PRACTICEXPERT INC: 8-K/A, Sub-Doc 1 BACK PRINT THIS PAGE CLOSE WINDOW
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A
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AMENDMENT NO. 1 TO
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MAY 31, 2005
PRACTICEXPERT, INC.
(Exact name of Registrant as Specified in its Charter)
NEVADA 0-30583 87-0622329
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(State or Other Jurisdiction (Commission file number) (I.R.S. Employer
of Incorporation or Identification Number)
Organization)
10833 WASHINGTON BLVD.
CULVER CITY, CALIFORNIA 90232
(Address of Principal Executive Offices including Zip Code)
(310) 815-3500
(Registrant's Telephone Number, Including Area Code)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2 below):
|_| Written communication pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
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ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
On January 3, 2005, the Registrant filed a current report on Form 8-K for
its acquisition of Physician Informatics, Inc. The Form 8-K/A amends such
current report on Form 8-K to include the following financial information
required to be filed pursuant to this Item 9.01.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
Independent Auditors' Report
Consolidated Balance Sheets of Physician Informatics, Inc. and
Subsidiaries as of December 31, 2004 and 2003 (audited)
Consolidated Statements of Operations, Stockholders' Equity
(Deficit) and Cash Flows for the years ended December 31, 2004 and
2003 (audited)
(b) PRO FORMA FINANCIAL INFORMATION.
The unaudited pro forma consolidated financial information of the
Registrant and Physician Informatics, Inc. and Subsidiaries for the
years ended December 31, 2004 and December 31, 2003.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Physician Informatics, Inc.
We have audited the accompanying consolidated balance sheets of Physician
Informatics, Inc. and Subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Physician
Informatics, Inc. and Subsidiaries as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared
assuming Physician Informatics, Inc. and Subsidiaries will continue as a going
concern. As more fully described in note 1, the Company has incurred recurring
operating losses and has a working capital deficiency. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 1. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.
/s/ Reznick Group, P.C.
Bethesda, Maryland
March 24, 2005
3
Physician Informatics, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
ASSETS
2004 2003
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CURRENT ASSETS
Cash and cash equivalents $ 27,350 $ 130,026
Accounts receivable, net 256,717 753,490
Accounts receivable - affiliate -- 28,880
Note receivable 320,000 --
Other current assets 13,538 41,465
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Total current assets 617,605 953,861
PROPERTY AND EQUIPMENT, NET 213,529 306,774
OTHER ASSETS
Goodwill -- 2,944,543
Intangible assets, net 48,641 114,448
Other assets -- 15,736
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Total assets $ 879,775 $ 4,335,362
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 878,100 $ 1,113,460
Capital leases payable -- 3,470
Demand notes 2,320,000 2,000,000
Stockholders' advances and loans payable 1,078,751 1,378,750
Convertible secured note payable to stockholder - Series C 2,719,397 --
Convertible secured note payable to stockholder - Series B 3,000,000 2,600,000
Deferred revenue 709,298 797,708
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Total current liabilities 10,705,546 7,893,388
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Convertible preferred stock, $.01 par value; 20,000,000 and 10,000,000 shares
authorized; 2,500,000 shares issued and outstanding;
liquidation preference of $15,000,000 25,000 25,000
Common stock, $.01 par value; 30,000,000 and 20,000,000 shares
authorized; 3,218,758 shares issued and outstanding 32,186 32,186
Additional paid-in capital 11,212,879 11,212,879
Accumulated deficit (21,095,836) (14,828,091)
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Total stockholders' equity (deficit) (9,825,771) (3,558,026)
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Total liabilities and stockholders' equity (deficit) $ 879,775 $ 4,335,362
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See notes to consolidated financial statements
4
Physician Informatics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2004 and 2003
2004 2003
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Net revenue $ 3,983,627 $ 6,443,834
Cost of revenues 3,235,904 4,315,264
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Gross margin 747,723 2,128,570
Operating expenses
Sales and marketing 1,110,417 2,214,630
General and administrative 1,190,207 1,948,137
Research and development 1,099,223 900,526
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Operating loss before impairment of goodwill and intangible assets
and depreciation and amortization (2,652,124) (2,934,723)
Impairment of goodwill 2,944,543 1,998,562
Impairment of intangible assets -- 169,600
Depreciation and amortization 178,742 670,954
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Operating loss (5,775,409) (5,773,839)
Other income (expense)
Debt forgiveness of stockholder loan 55,000 --
Interest income 888 2,192
Interest expense (548,224) (279,558)
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Loss before income taxes (6,267,745) (6,051,205)
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Income taxes -- --
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Net loss $ (6,267,745) $ (6,051,205)
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Basic and diluted net loss per common share $ (1.95) $ (1.88)
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Weighted average number of common shares outstanding $ 3,218,75 $ 3,218,758
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See notes to consolidated financial statements
5
Physician Informatics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 2004 and 2003
Preferred Stock Common Stock Additional
--------------------------- --------------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
December 31, 2002 2,500,000 $ 25,000 3,218,758 $ 32,186 $ 11,132,765 $ (8,776,886) $ 2,413,065
Issuance of warrants
to purchase
common stock -- -- -- -- 80,114 -- 80,114
Net loss -- -- -- -- -- (6,051,205) (6,051,205)
------------ ------------ ------------ ------------ ------------ ------------ ------------
December 31, 2003 2,500,000 25,000 3,218,758 32,186 11,212,879 (14,828,091) (3,558,026)
Net loss -- -- -- -- -- (6,267,745) (6,267,745)
------------ ------------ ------------ ------------ ------------ ------------ ------------
December 31, 2004 2,500,000 $ 25,000 3,218,758 $ 32,186 $ 11,212,879 $(21,095,836) $ (9,825,771)
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See notes to consolidated financial statements
6
Physician Informatics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2004 and 2003
2004 2003
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Cash flows from operating activities
Net loss $(6,267,745) $(6,051,205)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 178,742 670,954
Provision for doubtful accounts 11,208 34,807
Impairment of goodwill 2,944,543 1,998,562
Impairment of intangibles -- 169,600
Debt forgiveness of stockholder loan (55,000) --
Loss on disposal of property and equipment 4,075 --
Changes in operating assets and liabilities
Accounts receivable 485,565 (309,148)
Accounts receivable - affiliate 28,880 (28,880)
Other current assets 27,927 24,879
Accounts payable and accrued expenses (235,360) 376,599
Other assets 15,736 7,500
Deferred revenue (88,410) 604,944
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Net cash used in operating activities (2,949,839) (2,501,388)
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Cash flows from investing activities
Purchase of property and equipment (8,945) (126,446)
Purchase of software licenses (14,820) (48,083)
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Net cash used in investing activities (23,765) (174,529)
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Cash flows from financing activities
Principal payments on stockholder loans (669,999) (752,782)
Proceeds from stockholder advances 425,000 --
Proceeds from convertible secured promissory note - Series C 2,719,397 2,600,000
Proceeds from convertible secured promissory note - Series B 400,000 --
Repayment of capital leases (3,470) (13,156)
Proceeds from demand note -- 2,000,000
Repayment of borrowings under demand note -- (1,800,000)
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Net cash provided by financing activities 2,870,928 2,034,062
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NET DECREASE IN CASH AND CASH EQUIVALENTS (102,676) (641,855)
Cash and cash equivalents, beginning 130,026 771,881
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Cash and cash equivalents, end $ 27,350 $ 130,026
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Supplemental disclosures of cash flow information
Cash paid for interest during the year $ 85,042 $ 76,057
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Significant noncash investing and financing activities:
Issuance of warrants to purchase common stock $ -- $ 80,114
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Proceeds from demand note used for issuance of note receivable $ 320,000 $ --
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Purchase price adjustment related to achievement of earn out $ -- $ 500,000
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See notes to consolidated financial statements
7
Physican Informatics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
1. OPERATIONS
Nature of Business
Physician Informatics, Inc. (the "Company") dba PracticeOne was
incorporated in the Commonwealth of Virginia in February 1999. The Company
is a healthcare managed service provider offering a fully integrated
management solution that addresses the totality of the financial,
administrative, clinical, and practice management needs of office-based
physician practices. The Company's services include managed application
and information technology services delivered through its proprietary
platform, which seamlessly integrates leading third party and other
proprietary applications hosted and managed on the Company's facilities.
The Company's customers are located throughout the United States.
Sale of the Company
On January 3, 2005, the Company completed the sale of its common and
preferred stock under the terms of an Agreement of Purchase and Sale of
Stock (the "Agreement") to Practice Xpert Services Corp., a wholly-owned
subsidiary of PracticeXpert, Inc. ("PracticeXpert"), a publicly-traded
company. Under the terms of the Agreement, the Company's stockholders
received 12,500,000 shares of common stock of PracticeXpert in exchange
for all the Company's outstanding common and preferred stock.
Additionally, the Company's stockholders are to receive a quantity of
common stock of PracticeXpert equal in dollar value to two times the cash
flow from operations of the Company for each of the three consecutive
calendar years starting in 2005.
In connection with the sale, the obligations of the Company to its
majority stockholder were liquidated except for $4 million which is
convertible into common stock of PracticeXpert any time at the option of
PracticeXpert or anytime on or following the 181st calendar day after
January 7, 2005 at the option of the majority stockholder. The debt will
have a five year term, is non-interest bearing and is convertible $.40
cents per share.
As the result of the change in ownership, all stockholder loans
outstanding as of December 31, 2004 were paid in full by the majority
stockholder and will be recorded as additional paid-in capital by the
Company in 2005.
In addition, the majority stockholder agreed to provide an additional
funding commitment of $2 million for acquisition purposes only by
increasing the Company's existing secured line of credit with Citibank
N.A. ("Citibank") to $4 million. This note will be repayable in January
2008.
Management's Plans
The Company's operations are subject to significant risks and
uncertainties, including competitive, financial, developmental,
operational, financing, technological, regulatory and other risks
associated with an emerging business. Since inception, the Company has
incurred, and continues to incur, significant losses from operations. At
December 31, 2004, the Company has a working capital deficiency of $4.4
million. The Company's ability to continue as a going concern is also
dependent on its ability to generate sufficient cash flows to meet its
obligations on a timely basis, and to ultimately attain profitability. To
the extent the Company requires additional capital to continue its
operations; there can be no assurance that adequate capital will be
available or available on terms that are acceptable to the Company. These
conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any
adjustments relating to recoverability and classification of assets or the
amounts and classification of liabilities that might be necessary should
the Company be unable to continue to remain in existence.
8
Physican Informatics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
1. OPERATIONS (Continued)
Acquisitions
In 2002 and 2001, the Company acquired Phoenix Health Corporation
("Phoenix"), Infocus Medical Systems, Inc. ("Infocus"), Cado Systems, Inc.
("Cado"), MedPro Healthcare Management, LLC ("MedPro") and Westland
Medical Systems, Inc. ("Westland"), which were accounted for under the
purchase method of accounting. The consolidated financial statements
include the operating results of each business from the date of
acquisition.
On September 27, 2001, the Company acquired Phoenix, a medical practice
software development and sales company. In connection with the acquisition
of Phoenix, the Company paid $50,000, entered into a two-year promissory
note in the amount of $150,000 and issued 152,000 shares of the Company's
common stock at $3.17 per share in exchange for the common stock of
Phoenix. The purchase price has been allocated $212,000 to the acquired
customer list and $586,269 to goodwill, which management subsequently
determined was impaired and wrote off in 2001.
On March 1, 2002, the Company acquired Infocus, a reseller of medical
practice management software. In connection with the acquisition of
Infocus, the Company provided a cash payment of $80,000, $170,000 in the
form of a two-year promissory note, the issuance of 107,558 shares of
common stock of the Company at $3.17 per share to shareholders of Infocus
in exchange for their shares of common stock of Infocus, the assumption of
liabilities of $43,895 and legal costs of $22,573. The purchase price has
been allocated $23,694 to assets and $633,733 to goodwill. During 2004 and
2003, management determined that the goodwill was impaired and recorded an
impairment charge of $236,000 and $397,733, respectively.
On April 10, 2002, the Company acquired Cado, a reseller of medical
practice management software. In connection with the acquisition of Cado,
the Company provided a cash payment of $500,000, $600,000 in the form of a
promissory note, the issuance of 164,792 shares of common stock of the
Company at $3.17 per share to the shareholder of Cado in exchange for his
shares of common stock in Cado and legal costs of $43,890. The purchase
price has been allocated $1,666,281 to goodwill, which management recorded
an impairment charge of $870,000 and $796,281, in 2003 and 2002,
respectively.
On April 30, 2002, the Company acquired MedPro, a seller of medical
practice software products and outsources healthcare support services, and
an affiliated entity. In connection with the acquisition of MedPro, the
Company issued 337,290 shares of common stock of the Company at $3.17 per
share to the shareholders of the affiliate, provided a cash payment of
$200,000 and $400,000 in the form of promissory notes payable in 2002 and
2003, the assumption of liabilities of $154,288 and legal costs of
$37,998. The purchase price has been allocated $65,328 to assets and
$1,796,167 to goodwill. Management subsequently determined that the
goodwill was impaired in 2003 and 2002 and recorded impairment charges of
$983,000 and $813,167, in 2003 and 2002, respectively.
On October 24, 2002, the Company acquired Westland, a seller of medical
practice software products. In connection with the acquisition of
Westland, the Company provided a cash payment of $900,000, a promissory
note of $350,000, the issuance of 661,556 shares of the Company's common
stock at $2.00 per share in exchange for the outstanding shares of common
stock of Westland, the assumption of liabilities of $410,388 and legal
costs of $71,444. In addition, the shareholders of Westland were entitled
to a performance based earn-out of up to $500,000 which was achieved in
2003 as a result of the achievement of certain revenue milestones as
9
Physican Informatics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
1. OPERATIONS (Continued)
Acquisitions (Continued)
defined in the agreement. The earn-out amount is included in stockholders'
loans payable. The shareholders of Westland are also entitled to the
excess net working capital at the date of acquisition in the amount of
$363,423. An initial amount of $200,000 was paid to the shareholders in
November 2002. The balance of $163,423 plus interest at 6% per annum was
paid during 2003. The purchase price was initially allocated $700,839 to
assets and $2,354,105 to goodwill. During 2003, goodwill was increased by
$500,000 to reflect the amounts earned related to the Westland earn-out
provision. During 2004 and 2003, management determined that the goodwill
was impaired and recorded impairment charges of $2,708,543 and $391,093,
respectively.
The acquired customer lists are carried at cost less accumulated
amortization. Amortization is computed over the estimated useful life of
five years. The acquired customer lists are tested for impairment whenever
events occur of circumstances change that would more likely than not
reduce the fair value below its carrying amount. Due to a significant loss
of customers during 2003, the Company performed an impairment analysis of
the acquired customer lists and recognized an impairment loss of $169,600.
Goodwill, which reflects the cost of acquired businesses in excess of the
fair value of tangible and intangible assets and liabilities acquired, is
not amortized but are tested for impairment on an annual basis and between
annual tests if events occur or circumstances change that would more
likely than not reduce the fair value below its carrying amount. The
estimated fair values of the various reporting units are computed
principally using the present value of future cash flows. If the carrying
amount of goodwill exceeds its fair value, an impairment loss is
recognized as a noncash charge. As a result of impairment analysis'
performed (see individual analysis' above), the Company recognized an
impairment loss of $2,944,543 and $1,998,562 during the years ended
December 31, 2004 and 2003, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Consolidation
The accompanying consolidated financial statements include all of the
accounts of the Company. All intercompany transactions have been
eliminated.
Reclassifications
Certain items from the prior year financial statements have been
reclassified to conform to the current year presentation.
10
Physician Informatics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Accounts Receivable
Accounts receivable are reported net of an allowance for doubtful
accounts. Management's estimate of the allowance is based on historical
collection experience and a review of the current status of accounts
receivable. It is reasonably possible that management's estimate of the
allowance will change in the near term. As of December 31, 2004 and 2003,
management established an allowance for doubtful accounts of $95,307 and
$164,807, respectively.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments, which are
readily convertible into cash and have original maturities of three months
or less when acquired.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash
equivalents and accounts receivable. The Company deposits its cash with
financial institutions that the Company considers to be of high credit
quality.
With respect to accounts receivable, the Company performs ongoing
evaluations of its customers, generally grants uncollateralized credit
terms to its customers, and maintains an allowance for doubtful accounts
based on historical experience and management's expectations of future
losses. As of and for the years ended December 31, 2004 and 2003, there
were no significant concentrations with respect to the Company's revenues
or accounts receivable.
Unbilled Receivables
Unbilled receivables are recorded for services performed which have not
yet been billed as of the consolidated balance sheet date.
Property and Equipment
Property and equipment are recorded at cost and are being depreciated on a
straight-line basis over the estimated useful lives of the assets ranging
from five to ten years.
Intangible Assets
Intangible assets are amortized using the straight-line method over the
following estimated useful lives of the assets:
Software and software licenses 3 years
Acquired customer list 5 years
Financing fees Term of agreement
11
Physican Informatics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impairment of Goodwill and Intangibles
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142 Goodwill and
Other Intangible Assets. SFAS No. 142 requires goodwill to be tested for
impairment on an annual basis and between annual tests in certain
circumstances, and written down when impaired, rather than being amortized
as previous accounting standards required. The Company has chosen October
1 as the date to perform its annual impairment analysis. In addition, SFAS
No. 142 requires purchased intangibles other than goodwill to be amortized
over their estimated useful lives unless these lives are determined to be
indefinite.
During 2004 and 2003, the Company recognized an impairment loss of
$2,944,543 and $1,998,562, respectively in connection with acquisitions
made in 2002 (note 1).
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of any asset to future net undiscounted cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the future discounted cash
flows compared to the carrying amount of the asset.
Revenue Recognition
Revenue is derived from sales of software licenses, hardware, product
support and maintenance services, training, and consulting. The Company
accounts for revenue in accordance with American Institute of Certified
Public Accountants ("AICPA") Statement of Position ("SOP") 97-2, Software
Revenue Recognition, as modified by SOP 98-7, Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions.
The Company recognizes revenue when (i) persuasive evidence of an
arrangement exists, (ii) delivery of the product or service has occurred,
(iii) sales price is fixed or determinable, and (iv) collectibility is
reasonably assured.
If vendor specific objective evidence ("VSOE") of fair value exists for
all elements of an arrangement, the Company recognizes revenue for
delivered elements and defers revenue for undelivered elements.
If VSOE of fair value exists for all undelivered elements and there is no
such evidence of fair value established for one or more delivered
elements, revenue is first allocated to the elements where evidence of
fair value has been established and the residual amount is allocated to
the delivered elements. If evidence of fair value for any undelivered
element of the arrangement does not exist, all revenue from the
arrangement is deferred until such time that evidence of fair value exists
for undelivered elements or until all elements of the arrangement are
delivered.
Product support and maintenance revenue is recognized on a straight-line
basis over the period that the support is provided.
12
Physican Informatics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was
$29,226 and $10,947 for the years ended December 31, 2004 and 2003,
respectively.
Research and Development
Research and development costs are expensed as incurred.
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS
No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of SFAS No. 123, allows companies to account for
stock-based compensation using either the provisions of SFAS 123 or the
provisions of Accounting Principles Board Opinion ("APB") No. 25,
Accounting for Stock Issued to Employees, but requires pro forma
disclosure in the notes to the financial statements as if the measurement
provisions of SFAS 123 had been adopted. The Company accounts for its
stock-based employee compensation in accordance with APB No. 25.
Stock-based compensation related to options granted to nonemployees is
accounted for using the fair value method in accordance with the SFAS 123
and EITF 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.
The following table illustrates the pro forma effect of net loss
attributable to common stockholders and pro forma net loss attributable to
common stockholders per common share as if the Company had applied the
fair value recognition provisions of SFAS 123 to stock-based compensation.
2004 2003
------------ ------------
Proforma net loss: As reported $ (6,267,745) $ (6,051,205)
Deduct: Total employee noncash stock
compenation expense determined under
fair value based method for all rewards (243,948) (396,113)
------------ ------------
Pro forma net loss $ (6,511,693) $ (6,447,318)
============ ============
The effect of applying SFAS No. 123 on a pro forma net loss as stated
above is not necessarily representative of the effects on reported net
loss for future years due to, among other things, the vesting period of
the stock options and the fair value of additional options to be granted
in the future years.
The fair value of each option grant for 2003 is estimated on the date of
grant using the Black-Scholes option-pricing fair value model with the
following assumptions; dividend yield of 0%, volatility rate of 0%, risk
free rate of 4.3% and an expected term of 10 years. There were not stock
options granted during 2004.
13
Physican Informatics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company recognizes deferred taxes using the liability approach
pursuant to which deferred income taxes are calculated based on the
differences between the financial and tax bases of assets and liabilities
based upon enacted tax laws and rates applicable to the periods in which
the taxes become payable. The Company provides a valuation allowance, if
necessary, based on a number of factors, including available objective
evidence.
Financial Instruments
The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, note receivable, accounts
payable, accrued expenses, deferred revenues and notes payable
approximated their fair values based on the short-term maturities of these
instruments.
Net Loss Per Share
The Company follows the provisions of SFAS No. 128, Earnings per Share
("SFAS No. 128") which requires the Company to present basic and diluted
earnings per share. Basic earnings per share is based on the
weighted-average shares outstanding and excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share
increases the shares used in the basic calculation by the dilutive effect
of stock options, warrants, and convertible preferred stock.
The following table sets forth the computation of basic and diluted net
loss per share:
Unexercised stock options and warrants, which were previously granted to
purchase 1,315,774 and 1,905,474 shares of the Company's common stock as
of December 31, 2004 and 2003, respectively, were not included in the
computations of diluted earnings per share. The Company incurred a net
loss for the years ended December 31, 2004 and 2003, therefore, all
potential common shares are antidilutive and not included in the
calculation of diluted net loss per share.
Year ended December 31,
--------------------------
2004 2003
------------ ------------
Numerator:
Net loss available to common shareholders $ (6,267,745) $ (6,051,205)
============ ============
Denominator:
Denominator for basic earnings per share -
weighted average shares 3,218,758 3,218,758
------------ ------------
Denominator for diluted earnings per share -
adjusted weighted average shares $ 3,218,758 $ 3,218,758
============ ============
Basic and diluted loss per share:
Net loss per share availabe to common
shareholders $ (3,048,987) $ (2,832,447)
============ ============
14
Physican Informatics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
In November 2002, the EITF reached a consensus on EITF No. 00-21, Revenue
Arrangements with Multiple Deliverables which provides guidance on how to
account for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The provisions of
EITF 00-21 apply to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The application of the provisions of EITF
00-21 did not have a material impact on the Company's consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 changes the accounting for certain financial instruments
that, under previous guidance, could be classified as equity or
"mezzanine" equity, by now requiring those instruments to be classified as
liabilities ( or assets in some circumstances) in the balance sheets.
Further, SFAS No. 150 requires disclosure regarding the terms of those
instruments and settlement alternatives. The guidance in SFAS No. 150
generally was effective for all financial instruments entered into or
modified after May 31, 2003, and was otherwise effective at the beginning
of the first interim period beginning after June 15, 2003. The Company has
evaluated SFAS No. 150 and determined that it does not have a material
impact on the Company's consolidated financial statements or disclosures.
In August 2003, the FASB ratified the consensus reached by the EITF in
Issue 03-5, Applicability of AICPA Statement of Position 97-2 to
Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software. The issue is whether non-software
deliverables included in an arrangement that contains software that is
more than incidental to the products or services as a whole are included
within the scope of SOP 97-2. The application of EITF 03-5 did not have a
material impact on the Company's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) ("SFAS No.
123R"), Share-based Payment. This Statement replaces SFAS No. 123 and
supersedes APB 25. SFAS No. 123R requires that the compensation cost
relating to share-based payment transactions, including share options,
restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans, be recognized in financial
statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. SFAS No. 123R also includes an
appendix of implementation guidance that provides expanded guidance on
measuring the fair value of share-based payment awards. Public entities
(other than those filing as small business issuers) will be required to
apply Statement 123(R) as of the first quarter of the first fiscal year
that begins after June 15, 2005. Public entities that file as small
business issuers will be required to apply Statement 123(R) as of the
first quarter of the first fiscal year that begins after December 15,
2005. Non-public entities will be required to apply SFAS 123 at the
beginning of the first annual reporting period after December 15, 2005.
In December 2004, the FASB issued SFAS No. 153 ("SFAS No. 153"), Exchanges
of Nonmonetary Assets an amendment of APB Opinion No. 29. This statement
amends the guidance in APB Opinion No. 29 ("APB 29"), Accounting for
Nonmonetary Transactions, by eliminating the exception from fair value
measurement for nonmonetary exchanges of similar productive assets in
paragraph 21(b) of APB 29, and replaces it with an exception for exchanges
that do not have commercial substance. SFAS No. 153 specifies that a
nonmonetary
15
Physican Informatics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
exchange has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. SFAS No.
153 is effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005.
In December 2003, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition." SAB
104 supersedes Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 104's primary purpose is to rescind
accounting guidance contained in SAB 101 related to multiple element
revenue arrangements, superseded as a result of the issuance of EITF
00-21. Additionally, SAB 104 rescinds the SEC's Revenue Recognition in
Financial Statements Frequently Asked Questions and Answers ("the FAQ")
issued with SAB 101 that had been codified in SEC Topic 13, Revenue
Recognition. Selected portions of the FAQ have been incorporated into SAB
104. While the wording of SAB 104 has changed to reflect the issuance of
EITF 00-21, the revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104. The adoption of this pronouncement
did not have any impact on the Company's consolidated financial
statements.
3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT ASSETS
Accounts receivable consists of the following at December 31, 2004 and
2003:
2004 2003
------------ ------------
Billed $ 352,024 $ 665,506
Unbilled -- 252,791
------------ ------------
352,024 918,297
Less allowance for doubtful accounts 95,307 164,807
------------ ------------
Total $ 256,717 $ 753,490
============ ============
Property and equipment consists of the following at December 31, 2004 and
2003:
2004 2003
------------ ------------
Computer equipment and software $ 528,033 $ 519,088
Furniture and fixtures 120,711 124,786
------------ ------------
648,744 643,874
Less allowance for doubtful accounts 435,215 337,100
------------ ------------
Total $ 213,529 $ 306,774
============ ============
Depreciation expense charged to operations was $98,115 and $119,984 for
the years ended December 31, 2004 and 2003, respectively.
16
Physican Informatics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT ASSETS (Continued)
Intangible assets consist of the following at December 31, 2004 and 2003:
2004 2003
------------ ------------
Software licenses $ 170,138 $ 155,318
Software 40,932 40,932
Financing fees 80,114 80,114
------------ ------------
291,184 276,364
Less allowance for doubtful accounts 242,543 161,916
------------ ------------
Total $ 48,641 $ 114,448
============ ============
Amortization expense charged to operations was $80,627 and $550,970,
respectively, for the years ended December 31, 2004 and 2003. During 2003,
the Company recognized an impairment loss of $169,600 related to its
acquired customer lists.
4. NOTE RECEIVABLE
During 2004, the Company used proceeds in the amount of $320,000 from a
note agreement with Citibank (see note 6) to fund a promissory note in the
amount of $330,000 to Practice Xpert Services Corp. Interest on the note
receivable accrues at the rate of LIBOR plus .625% (3.183% at December 31,
2004) and is payable on a quarterly basis. The note receivable and any
unpaid interest are due on December 31, 2007. As of December 31, 2004,
$320,000 remained outstanding.
5. LEASES
The Company leases its office facilities and computer hardware and
software under various operating and capital leases that expire at various
dates through 2007.
Minimum annual rental and lease commitments with original lease terms
greater than one year at December 31, 2004, are as follows:
Year ending December 31, 2004 $ 399,920
2005 237,410
2006 49,872
2007 ------------
Total $ 687,202
============
The gross amount of property and equipment and other assets recorded under
capital leases as of December 31, 2003 was approximately $114,000. There
were no capital lease obligations outstanding as of December 31, 2004.
Amortization of assets recorded under capital lease obligations is
included in depreciation expense in the accompanying consolidated
statements of operations.
Rent expense for the years ended December 31, 2004 and 2003, was $423,543
and $387,261, respectively.
17
Physican Informatics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
6. NOTES PAYABLE AND LINE OF CREDIT
In October 2003, the Company entered into a note agreement with Citibank
in the amount of $2,000,000. Interest payments are payable quarterly at a
rate equal to LIBOR plus .625% (3.183% at December 31, 2004). The note is
guaranteed by the majority stockholder and is due on demand.
In December 2004, the Company entered into a note agreement with Citibank
in the amount of $320,000. Beginning in March 2005, interest payments are
payable quarterly at a rate equal to LIBOR plus .625% (3.183% at December
31, 2004). The note is guaranteed by the majority stockholder and is
payable to on demand.
In February 2003, the Company entered into a line of credit agreement with
the majority stockholder in an amount up to $3,000,000. The line of credit
agreement expired on December 31, 2003. In February 2003, in connection
with the line of credit agreement, the stockholder was issued a secured
promissory note convertible into Series B Preferred Stock of the Company.
The note bears interest at 10% per annum and matures on December 31, 2005.
As amended, principal and interest is payable in quarterly installments
beginning March 31, 2005. The note is secured by a first priority security
interest in all the assets of the Company. The note and accrued interest
thereon is convertible at the option of the stockholder any time after
December 31, 2003 into Series B Preferred Stock at $1.35 per share. As of
December 31, 2004 and 2003, $3,000,000 and $2,600,000, respectively is
outstanding under the secured promissory note agreement.
The terms of the financing include a provision that the maximum number of
shares of Series B Convertible Preferred Stock (see note 7) that are
convertible will be adjusted on December 31, 2003 based on the achievement
of specified performance targets by the Company and business segments of
the Company. In the event that the Company achieves certain performance
targets prior to December 31, 2003 by greater than 10%, then the number of
shares of Series B Convertible Preferred Stock into which the note is
convertible shall be decreased by such percentage or, in the event that
the Company reaches less than 90% of the performance targets, then the
number of shares of Series B Convertible Preferred Stock into which the
note is convertible shall be increased by the percentage difference
between 90% and the actual percentage of performance targets reached by
the Company. In the event that some business segments of the Company
achieve performance targets and others do not, the results shall be netted
against each other in determining the number of shares of Series B
Convertible Preferred Stock into which the note is convertible. The
maximum adjustment allowed is 25%. As of December 31, 2003, the Company
reached less than 90% of the performance targets and the number of shares
of Series B Convertible Preferred Stock available for conversion was
increased by the maximum conversion adjustment of 25%.
In June 2004, the Company entered into a promissory note agreement with
the majority stockholder in the amount of $3,200,000 which is convertible
into Series C Preferred Stock of the Company. The note bears interest at
10% per annum and matures on June 30, 2007. The note is secured by a first
priority security interest in all the assets of the Company. Beginning
September 30, 2005, the outstanding principal is payable in 8 quarterly
installments. Beginning September 30, 2005, accrued and unpaid interest is
payable in quarterly installments. The note principal and any accrued and
unpaid interest thereon is convertible, at the option of the holder and at
any time until maturity, into Series C Preferred Stock at $0.26 per share.
As of December 31, 2004, $2,719,397 has been advanced and is outstanding
under the promissory note agreement.
18
Physican Informatics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
7. STOCKHOLDERS' ADVANCES AND LOANS
During 2004, the majority stockholder made advances totaling $425,000 to
the Company to fund operations. These advances are non-interest bearing
and are due upon demand.
On June 30, 2004 the Company and the note holders of certain of the
defaulted notes, which were in technical default, entered into agreements
whereby the Company agreed to replace the existing Promissory Notes as
well as other Promissory Notes held by the same note holders but not yet
overdue (collectively referred to as "Original Notes") with new Promissory
Notes ("Replacement Notes"). Under the terms of the Replacement Notes:
1. Each note holder received 67% of the principal amounts due or
overdue at June 30, 2004 together with accrued interest to date as
stated in the Original Notes or in any prior extensions. Interest
from date of default to June 30, 2004 was also included in the
payment to note holders.
2. Any remaining Original Notes that were not yet due at June 30, 2004
will be paid when the notes become due in the amount of 67% of the
principal on such notes together with the interest to date of
payment on those Original Notes.
3. The remaining amount consisting of 33% of the principal of the notes
are evidenced by the issuance of the new Replacement Notes. The
terms of the Replacement Notes provide for the remaining principal
together with interest thereon at the rate of 10% to be paid on June
30, 2005 or the date the amount would have been paid under the
Original Note, whichever is later.
In 2001, in connection with the acquisition of Phoenix (see note 1), the
Company entered into a note agreement with a stockholder in the amount of
$150,000. Interest is imputed at the applicable federal short-term rate
(3.76%) as of the date of the agreement, compounded quarterly. The note
had an original maturity of September 2003, which has been extended to
June 2005. As of December 31, 2004 and 2003, $6,188 and $18,750,
respectively, was outstanding to the stockholder.
In 2002, in connection with the acquisition of Infocus (note 1), the
Company entered into a note agreement with certain stockholders in the
amount of $170,000, bearing interest at 10% per annum. The note had an
original maturity of December 2003, which has been extended to June 2005.
As of December 31, 2004 and 2003, $26,730 and $85,000, respectively, was
outstanding to the stockholders.
In 2002, in connection with the acquisition of Cado (note 1), the Company
entered into a note agreement with a stockholder in the amount of
$600,000, bearing interest at 10% per annum. The note had an original
maturity of January 2004, which was extended to June 2004. In September
2004, the stockholder and the Company entered into a settlement agreement
(see note 13) resulting in debt forgiveness to the Company in the amount
of $55,000. As of December 31, 2004 and 2003, $0 and $350,000,
respectively, was outstanding to the stockholder.
In 2002, in connection with the acquisition of MedPro (note 1), the
Company entered into a note agreement with certain stockholders in the
amount of $400,000, bearing interest at 10% per annum. The note had an
original maturity of December 2003, which has been extended to June 2005.
As of December 31, 2004 and 2003, $16,500 and $75,000, respectively, was
outstanding to the stockholders.
19
Physican Informatics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
7. STOCKHOLDERS' ADVANCES AND LOANS (Continued)
In 2002, in connection with the acquisition of Westland (note 1), the
Company entered into a note agreement with certain stockholders in the
amount of $350,000. The note matures in October 2005 and bears interest at
rates from 6% to 10% per annum. In connection with the issuance of the
Replacement Notes, the maturity dates were extended to October 2005. As of
December 31, 2004 and 2003, $604,333 and $350,000, respectively, was
outstanding to the stockholders. The amounts outstanding as of December
31, 2004 include the performance based earn-out of $500,000.
The second installment of the Westland excess net working capital amount
of $163,423 (note 1) was included in stockholders' loans payable as of
December 31, 2002. In March 2003, the second installment of excess net
working capital in the amount of $164,632, which included accrued interest
payable of $1,209, was paid to the former stockholders of Westland. In
addition, the performance based earn-out for Westland of $500,000 is
included in stockholders' loans payable as of December 31, 2003.
During 2003, the stockholders' loans were extended to varying maturity
dates. In connection with the extension of these loans, the Company issued
169,804 warrants to purchase common stock at a per share price of $1.35
and having an estimated fair value of $80,114. The fair value of the
warrants was calculated using the Black-Scholes option-pricing fair value
model. The fair value of the warrants was recorded as a financing fee of
$80,114. During 2004 and 2003, the Company amortized $47,301 and $32,813,
respectively, to interest expense. The number of warrants outstanding and
exercisable as of December 31, 2004 and 2003 was 169,804. As of December
31, 2004 and 2003, the weighted average remaining contractual life of the
warrants was 8.85 and 9.86 years, respectively.
8. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
In April 2002, the Company raised net proceeds of approximately $5,000,000
in a private placement of Series A Convertible Preferred Stock (the
"Series A Convertible Preferred Stock"). In this transaction, the Company
issued 2,500,000 shares of the Series A Convertible Preferred Stock, which
are convertible into shares of common stock at $2.00 per share subject to
adjustment including an anti-dilution provision. The Series A Convertible
Preferred Stockholders are entitled to receive dividends, prior and in
preference to any other series of capital stock except Series C
Convertible Preferred Stock and Series B Convertible Preferred Stock,
which are non cumulative, if and when declared by the Board of Directors.
As of December 31, 2004, no dividends have been declared by the Board of
Directors. The Series A Convertible Preferred Stock has a liquidation
preference of $6.00 per share plus all declared but unpaid dividends upon
sale or liquidation of the Company. Each share of Series A Convertible
Preferred Stock is entitled to the number of votes equal to the number of
whole shares of common stock into which each share of Series A Convertible
Preferred Stock could be converted. In connection with the issuance of the
convertible note issued in 2003 (see note 6), the Company reserved 371,913
shares of Series A Convertible Preferred Stock as a result of the
anti-dilution provision. In connection with the issuance of convertible
promissory notes in 2004 and 2003, the conversion price of the Series A
Convertible Preferred Stock was reduced to $0.83 per share as a result of
the anti-dilution provision.
In February 2003, in connection with the line of credit agreement with a
stockholder (see note 6), the Company authorized 2,800,000 shares of
Series B Convertible Preferred Stock (the "Series B Convertible Preferred
Stock") which are convertible into shares of common stock at $1.35 per
share subject to adjustment including an anti-dilution provision. The
Series B Convertible Preferred stockholders are entitled to receive
dividends,
20
Physican Informatics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
8. STOCKHOLDERS' EQUITY (Continued)
Convertible Preferred Stock (Continued)
prior and in preference to any other series of capital stock except Series
C Convertible Preferred Stock, which are noncumulative, if and when
declared by the Board of Directors. As of December 31, 2004, no dividends
have been declared by the Board of Directors. The Series B Convertible
Preferred Stock has a liquidation preference of $4.05 per share plus all
declared but unpaid dividends upon sale or liquidation of the Company.
Each share of Series B Convertible Preferred Stock is entitled to the
number of votes equal to the number of whole shares of common stock into
which each share of Series B Convertible Preferred Stock could be
converted.
In June 2004, in connection with a promissory note agreement with a
stockholder (see note 6), the Company authorized 14,000,000 shares of
Series C Convertible Preferred Stock (the "Series C Convertible Preferred
Stock") which are convertible into shares of common stock at $0.26 per
share subject to adjustment including an anti-dilution provision. The
Series C Convertible Preferred Stockholders are entitled to receive
dividends, prior and in preference to any other series of capital stock,
which are noncumulative, if and when declared by the Board of Directors.
As of December 31, 2004, no dividends have been declared by the Board of
Directors. The Series C Convertible Preferred Stock has a liquidation
preference of $0.78 per share plus all declared but unpaid dividends upon
sale or liquidation of the Company. Each share of Series C Convertible
Preferred Stock is entitled to the number of votes equal to the number of
whole shares of common stock into which each share of Series C Convertible
Preferred Stock could be converted.
Sales and Issuances of Common Stock
The Company has entered into an Amended and Restated Investor Rights
Agreement (the "Investor Rights Agreement"), whereby certain stockholders
received the right to the issuance of additional shares of common stock
totaling 128,616 in the event the Company sold shares at a price per share
less than $5.5533 per share. In 2002, the Company sold 78,864 shares of
common stock at $3.17 per share for total consideration of $250,000.
Pursuant to the terms of the Investor Rights Agreement, the Company issued
32,154 shares of common stock to certain stockholders as of December 31,
2004.
Stock Option Plans
In June 2002, the Company adopted an Incentive Stock Option Plan and a
Non-Qualified Stock Option Plan. The number of options granted under the
each plan shall not exceed 2,000,000 shares of common stock of the
Company. Under each plan, the term of the option is ten years and the
option price shall not be less than the fair market value of a share of
the common stock of the Company on the date of the grant. Options are
exercisable one year after the grant date. The options vest one third
(1/3) of the number of shares granted by the plan per year on each
anniversary of the date of grant.
21
Physican Informatics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
8. STOCKHOLDERS' EQUITY (Continued) Stock Option Plans (Continued)
The following summary represents the activity under the stock option plans
during 2004 and 2003:
2004 2003
----------------------------- ---------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
----------- -------------- --------- --------------
Options outstanding, beginning of year 1,639,208 $ 2.04 1,405,200 $ 2.00
Granted -- -- 624,000 1.80
Exercised -- -- -- --
Forfeited (589,700) 2.00 (389,992) 2.02
----------- -------------- --------- --------------
Options outstanding, end of year 1,049,508 $ 2.05 1,639,208 $ 2.04
=========== ============== ========= ==============
Options exercisable at end of year 762,644 743,303
=========== =========
Weighted average fair value of
options granted $ -- $ 0.61
============== ==============
The following table summarized information about stock options outstanding
at December 31, 2004:
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------------
Number Weighted Weighted- Number Weighted-
Range of Outstanding Average Average Exercisable Average
Exercise at Remaining Exercise at Exercise
Prices 12/31/2004 Contractual Price 12/31/2004 Price
------------- -------------- ----------- ---------- ------------ ----------
1.35 15,000 8.00 years $ 1.35 10,000 $ 1.35
2.00 - 2.25 1,034,508 7.81 years 2.06 752,644 2.06
1.35 to 2.25 1,049,508 7.81 years $ 2.06 762,644 $ 2.05
22
Physican Informatics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
9. INCOME TAXES
A reconciliation of the expected income tax provision (benefit) computed
at the statutory federal tax rate to the actual income tax provision
(benefit) is as follows:
2004 2003
------------ ------------
Tax benefit at federal statuatory rate $ (2,193,711) $ (2,117,922)
State income taxes, net of federal tax
effect (313,701) (302,863)
Increase in valuation allowance 1,322,242 1,546,642
Goodwill impairment 1,178,112 867,373
Other 7,058 6,770
------------ ------------
Net deferred tax asset (liability) $ -- $ --
============ ============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31,
2004 and 2003 are presented below:
2004 2003
------------ ------------
Deferred tax assets (liabilities):
Net operating loss carryforward $ 5,179,823 $ 3,458,011
Book over tax amortization 66,887 56,976
Book over tax depreciation 12,614 --
Other 13,925 197,795
------------ ------------
Total gross deferred tax assets 5,273,249 3,712,782
Less valuation allowance (5,237,880) (3,686,559)
------------ ------------
Net deferred tax assets 35,369 26,223
Deferred tax liability:
Tax over book depreciation -- (26,223)
Deferred revenue (35,369) --
------------ ------------
Total gross deferred tax liability (35,369) (26,223)
------------ ------------
As of December 31, 2004, the Company had net operating loss carryforwards
of approximately $12,948,000 for federal income tax purposes which expire
in various amounts through 2024. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible. The
Company's net deferred tax assets are fully offset by a valuation
allowance. The Company will continue to assess the valuation allowance and
to the extent it is determined that such allowance is no longer required,
the tax benefit of the remaining net deferred tax assets will be
recognized in the future.
23
Physican Informatics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
9. INCOME TAXES (Continued)
Under the Internal Revenue Code of 1986, as amended, the availability of
net operating loss carryforwards to reduce the Company's future federal
income tax liability may be subject to certain limitations as a result of
ownership changes experienced by the Company (see note 1).
10. RELATED PARTY TRANSACTIONS
During 2003, the Company entered into a contract to provide software and
services to an affiliate of a member of the Company's Board of Directors.
During 2004 and 2003, the Company earned revenue totaling $70,855 and
$86,025, respectively under the contract and has a receivable of $28,880
from the affiliate as of December 31, 2003.
11. EMPLOYEE BENEFIT PLAN
On January 1, 2002, the Company adopted a plan to provide retirement
benefits under the provisions of Section 401(k) of the Internal Revenue
Code (the "401(k) Plan") for all employees who attain the age of
twenty-one. Employees may elect to contribute up to 100% of their eligible
compensation on a pretax basis, subject to the maximum dollar limitation.
The Company may make matching contributions equal to a discretionary
percentage, to be determined by the Company, of the participants' salary
deductions. For the years ended December 31, 2004 and 2003, the Company
contributed $0 and $204,722, respectively.
12. LITIGATION
A stockholder has brought a lawsuit against the Company related to
non-payment of a promissory note. On September 30, 2004, the Company and
the stockholder entered into a settlement agreement whereby the Company
paid $295,000 into an escrow to be released pending acknowledgement of
settlement by the stockholder's attorney. The settlement resulted in debt
forgiveness in the amount of $55,000 which is included in the accompanying
consolidated statement of operations for 2004.
The Company and a supplier settled a contractual dispute during 2004. The
Company was required to pay an amount of $60,000 to the supplier. As of
December 31, 2003, the Company had fully accrued for this contingency
which was recorded under accounts payable and accrued expenses on the
consolidated balance sheet.
13. SUBSEQUENT EVENT
In January 2005, the Company entered into a note agreement with Citibank
in the amount of $130,000. Beginning in April 2005, interest payments will
be payable quarterly at a rate equal to LIBOR plus .625%. The note is
guaranteed by a stockholder and is payable on demand.
24
PRACTICEXPERT, INC.
(FORMERLY THAON COMMUNCIATIONS, INC.)
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDTTED)
For the years ended December 31, 2004 and 2003.
The following unaudited Pro Forma Consolidated Statement of Operations has been
derived from the historical audited financial statements of PracticeXpert, Inc.
and Physician Informatics and Subsidiaries and assumes that the stock purchase
transaction had been completed for the years ended on December 31, 2004 and
December 31, 2003.
For the year ended
December 31, 2004 December 31, 2003
-----------------------------------------------
(Unaudited) (Unaudited)
Revenue $ 15,080,139 $ 9,823,092
Net Income (loss) for the period $ (10,530,883) $ (5,427,791)
Net Income (loss) per share- Basic $ ( 0.13) $ ( 0.43)
Net Income (loss) per share-Diluted $ (0.13) $ (0.12)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PRACTICEXPERT, INC.
(Registrant)
Dated: May 31, 2005 By: /s/ Jonathan Doctor
-------------------------------------
Jonathan Doctor
President and Chief Executive Officer
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