seeking more economical, efficient and reliable methods for compiling and analyzing clinical data in conducting clinical trials. Furthermore, many drug development protocols have begun to emphasize subjective criteria and outcomes information. The Company believes that its system will allow it to develop programs tailored to the measurement of outcomes data relating to the conduct of later stage clinical trials. The Company believes that its system can also assist pharmaceutical companies in studying and documenting the efficacy of approved products in order to provide ongoing information to FDA or for marketing purposes.
Patient Surveys
Organizations in many different areas of the health care industry survey users regarding their products and services for a variety of reasons including regulatory, marketing and research purposes. The Company's information systems, with their ability to proactively contact patients in a cost-efficient manner, may be used for this type of application. The Company has developed a series of 10 automated surveys ranging from general health to disease specific instruments. The product line includes surveys for SF-12; child health questionnaire; patient satisfaction; asthma; diabetes; back pain; depression; prostatis; maternity; and the Pra Plus for elderly populations. The Company has completed approximately 125,000 surveys during 1998 through February 1999.
Case Management
Patients who are prescribed complex or high cost treatment regimens may require a higher level of monitoring, interaction, care planning and reassessment than patients with less complicated treatment regimens. The Company believes that its system is capable of providing these enhanced services to such patients to eliminate or minimize the unnecessary costs and medical attention that result from a patient's lack of compliance with a prescribed treatment regimen.
Sales and Marketing
Through 1997, the Company's efforts focused primarily on the development of disease management programs. During 1998, the Company began aggressively marketing the other services that its technology platform can provide including demand management, patient surveys and outcomes analysis. The Company markets its integrated disease state management system to organizations within the health care industry that are involved in the treatment of disease or payment of medical services for patients who require complex or long-term medical therapies. These industry organizations include five distinct groups: pharmaceutical companies, medical service companies, PBMs, health care payors and employer groups. The Company employs a sales and marketing staff of twelve persons to market the Company's systems. In addition, the senior members of the Company's management are actively engaged in marketing the Company's programs.
The Company has expanded its marketing efforts by conducting patient surveys, clinical studies and implementing other measures designed to document the clinical and cost benefits it believes will result from the application of its integrated information capture and delivery system. In collaboration with the members of its expert panels who are retained to develop program protocols and other research and clinical technicians, the Company intends to promote the benefits of its system through publication in clinical journals and presentations at scientific conferences of the results of these studies. The Company is conducting such studies designed to produce significant short-term data with respect to its asthma, diabetes and cardiac programs.
The Company entered into a joint venture agreement with MacLean Hunter Publishing Limited, an Ontario, Canada corporation, in November 1998 to market and sell, on an exclusive basis in Canada, products and services developed by the Company and to manage jointly, finance and operate the business entity Patient Infosystems Canada, Inc., which is dedicated to the development of a commercially viable business built around the sale, marketing and service of the Company's products and services.
Research and Development
Research and development expenses consist primarily of salaries and related benefits and administrative costs allocated to the Company's research and development personnel for development of certain components of its integrated information capture and delivery system, as well as development of the Company's standardized disease state management programs. Research and development costs have decreased as the Company has completed the development of its primary disease management programs. The Company anticipates that research and development expenses will continue to decrease in future periods, as the Company continues to expand its operations.
The development and maintenance of the telecommunications and computer publishing systems through which the Company operates its integrated information capture and delivery system is a major component of its business. The communications and information technology industries are subject to rapid and significant technological change, and the ability of the Company to operate and compete is dependent in significant part on its ability to update and enhance its system continuously. In order to do so, the Company must be able to utilize effectively its research and development capabilities and implement new technology in order to enhance its systems. At the same time, the Company must not jeopardize its ability to contact patients and to process and publish patient information or adapt to customer preferences or needs. The Company will maintain a significant investment in its technology, and therefore is subject to the risk of technological obsolescence. Competition
The market for health care information products and services is intensely competitive. Competitors vary in size and in scope and breadth of products and services offered, and the Company competes with various companies in each of its disease target markets. Many of the Company's competitors have significantly greater financial, technical, product development and marketing resources than the Company. Furthermore, other major information, pharmaceutical and health care companies not presently offering disease state management or other health care information services may enter the markets in which the Company intends to compete. In addition, with sufficient financial and other resources, many of these competitors may provide services similar to those of the Company without substantial barriers. The Company does not possess any patents with respect to its integrated information capture and delivery system, and although it has filed a patent application with respect to certain aspects of its integrated information capture and delivery system and its integrated disease state management system, there can be no assurance that this application will result in the issuance of a patent, or if issued, that a patent would provide the Company with any competitive advantage.
The Company's potential competitors include specialty health care companies, health care information system and software vendors, health care management organizations, pharmaceutical companies and other service companies within the health care industry. Many of these competitors have substantial installed customer bases in the health care industry and the ability to fund significant product development and acquisition efforts. The Company will also compete against other companies that provide statistical and data management services, including clinical trial services to pharmaceutical companies.
The Company is aware of several large pharmaceutical and medical service companies that have publicly stated that they intend to be involved in providing comprehensive disease state management services. The Company believes that the principal competitive factors in its market are the ability to link patients, health care providers and payors, and provide the relevant health care information at an acceptable cost. In addition, the Company believes that the ability to anticipate changes in the health care industry and identify current needs are important competitive factors.
Quality Control
The Company has developed quality control measures designed to insure that information obtained from patients is accurately transcribed, that reports covering each patient contact are delivered to health care providers and patients and that the Company's personnel and technologies are interacting appropriately with patients and health care providers. Quality control systems include random monitoring of telephone calls, patient surveys to confirm patient participation and effectiveness of the particular program, and supervisory reviews of telephone agents.
Government Regulation
The health care industry, including the current and proposed business of the Company, is subject to extensive regulation by both the Federal and state governments. A number of states have extensive licensing and other regulatory requirements applicable to companies that provide health care services. Additionally, services provided to health benefit plans in certain cases are subject to the provisions of the Employee Retirement Income Security Act ("ERISA") and may be affected by other state and Federal statutes. Generally, state laws prohibit the practice of medicine and nursing without a license. Many states interpret the practice of nursing to include health teaching, health counseling, the provision of care supportive to or restorative of life and well being and the execution of medical regimens prescribed by a physician. Accordingly, to the extent that the Company assists providers in improving patient compliance by publishing educational materials or providing behavior modification training to patients, such activities could be deemed by a state to be the practice of medicine or nursing. Although the Company has not conducted a survey of the applicable law in all 50 states, it believes that it is not engaged in the practice of medicine or nursing. There can be no assurance, however, that the Company's operations will not be challenged as constituting the unlicensed practice of medicine or nursing. If such a challenge were made successfully in any state, the Company could be subject to civil and criminal penalties under such state's law and could be required to restructure its contractual arrangements in that state. Such results or the inability to successfully restructure its contractual arrangements could have a material adverse effect on the Company.
The confidentiality of patient information is subject to regulation by state law. A variety of statutes and regulations exist safeguarding privacy and regulating the disclosure and use of medical information. State constitutions may provide privacy rights and states may provide private causes of action for violations of an individual's "expectation of privacy." Tort liability may result from unauthorized access and breaches of patient confidence. The Company intends to comply with state law and regulations governing medical information privacy.
In addition, on August 21, 1996 Congress passed the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), P.L. 104-191. This legislation requires the Secretary of the Department of Health and Human Services to adopt national standards for electronic health transactions and the data elements used in such transactions. The Secretary is required to adopt safeguards to ensure the integrity and confidentiality of such health information. Violation of the standards is punishable by fines and, in the case of wrongful disclosure of individually identifiable health information, imprisonment. The Secretary has promulgated and published proposed rules addressing the standards, however, no final rules have been adopted to date. Final rules may be adopted during 1999.
The Company and its customers may be subject to Federal and state laws and regulations which govern financial and other arrangements between health care providers. These laws prohibit certain fee splitting arrangements between health care providers, as well as direct and indirect payments, referrals or other financial arrangements that are designed to induce or encourage the referral of patients to, or the recommendation of, a particular provider for medical products and services. Possible sanctions for violation of these restrictions include civil and criminal penalties. Specifically, HIPAA increased the amount of civil monetary penalties from $2,000 to $10,000. Criminal penalties range from misdemeanors, which carry fines of not more than $10,000 or imprisonment for not more than one year, or both, to felonies, which carry fines of not more than $25,000 or imprisonment for not more than five years, or both. Further, criminal violations may result in permanent mandatory exclusions and additional permissive exclusions from participation in Medicare and Medicaid programs.
Furthermore, the Company and its customers may be subject to federal and state laws and regulations governing the submission of false healthcare claims to the government and private payers. Possible sanctions for violations of these laws and regulations include minimum civil penalties between $5,000-$10,000 for each false claim and treble damages.
Regulation in the health care field is constantly evolving. The Company is unable to predict what government regulations, if any, affecting its business may be promulgated in the future. The Company's business could be adversely affected by the failure to obtain required licenses and governmental approvals, comply with applicable regulations or comply with existing or future laws, rules or regulations or their interpretations.
Intellectual Property
The Company considers its methodologies, processes and know-how to be proprietary. The Company seeks to protect its proprietary information through confidentiality agreements with its employees. The Company's policy is to have employees enter into confidentiality agreements containing provisions prohibiting the disclosure of confidential information to anyone outside the Company, requiring employees to acknowledge, and, if requested, assist in confirming the Company's ownership of any new ideas, developments, discoveries or inventions conceived during employment, and requiring assignment to the Company of proprietary rights to such matters that are related to the Company's business.
Employees
As of February 28, 1999, the Company had 121 full and part-time employees.
Financial Information
For financial information concerning the Company, see the financial statements and the notes thereto included elsewhere herein.
Item 2.
Item 2. Description of Properties.
The Company's executive and corporate offices are located in Rochester, New York in approximately 13,000 square feet of leased office space under an operating lease that expires on November 30, 1999. The Company leases office space for its Demand Management call center in Wayne, Pennsylvania in approximately 2,047 square feet of leased office space under a lease agreement that expires in May 2001. The Company leases office space for its Berkeley, California office in approximately 2,800 square fee of lease office space under a lease agreement that expires in October 1999.
The Company believes its plants and facilities are suitable and adequate, and have sufficient productive capacity, to meet its current needs.
Item 3.
Item 3. Legal Proceedings.
The Company is not a party to any material legal proceedings.
Item 4.
Item 4. Submission of Matters To A Vote Of Security Holders.
No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 1998.
PART II
Item 5.
Item 5. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters.
(a) Market Information
The Company's common stock is traded on the NASDAQ National Market System under the symbol "PATI". The following table sets forth, for the periods indicated, the range of the high and low closing sale price for the Company's Common Stock as reported on the NASDAQ National Market.
High Low
First Quarter $9.25 $6.38 Second Quarter $6.25 $4.50 Third Quarter $5.00 $2.88 Fourth Quarter $4.38 $2.63
First Quarter $4.50 $2.63 Second Quarter $5.00 $2.50 Third Quarter $3.44 $1.81 Fourth Quarter $1.88 $1.00
(b) Holders
The approximate record number of holders of the Company's common stock as of February 28, 1999 is 87. However, the Company believes that there are in excess of 400 beneficial holders of Common Stock of the Company.
(c) Dividends
The Company has never paid cash dividends on its capital stock and does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain all future earnings, if any, to fund the development and growth of its business. Any future determination to pay cash dividends will be at the discretion of the Board of Directors.
(d) Use of Proceeds
The Company has used and continues to use the proceeds from its initial public offering of common stock in December 1996 for capital improvements and expansion of its telephone and computer capabilities for sales and marketing and for general corporate purposes as more fully discussed in financial statements and notes thereto appearing elsewhere herein. Recently, the Company used $761,000 in connection with the acquisition of the assets of HealthDesk.
Item 6.
Item 6. Selected Financial Data.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management's discussion and analysis provides a review of the Company's operating results for the years ended December 31, 1998, 1997 and 1996, and its financial condition at December 31, 1998. 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 financial statements.
In an effort to give investors a well-rounded view of the Company's current condition and future opportunities, this Annual Report on Form 10-K includes forecasts by the Company's management about future performance and results. Because they are forward-looking, these forecasts involve uncertainties. They include risks of market acceptance of or preference for the Company's systems and services, competitive forces, the impact of, and changes in, government regulations, general economic factors in the healthcare industry, and other factors discussed in the Company's filings with the Securities and Exchange Commission.
Overview
The Company was formed on February 22, 1995 and has a limited operating history from which to evaluate its performance. Although the Company has completed the development of its integrated information capture and delivery system and has developed several disease state management programs for specific diseases, the Company is continuing to refine its products for additional applications. In October 1996 the Company began enrolling patients in its first disease state management program and only began substantial patient contacts during 1998. The Company currently has patients enrolled in five of its disease-specific programs. Through February 1999, an aggregate of approximately 350,000 persons have enrolled and participated in Company programs. The enrollment of patients in the Company's programs has been limited by several factors, including the limited ability of clients to provide the Company with accurate information with respect to the specific patient populations, including coding errors that necessitated extensive labor intensive data processing prior to program implementation. In addition, the Company has encountered resistance from patients and other sources of information to the Company's systems.
In response to these market dynamics, the Company has taken several tactical and strategic steps including, formal designation of internal personnel at customer sites to assist clients with implementation; closer integration of Company systems personnel with clients to facilitate accurate data transfers; and most importantly, promotion of a broader product line to enable clients to enter the Company's disease management programs through a variety of channels. The Company now markets two additional services, demand management services and automated surveys (general health and disease-specific), both of which can provide mechanisms for enrollment to the Company's disease management programs. Nevertheless, no assurance can be given that the Company's efforts will succeed in increasing patient enrollment in Company programs.
The Company has entered into services agreements to develop, implement and operate programs for: (i) patients who have recently experienced certain cardiovascular events; (ii) patients who have been diagnosed with primary congestive heart failure; (iii) patients suffering from anorexia or cachexia secondary to diagnosis of cancer or AIDS; (iv) patients suffering from chronic pain, and (v) patients who are at increased risk of suffering from epilepsy. In addition, the Company has entered into services agreements to operate its disease management programs for patients suffering from asthma, diabetes and hypertension. These contracts provide for, and the Company anticipates future contracts will provide for, fees paid by its customers based upon the number of patients participating in each of its programs, as well as initial program development fees from customers for the development of a disease-specific program. To the extent that the Company has had limited enrollment of patients in its programs, the Company's operations revenue has been, and may continue to be limited. Moreover, as the Company has completed the development of its primary disease management programs, it anticipates that development revenue will also decline over the next twelve months unless and until the Company enters into new development agreements. The Company's program development contracts typically require payment from the customer at the time that the contract is executed, with additional payments made as certain development milestones are met. Development contract revenue is recognized on a percentage of completion basis, in accordance with the ratio of total development cost incurred to the estimated total development costs for the entire project. Losses, if any, related to program development will be recognized in full as identified. The Company's contracts call for a fixed program operational fee to be paid by the customer for each patient enrolled for a series of program services as defined in the contract. The timing of customer payments for the delivery of program services varies by contract. Revenues from program operations are recognized ratably as the program services are delivered. The amount of the per patient fee varies from program to program depending upon the number of patient contacts required, the complexity of the interventions and the detail of the reports generated. The Company has not capitalized any costs related to the development of software for use in its disease state management programs since all of such software has been developed for internal use.
Revenues from Operations, which includes fees received by the Company for operating its programs has increased substantially and has become the most significant source of the Company's revenues. Furthermore, as enrollment in Company operated disease management programs continues to increase, the Company anticipates that these revenue sources will become the primary source of the Company's revenues. Currently, the Company's demand management programs generate more revenue than the Company's disease management programs. However, the Company is continuing to devote significant marketing efforts to increasing the number of disease management programs that are in operation. Nevertheless, the Company is still supporting a substantial infrastructure in maintaining the capacity necessary to deliver its services and to offer its services to new customers. Therefore, the Company will be required to increase substantially the number of patient contacts and management programs to cover the costs necessary to maintain the capability to service its customers. In that the Company has only begun substantial patient contacts during 1998, the Company is continually examining its costing structures to determine the levels that will be necessary to achieve profitability.
The sales cycle for the Company's programs may be extensive from initial contact to contract execution. During these periods, the Company may expend substantial time, effort and funds to prepare a contract proposal and negotiate the contract. The Company may be unable to consummate a commercial relationship after the expenditure of such time, effort and financial resources.
The Company began to provide other services to customers in the healthcare industry during 1997 which included new applications of its information capture and delivery system. These consisted of patient surveys, health risk assessments, nursing support lines and marketing support functions.
In February, 1999, the Company, through its newly formed, wholly-owned subsidiary, Patient Infosystems Acquisition Corp., acquired substantially all of the assets of HealthDesk Corporation, a consumer healthcare software company, primarily engaged in the business of designing and developing Internet based products in the healthcare, wellness and disease management industries for $761,463. The Company obtained funds for the HealthDesk acquisition from its available cash. The assets that were acquired by the Company included inventory, intellectual property, hardware and software.
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues
Revenues are comprised of revenues from operations fees, development fees and licensing fees. Revenues increased 14% from $2,062,373 for the year ended December 31, 1997 to $2,344,072 for the year ended December 31, 1998. A summary of these revenues by category is as follows: December 31, ------------ 1998 1997 ---- ---- Revenues - -------- Operations Fees ...................................... $1,385,720 $ 735,841 Development Fees ..................................... 689,157 826,532 Licensing Fees ....................................... 269,195 500,000 ------- -------
Total Revenues ....................................... $2,344,072 $2,062,373 ========== ==========
Revenues from operations increased 88% from $735,841 for the year ended December 31, 1997 to $1,385,720 for the year ended December 31, 1998. Operations revenues are generated as the Company provides services to its customers for their disease-specific programs. Operations revenues increased significantly in 1998, as the Company continues to increase the membership levels in the Company's disease state management programs and primarily from the Company's demand management programs. The demand management programs operate from the Company's medical call center which was established in May 1998, in Wayne, Pennsylvania The medical call center is staffed by registered nurses on a 24 hour, 7 day a week schedule.
Revenues from development fees decreased 17% from $826,532 for the year ended December 31, 1997 to $689,157 for the year ended December 31, 1998. The Company received $689,157 in development revenues for the year ended December 31, 1998, related almost entirely to fees from Bristol-Myers for the development of disease state management agreements. The Company also received development revenues from a small number of other customers related to other disease-specific programs. The Company has completed substantially all services under these agreements and is currently receiving revenues in connection with only the development of three programs. Development revenues include clinical, technical and operational design or modification of the Company's primary disease management programs. Development revenue declined from the year ended December 31, 1997 to December 31, 1998 as the Company reduced its development fees charged to certain customers. The Company anticipates that revenue from development fees will continue to decline unless the Company enters into new development agreements.
Revenues from licensing fees decreased 46% from $500,000 for the year ended December 31, 1997 to $269,195 for the year ended December 31, 1998. Licensing revenue represents amounts that the Company charges its customers, on a one-time fee basis, for the right to enroll patients in or the right to license other entities certain of its programs, primarily but not limited to, the Company's standardized asthma and diabetes programs. The Company had licensing fees of $99,750 from the sale of consumer healthcare software which are Internet based products.
The Company also provides other services to customers in the healthcare industry which involve new applications of its information capture and delivery system. These services include patient surveys, health risk assessments, patient satisfaction surveys, physician education programs and marketing support functions.
Costs and Expenses
Cost of sales include salaries and related benefits, services provided by third parties, and other expenses associated with the development of the Company's customized disease state management programs, as well as the operation of each of its disease state management programs.
Cost of sales increased 55% from $1,629,128 for the year ended December 31, 1997 to $2,529,619 for the year ended December 31, 1998. The increase in these costs primarily reflects an increased level of program development and operational activities, as well as the Company's creation of the capacity necessary to handle anticipated increases in the number of individuals to whom the Company provides services.
Sales and marketing expenses increased 12% from $1,609,837 for the year ended December 31, 1997 to $1,795,921 for the year ended December 31, 1998. These costs consist primarily of salaries, related benefits and travel costs, sales materials and other marketing related expenses. Spending in this area has remained consistent as the Company's sales and marketing staff has not expanded during the twelve month period ended December 31, 1998. However, it is anticipated that the Company will continue to invest in the sales and marketing process, and that such expenses will 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 increased 25% from $2,442,269 for the year ended December 31, 1997 to $3,062,204 for the year ended December 31, 1998. These expenditures were incurred to develop the corporate infrastructure necessary to support anticipated program development and operations. The increase in these costs was caused by an increase in the Company's level of business activity, and the addition of required administrative personnel. The Company expects that general and administrative expenses will continue to increase in future periods.
Research and development expenses consist primarily of salaries and related benefits and administrative costs allocated to the Company's research and development personnel for development of certain components of its integrated information capture and delivery system, as well as development of the Company's standardized disease state management programs. Research and development expenses decreased 39% from $489,115 for the year ended December 31, 1997 to $298,686 for the year ended December 31, 1998. The decrease in research and development expenses reflects the Company's completion of the development of its primary disease management programs.
The Company generates net investment income primarily from cash balances and investments. Investment income decreased to $556,592 for the year ended December 31, 1998 from $835,116 for the year ended December 31, 1997. The decrease in interest income reflects the use by the Company of its available cash and the reduction of proceeds that can earn interest.
The Company had a net loss of $4,829,467 for the year ended December 31, 1998 compared to $3,263,351 for the year ended December 31, 1997. This represents a loss of $.60 per share for 1998 and $.41 for 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues
Revenues are comprised of revenues from development fees, operations fees and licensing fees. Revenues increased 144% from $845,412 for the year ended December 31, 1996 to $2,062,373 for the year ended December 31, 1997. A summary of these revenues by category is as follows:
December 31, ------------ Revenues 1997 1996 - -------- ---- ----
Development Fees ..................................... $ 826,532 $ 798,138 Operations Fees ...................................... 735,841 11,718 Licensing Fees ....................................... 500,000 35,556 ------- ------
Total Revenues ....................................... $2,062,373 $ 845,412 ========== ==========
Revenues from development fees increased 3.6% from $798,138 for the year ended December 31, 1996 to $826,532 for the year ended December 31, 1997. The Company received $826,532 in development revenues for the year ended December 31, 1997, primarily related to fees from Bristol-Myers for the development of six disease state management contracts. The Company also received development revenues from a small number of other customers related to other disease-specific programs. The Company has completed substantially all services under these agreements and is currently receiving revenues in connection with only the development of three programs.
The Company's development contracts generally require that payments be made by the customer at the time of contract execution and at the achievement of certain milestones in the development process. These payments are normally received in advance of the Company's recognition of the associated revenue. The timing of customer payments for program operation services varies by contract, but typically occurs prior to the associated services being provided. The Company recognizes deferred revenue for amounts billed for these services in advance of the rendering of the services. The advance payments have been a source of liquidity for the Company.
Revenues from operations increased 6180% from $11,718 for the year ended December 31, 1996 to $735,841 for the year ended December 31, 1997. Operations revenues are generated as the Company provides services to its customers for their disease-specific programs. Operations revenues increased significantly in 1997, as the Company began enrolling patients and implementing its disease state management programs during 1997. Operations revenue consisted primarily of $440,000 in fees received from Abbott Laboratories in connection with a teleconference program completed during the year ended December 31, 1997.
Revenues from licensing fees increased 1306% from $35,556 for the year ended December 31, 1996 to $500,000 for the year ended December 31, 1997. Licensing revenue represents amounts that the Company charges its customers for the right to enroll patients in or the right to market to other entities certain of its programs, primarily the Company's standardized asthma and diabetes programs, and the right to have access to data collected from patients enrolled in such programs. The Company did not initiate any licensing activity until the second quarter of 1996, therefore licensing revenues for the year ended December 31, 1997 were significantly higher that those generated during the year ended December 31, 1996. In 1997, the Company received licensing revenues of $150,000 from the PulseGroup, Inc. for a licensing contract related to the Company's asthma and diabetes programs.
The Company began to provide other services to customers in the healthcare industry during 1997 which involve new applications of its information capture and delivery system. These services include patient surveys, health risk assessments, nursing support lines and marketing support functions.
Costs and Expenses
Cost of sales include salaries and related benefits, services provided by third parties, and other expenses associated with the development of the Company's customized disease state management programs, as well as the operation of each of its disease state management programs. In addition, cost of sales for 1997 and 1996 includes accrued losses on program development in accordance with the Company's policy of recognizing such losses, if any, in full as identified. The accrued loss for 1997 and 1996 is a result of a particular contract for which the amount of the program development fee is based upon the success of the program, and the fact that the guaranteed development revenue for this program is less than the estimated cost of its development. To the extent that the Company enters into any contracts of this type in the future, and that those contracts provide for guaranteed development revenue which is less than the estimated cost of program development, such losses will continue to be accrued.
Cost of sales increased 118% from $748,322 for the year ended December 31, 1996 to $1,629,128 for the year ended December 31, 1997. The increase in these costs primarily reflects an increased level of program development and operational activities.
Sales and marketing expenses increased 76% from $913,547 for the year ended December 31, 1996 to $1,609,837 for the year ended December 31, 1997. These costs consist primarily of salaries, related benefits and travel costs. These expenditures allowed the Company to undertake initial marketing efforts to pharmaceutical companies, payors and other health care services organizations. The increase in these costs reflects an increase in the size of the Company's sales and marketing staff.
General and administrative expenses include the costs of corporate operations, finance and accounting, human resources and other general operating expenses of the Company. General and administrative expenses increased 39% from $1,759,044 for the year ended December 31, 1996 to $2,442,269 for the year ended December 31, 1997. These expenditures were incurred to develop the corporate infrastructure necessary to support anticipated program development and operations. The increase in these costs was caused by an increase in the Company's level of business activity, and the addition of required administrative personnel.
Research and development expenses consist primarily of salaries and related benefits and administrative costs allocated to the Company's research and development personnel for development of certain components of its integrated information capture and delivery system, as well as development of the Company's standardized disease state management programs. Research and development expenses increased 57% from $310,552 for the year ended December 31, 1996 to $489,115 for the year ended December 31, 1997. The increase in these costs reflects initiation of development of the Company's standardized disease state management programs for patients suffering from asthma and diabetes.
The Company generates net interest income primarily from cash balances and investments. Interest income increased to $835,116 for the year ended December 31, 1997 from $81,333 for the year ended December 31, 1996. The increase in interest income reflects the additional funds available to the Company for investment as a result of its initial public offering on December 19, 1996.
The Company had a net loss of $3,263,351 for the year ended December 31, 1997 compared to $2,806,436 for the year ended December 31, 1996. This represents a loss of $.41 per share for 1997 and $.44 for 1996.
Liquidity and Capital Resources
At December 31, 1998 the Company had working capital of $7,992,894, as compared to $13,242,387 at December 31, 1997. Since its inception the Company has primarily funded its operations, working capital needs and capital expenditures from the sale of equity securities. On December 19, 1996 the Company completed an initial public offering of its common stock which generated net proceeds to the Company of $14,082,048. On January 8, 1997, an additional 300,000 shares of common stock were sold pursuant to an underwriters over-allotment provision, which generated net proceeds to the Company of $2,232,000. The Company has continued to expend increasing amounts to expand its operational capabilities including increasing its administrative and technical costs. To the extent that revenues do not increase, the Company's losses will increase, creating an increased burden on the Company's available capital. If the Company is not able to operate profitably or to reduce its losses significantly, it will be required to seek additional capital or reduce its operations.
Capital expenditures during 1998 were $594,663, as compared to expenditures of $394,161 during 1997 and $494,577 during 1996. The expenditures during these periods represented the purchase of the significant technology platform components of the integrated information capture and delivery system as well as purchases required to support the Company's growing employee base.
The Company has been substantially dependent upon the public and private sale of securities to fund its research and development activities and working capital requirements. In order to implement programs using the Company's integrated information capture and delivery system, the Company will be required to devote substantial additional assets to the development of technology, the construction of physical facilities and the acquisition of telephone and computer equipment. The Company will also be required to retain the services of employees in advance of obtaining contracts to provide services.
Inflation
Inflation did not have a significant impact on the Company's costs during 1998, 1997 or 1997. The Company continues to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity, which is required to be adopted by the Company in 2001. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges of underlying transactions must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Management has not yet determined the effect SFAS No. 133 will have, if any, on the Company's consolidated financial position, results of operations or cash flows. Year 2000 Issues
The Year 2000 issue refers to the inability of computerized systems and technologies to recognize and process dates beyond December 31, 1999. The Company has reviewed the Company's information technology systems, cable network equipment and other embedded technologies. A significant portion of the Company's computerized systems and technologies have been developed, installed or upgraded in recent years and are generally more likely to be Year 2000 ready. The Company is also evaluating the potential impact as a result of its reliance on third-party systems that may have year 2000 issues.
Computerized business applications that could be adversely affected by the year 2000 issue include:
* information processing and financial reporting systems, * customer billing systems, * customer service systems, * telecommunication transmission and reception systems, and * facility systems.
System failure or miscalculation could result in an inability to process transactions, send invoices, accept customer orders or provide customers with products and services. Customers could also experience a temporary inability to receive or use the Company's products and services.
The Company has developed a program to assess and address the year 2000 issue. This program consists of the following phases:
* inventorying and assessing the impact on affected technology and systems, * developing solutions for affected technology and systems, * modifying or replacing affected technology and systems * testing and verifying solutions * implementing solutions, and * developing contingency plans.
The Company has substantially completed inventorying and assessing the affected computerized systems and technologies. The Company is in various stages of its year 2000 compliance program with respect to the remaining phases as it relates to the affected systems and technologies. The Company has completed adaptation of all internally created systems and has begun surveying its customers and suppliers regarding their readiness for the year 2000. Final testing to independently validate readiness will begin when the Company has received all third party hardware and software promised to date.
Costs incurred to date directly related to addressing the year 2000 are approximately $50,000. The Company currently estimates the total cost of its year 2000 remediation program to be approximately $60,000. Although the Company will continue to incur substantial capital expenditures in the ordinary course of meeting its telecommunications system upgrade through the year 2000, it will not specifically accelerate its expenditures to facilitate year 2000 readiness, and accordingly such expenditures are not included in the above estimate.
The Company has begun communicating with others with whom it does significant business to determine their year 2000 readiness and to determine the extent to which the Company is vulnerable to year 2000 issues related to those third parties. The Company purchases much of its technology from third parties. There can be no assurance that the systems of other companies on which the Company's systems rely will be year 2000 ready or timely converted into systems compatible with the Company's systems. The Company's failure or a third party's failure to become year 2000 ready or the Company's inability to become compatible with third parties with which the Company has a material relationship, may have a material adverse effect on the Company, including significant service interruption or outages, however, the Company cannot currently estimate the extent of any such adverse effects.
The Company is in the process of identifying secondary sources to supply its systems or services in the event it becomes probable that any of its systems will not be year 2000 ready prior to the end of 1999. The Company is also in the process of identifying secondary vendors and service providers to replace those vendors and service providers whose failure to be year 2000 ready could lead to a significant delay in the Company's ability to provide its service to its customers.
Forward Looking Statements
When used in this and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer of the Company, the words or phrases "will likely result," "expects," "plans," "will continue," "is anticipated," "estimated," "project," or "outlook" or similar expressions (including confirmations by an authorized executive officer of the Company of any such expressions made by a third party with respect to the Company) are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, each of which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company has no obligation to publicly release the result of any revisions 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 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in interest rates primarily in its cash transactions. The Company does not believe it is exposed to changes in foreign currently exchange rates because it does not currently invest in foreign currency instruments. A discussion of the Company's accounting policies for financial instruments is included in the Summary of Significant Accounting Policies in the Notes to the Financial Statements. The Company currently does not have any international operations nor does invest its cash in foreign currency instruments. The balances the Company has in cash or cash equivalents are generally available without legal restrictions to fund ordinary business operations. The Company regularly invests excess operating cash in certificates of deposit and U.S. government bonds and other bonds that are subject to changes in short-term interest rates. Accordingly, the Company believes that the market risk arising from its holding of these financial instruments is minimal. The Company made purchases of available-for-sale securities in the amounts of $7,826,910 in 1998 and $18,121,444 in 1997.
Item 8.
Item 8. Financial Statements And Supplemental Data
Index to Financial Statements Page
Independent Auditors' Report 26 Balance Sheets 27 Statements of Operations 28 Statements of Stockholders' Equity 29 Statements of Cash Flows 30 Notes to Financial Statements 31-40
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Patient Infosystems, Inc.:
We have audited the accompanying balance sheets of Patient Infosystems, Inc. as of December 31, 1998 and 1997 and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Patient Infosystems, Inc. at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP Rochester, New York February 5, 1999 (February 26, 1999 as to Note 10)
See notes to financial statements.
See notes to financial statements
See notes to financial statements.
See notes to financial statements.
PATIENT INFOSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Patient Infosystems, Inc. ("the Company") designs and develops health care information systems and services to manage, collect and analyze patient-related information to improve patient compliance with prescribed treatment protocols. Through its various patient compliance programs for disease state management, the Company provides important benefits for the patient, the health care provider and the payor. The Company was incorporated in Delaware on February 22, 1995 under the name DSMI Corp., changed its name to Disease State Management, Inc. on October 13, 1995, and on June 28, 1996 changed its name to Patient Infosystems, Inc. Prior to January 1, 1997, the Company was a development stage enterprise.
Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates.
Fair Value of Financial Instruments - The Company's financial instruments consist of cash and cash equivalents and available-for-sale securities. The carrying values of cash and cash equivalents and available-for-sale securities approximate fair value.
Revenue Recognition and Deferred Revenue - The Company's principal source of revenue to date has been from contracts with various pharmaceutical companies and managed care organizations for the development and operation of disease management programs for chronic diseases, disease management programs and other health care information system applications. Deferred revenue represents amounts billed in advance under these contracts.
Development Contracts - The Company's program development contracts typically require payment from the customer at the time that the contract is executed, with additional payments made as certain development milestones are met. Development contract revenue is recognized on a percentage of completion basis, in accordance with the ratio of total development cost incurred to the estimated total development costs for the entire project. Losses, if any, are recognized in full as identified.
Program Operations - The Company's program operation contracts call for a per enrolled patient fee to be paid by the customer for a series of program services as defined in the contract. The timing of customer payments varies by contract, but typically occurs in advance of the associated services being provided. Revenues from program operations are recognized ratably as the program services are delivered.
Cash and Cash Equivalents - Cash and cash equivalents include all highly liquid debt instruments with original maturities of three months or less.
Concentrations of Credit Risk - Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with high credit quality institutions.
The Company's current contracts are concentrated in a small number of customers, consequently, the loss of any one of its customers could have a material adverse effect on the Company and its operations. During the years ended December 31, 1998 and 1997, approximately $755,000 (33%) and $925,800 (45%), respectively, of the Company's revenues arose from contracts with one customer. At December 31, 1998 and 1997, accounts receivable included balances of $736,650 and $231,484, respectively, from contracts with that customer.
Property and Equipment - Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from 3 to 10 years.
The Company regularly assesses all of its long lived assets for impairment and recognizes a loss when the carrying value of an asset exceeds its fair value. The Company determined that no impairment loss need be recognized for applicable assets in 1998 or 1997.
Research and Development - Research and development costs consist principally of compensation and benefits paid to Company employees. All research and development costs are expensed as incurred.
Income Taxes - The Company uses the asset and liability method of accounting for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Under the asset and liability method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards.
Net Loss Per Share - Net loss per share is based on the weighted average number of common shares outstanding subsequent to the Company's initial public offering in 1996. Pursuant to rules of the Securities and Exchange Commission Staff, all common and potential common shares issued by the Company at a price less than the initial public offering price during at least the 12 months preceding the offering date (using the treasury stock method until shares are issued) have been included in the calculation of common and potential common shares outstanding for all periods presented prior to the December 1996 initial public offering. (See Note 8)
Retirement Plan - The Company has a retirement plan which qualifies under Section 401(k) of the Internal Revenue Code This retirement plan allows eligible employees to contribute 1% to 15% of their income on a pretax basis to the plan. The Company's annual contribution to the plan is at the discretion of the Board of Directors. The Company made no contributions to this plan in 1998 or 1997.
Stock Split - On November 22, 1996, the Company effected a .72-for-1 reverse stock split of all outstanding shares of common stock.
Statement of Financial Accounting Standards No. 130 - In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income" and restated the prior years' financial statements to conform to the new reporting standard. This Statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income for the Company includes net loss and the unrealized gain or loss on available-for-sale securities.
Statement of Financial Accounting Standards No. 131 - In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Statement requires that a public company report financial and descriptive information about its reportable operating segments using the management approach. SFAS also requires that segment information of earlier years be restated to conform to the new standard. The adoption of SFAS No. 131 had no effect on the consolidated financial position, results of operations, or cash flows of the Company.
Statement of Position 97-2 - In 1998, the Company adopted Statement of Position (SOP) 97-2, "Software Revenue Recognition," which provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. The implementation of SOP 97-2 did not have a material effect on the Company's revenues or earnings.
Statement of Financial Accounting Standards No. 133 - In June 1998, the Financial Accounting Standards Bard issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity, which is required to be adopted by the Company in 2001. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges of underlying transactions must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Management has not yet determined the effect SFAS No. 133 will have, if any, on the Company's consolidated financial position, results of operations or cash flows.
Reclassifications - Certain 1997 and 1996 amounts have been reclassified to conform with 1998 presentations.
2. AVAILABLE -FOR-SALE SECURITIES
The following is a summary of available-for-sale securities at December 31:
1998 1997 ---- ----
Certificates of Deposit $1,029,674 $ - U.S. Government Securities - 12,232,335 ---------- ----------
Total Available-for-Sale Securities $1,029,674 $12,232,335 ========== ===========
Realized and unrealized gains and losses on available-for-sale securities were immaterial as of and for the years ended December 31, 1998, 1997 and 1996.
The cost and estimated fair value of available-for-sale securities by contractual maturity at December 31, 1998 and 1997 are as follows:
3. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at December 31:
4. INCOME TAXES
Income tax expense for the years ended December 31, 1998, 1997 and 1996 consists of:
Income tax expense for the years ended December 31, 1998, 1997 and 1996 differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent as a result of the following:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are presented below.
At December 31, 1998, the Company has net operating loss carryforwards for federal income tax purposes of approximately $11,437,000 which are available to offset future federal taxable income, if any, through 2018. The Company also has investment tax credit carryforwards for federal income tax purposes of approximately $59,000 which are available to reduce future federal income taxes, if any, through 2018.
5. PUBLIC OFFERING OF COMMON STOCK
In December 1996, the Company sold 2,000,000 shares of common stock through an initial public offering which generated net proceeds of $14,082,048 after deducting applicable issuance costs and expenses. On January 8, 1997, an additional 300,000 shares of common stock were sold pursuant to an underwriters over-allotment provision, which generated net proceeds to the Company of $2,232,000 after deducting underwriting discounts and commissions.
In connection with this initial public offering, the Company's outstanding shares of Series A and B convertible preferred stock were converted into 2,046,000 shares of common stock.
6. STOCK OPTIONS AND WARRANTS
The Company has an Employee Stock Option Plan (the "Stock Option Plan") for the benefit of certain employees, non-employee directors, and key advisors. The Company has adopted the disclosures-only provision of SFAS No. 123, "Accounting for Stock-Based Compensation". No compensation cost has been recognized for the Stock Option Plan as it relates to employees since the exercise price of the options on the date of grant approximated fair market value. Had compensation cost for the Company's stock option plan been determined based on the fair value at the date of grant for awards consistent with the provisions of SFAS No. 123, the Company's net loss and net loss per share would have been increased to the pro forma amounts indicated below:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model using an assumed risk-free interest rates of 5.32% for year ended December 31, 1998, 5.98% for the year ended December 31, 1997 and 7% for the year ended December 31, 1996 and an expected life of 7 years. As the Company was still considered a private company for the purposes of applying SFAS No. 123 for the period from Inception to June 30, 1996, the Company did not include a volatility factor assumption in its fair value model. For the options granted after July 1, 1996, the Company has used a volatility factor of .94 for year ended December 31, 1998, .53 for year ended December 31, 1997 and .60 for year ended December 31, 1996. For purposes of pro forma disclosure, the estimated fair value of each option is amortized to expense over that option's vesting period. The Stock Option Plan authorizes 1,080,000 shares of common stock to be issued.
Stock options granted under the Stock Option Plan may be of two types: (1) incentive stock options and (2) nonqualified stock options. The option price of such grants shall be determined by a Committee of the Board of Directors (the "Committee"), but shall not be less than the estimated fair market value of the common stock at the date the option is granted. The terms of the grants shall be fixed by the Committee, with no term lasting longer than ten years. The ability to exercise such options shall be determined by the Committee when the options are granted. All of the outstanding options vest at the rate of 20% per year with the exception of 36,000 options which were vested as of the date of grant.
A summary of stock option activity follows:
The following table summarizes information concerning outstanding and exercisable options at December 31, 1998:
The Company also has outstanding stock purchase warrants entitling the holders to purchase a total of 23,400 shares of common stock at a price of $1.38 per share (weighted average exercise price of $1.38). At December 31, 1998, 9,360 of these warrants are currently vested, with the remaining 14,040 warrants vesting at 20% per year. The Company has recorded compensation costs in connection with the issuance of these warrants for the years ended December 31, 1998, 1997 and 1996 in the amount of $7,388, $8,283 and $13,208 respectively.
7. COMMITMENTS
The Company leases office space for its main operating facility in Rochester, New York, under an operating lease agreement expiring in November 1999. Additionally, the Company subleases office space for its Wayne, Pennsylvania facility under an operating lease agreement expiring in May 2001 and leases office space for its Berkeley, California facility under an operating lease agreement expiring in October 1999. Rent expense from these leases for the years ended December 31, 1998, 1997 and 1996 was $210,375, $154,907 and $70,479 respectively.
At December 31, 1998, future minimum lease payments under these leases are summarized as follows:
1999 $ 253,301 2000 40,200 2001 16,750 ------ $ 310,251 =========
8. NET LOSS PER SHARE
Net loss per share is based on weighted average number of common shares outstanding subsequent to the Company's initial public offering in 1996. Pursuant to rules of the Securities and Exchange Commission Staff, all common and potential common shares issued by the Company at a price less than the initial public offering price during at least the 12 months preceding the offering date (using the treasury stock method until shares are issued) have been included in the calculation of common and potential common shares outstanding for all periods presented prior to the December 1996 initial public offering. Because the Company incurred a loss in 1998 and 1997, outstanding options to purchase 867,920 and 798,060 shares of common stock at $.14 to $4.99 per share, were not included in the computation of diluted loss per share as they would be antidilutive.
9. JOINT VENTURE
On November 12, 1998, the Company entered into a joint venture agreement with MacLean Hunter Publishing Limited to market and sell, on an exclusive basis in Canada, products and services developed by the Company and to jointly manage, finance and operate the business entity Patient Infosystems Canada, Inc., which is dedicated to the development of a commercially viable business built around the sale, marketing and service of the Company's products and services.
10. SUBSEQUENT EVENT
On February 26, 1999, the Company, through its newly formed, wholly-owned subsidiary, Patient Infosystems Acquisition Corp., acquired substantially all of the assets of HealthDesk Corporation, a consumer healthcare software company primarily engaged in the business of designing and developing Internet based products in the healthcare, wellness and disease management industries. The acquired assets include inventory, intellectual property, hardware and software. The principal consideration paid for the transaction was $761,463. The Company paid for the acquisition using its available cash.
11. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of the unaudited interim results of operations by quarter:
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures. None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Incorporated by reference to the Company's Proxy Statement for Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 1998.
Item 11.
Item 11. Executive Compensation.
Director Compensation
Incorporated by reference to the Company's Proxy Statement for Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 1998.
Executive Compensation
Incorporated by reference to the Company's Proxy Statement for Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 1998.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the Company's Proxy Statement for Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 1998.
Item 13.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference to the Company's Proxy Statement for Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 1998.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements:
The financial statements of the Company are included in Part II, Item 8.
(b) Reports on Form 8 - K:
No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 1998.
(c) Exhibits:
Exhibit # Description of Exhibits
(3) Articles of Incorporation and By-Laws:
Certificate of Incorporation Incorporated herein by reference from Exhibit 3.1 on Form S-1 Registration Statement of the Company, filed with the Commission on December 17, 1996.
By-Laws Incorporated herein by reference from Exhibit 3.3 on Form S-1 Registration Statement of the Company, filed with the Commission on December 17, 1996.
(10) Material contracts:
10.15 Asset Purchase Agreement dated as of September 29, 1998 among Patient Infosystems Acquisition Corp., the Company and HealthDesk Corporation.
10.16 Amendment to Asset Purchase Agreement dated as of December 1, 1998 among Patient Infosystems Acquisition Corp., the Company and HealthDesk Corporation.
10.17 Second Amendment to Asset Purchase Agreement dated as of February 1, 1999 among Patient Infosystems Acquisition Corp., the Company and HealthDesk Corporation.
10.18 Sublease dated as of September 29, 1998 between HealthDesk Corporation and Patient Infosystems Acquisition Corporation.
10.19 Consulting Agreement dated as of March 8, 1999 between the Company and John V. Crisan.
10.20 Lease Agreement dated as of February 22, 1995 between the Company and Conifer Prince Street Associates.
10.21 First Addendum to Lease Agreement dated as of August 22, 1995 between the Company and Conifer Prince Street Associates.
10.22 Second Addendum to Lease Agreement dated as of November 17, 1995 between the Company and Conifer Prince Street Associates.
10.23 Third Addendum to Lease Agreement dated as of March 28, 1996 between the Company and Conifer Prince Street Associates.
10.24 Fourth Addendum to Lease Agreement dated as of October 29, 1996 between the Company and Conifer Prince Street Associates.
10.25 Fifth Addendum to Lease Agreement dated as of November 30, 1996 between the Company and Conifer Prince Street Associates.
10.26 Sixth Addendum to Lease Agreement dated as of November 24, 1997 between the Company and Conifer Prince Street Associates.
10.27 Sublease Agreement dated as of March 30, 1998 between the Company and Medecision, Incorporated.
10.28 Joint Venture and Stockholders Agreement dated as of November 12, 1998 between the Company and Maclean Hunter Publishing Limited.
10.29 Lease Agreement dated as of October 12, 1998 between the Company and Parker Associates.
(11) Statement of Computation of Per Share Earnings
(21) Subsidiaries
(27) Financial Data Schedule Filed electronically
All other exhibits are omitted because they are not applicable or the required information is shown elsewhere in this Annual Report on Form 10-K.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PATIENT INFOSYSTEMS, INC.
By: /s/ Donald A. Carlberg April 13, 1999 ---------------------- -------------- Donald A. Carlberg Date Director, President, and Chief Executive Officer
Pursuant to the requirements the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Donald A. Carlberg April 13, 1999 - -------------------------- -------------- Donald A. Carlberg Date Director, President and Chief Executive Officer (Principal Executive Officer)
By: /s/ John V. Crisan April 13, 1999 - ---------------------- -------------- John V. Crisan Date Chief Financial Officer (Principal Financial and Accounting Officer)
By: /s/ Derace L. Schaffer, M.D. April 13, 1999 - -------------------------------- -------------- Derace L. Schaffer, M.D. Date Chairman of the Board
By: /s/ John Pappajohn April 13, 1999 - ---------------------- -------------- John Pappajohn Date Director
By: /s/ Barbara J. McNeil, M.D., Ph.D. April 13, 1999 - -------------------------------------- -------------- Barbara J. McNeil, M.D., Ph.D. Date Director
By: /s/ Carl F. Kohrt, Ph.D. April 13, 1999 - ---------------------------- -------------- Carl F. Kohrt, Ph.D. Date Director
By: /s/ David B. Nash, M.D. April 13, 1999 - --------------------------- -------------- David B. Nash, M.D. Date Director