UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT
Commission File Number: 0-30275
I-TRAX, INC.
------------------------------------------
(Exact name of small business issuer in its charter)
Delaware 23-3057155
-------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Logan Square, 130 N. 18th Street, Suite 2615
Philadelphia, Pennsylvania 19103
--------------------------
(Address of principal executive offices)
(215) 557-7488
--------------------------
(Issuer's telephone number)
-----------------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practicable date: As of October 31, 2002, the Registrant
had 46,986,356 shares of its $0.001 par value Common Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Explanatory Statement
This amendment amends I-trax, Inc.'s Quarterly Report on Form 10-QSB
for the quarter ended September 30, 2002, filed with the Securities and Exchange
Commission on November 14, 2002, to re-characterize the accounting treatment of
a convertible debenture sold by I-trax in February 2002 and of a charge for
stock options granted to a former employee.
Except as described above, no other changes have been made to this
Quarterly Report on Form 10-QSB. This amendment continues to speak as of the
date of the original Quarterly Report on Form 10-QSB, and I-trax has not updated
the disclosures contained therein to reflect any events, which occurred at a
later date.
INDEX
Page No.
PART I. FINANCIAL INFORMATION..............................................................................3
Item 1. Consolidated Financial Statements ................................................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................23
Item 3. Controls and Procedures..........................................................33
PART II. OTHER INFORMATION................................................................................34
Item 1. Legal Proceedings................................................................34
Item 2. Changes in Securities............................................................34
Item 3. Defaults upon Senior Securities..................................................34
Item 4. Submission of Matters to a Vote of Security Holders..............................34
Item 5. Other Information................................................................34
Item 6. Exhibits and Reports on Form 8-K.................................................34
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
I-TRAX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Page No.
Consolidated Balance Sheets at September 30, 2002 (unaudited) and December 31, 2001 4
Consolidated Statements of Operations for the three months ended September 30, 2002 (unaudited) and 2001 5
Consolidated Statements of Operations for the nine months ended September 30, 2002 (unaudited) and 2001 6
Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2002 (unaudited) 7
Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 8
Notes to consolidated financial statements 10
3
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
September 30, December 31,
2002 2001
(unaudited)
----------------- -----------------
Current assets:
Cash $ 2,456,156 $ 1,029,208
Accounts receivables, net 302,889 --
Prepaid expenses 151,046 99,245
Other current assets 10,356 1,915
Note receivable -- 72,437
----------------- -----------------
Total current assets 2,920,447 1,202,805
----------------- -----------------
Office equipment, furniture and leasehold improvements, net 568,507 279,635
Goodwill 9,536,001 2,224,726
Intangible assets, net 3,910,211 --
Debt issuance costs, net 291,074 --
Security deposits 37,067 66,896
----------------- -----------------
Total assets $ 17,263,307 $ 3,774,062
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 936,723 $ 619,612
Accrued expenses 582,497 276,750
Credit line payable 300,000 --
Due to related parties 1,374,598 739,598
Capital lease payable 4,281 42,878
Other current liabilities 53,692 --
Deferred revenue 2,816,893 148,830
----------------- -----------------
Total current liabilities 6,068,684 1,827,668
----------------- -----------------
Capital lease obligation, net of current portion 196,919 55,901
Promissory notes and debenture payable, net of discount 993,335 312,327
----------------- -----------------
Total liabilities 7,258,938 2,195,896
================= =================
Commitments and contingencies (Note 10)
Stockholders' equity
Preferred stock - $.001 par value, 2,000,000 shares authorized,
-0- issued and outstanding -- --
Common stock - $.001 par value, 100,000,000 shares authorized,
46,956,452 and 34,939,466 issued and outstanding, respectively 46,956 34,939
Additional paid in capital 37,617,568 22,964,778
Accumulated deficit (27,660,155) (21,421,551)
----------------- -----------------
Total stockholders' equity 10,004,369 1,578,166
----------------- -----------------
Total liabilities and stockholders' equity $ 17,263,307 $ 3,774,062
================= =================
See accompanying notes to consolidated financial statements (unaudited).
4
I-TRAX, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
Three months Three months
ended ended
September 30, September 30,
2002 2001
----------------- -----------------
Revenue
Technology licenses $ 366,340 $ 127,726
Services 405,160 --
----------------- -----------------
Total revenue 771,500 127,726
----------------- -----------------
Operating expenses:
Cost of revenue 324,923 46,107
General and administrative 1,313,140 1,356,426
Research and development 97,400 115,831
Depreciation and amortization 349,714 179,517
Marketing and advertising 39,413 35,229
----------------- -----------------
Total operating expenses 2,124,590 1,733,110
----------------- -----------------
Operating loss (1,353,090) (1,605,384)
----------------- -----------------
Other income (expenses):
Miscellaneous income -- 2,168
Amortization of debt and conversion costs (54,576) --
Interest income -- 13,766
Interest expense (287,965) (64,037)
----------------- -----------------
Total other income (expenses) (342,541) (48,103)
----------------- -----------------
(Loss) before provision for income taxes (1,695,631) (1,653,487)
----------------- -----------------
Provision for income taxes -- --
----------------- -----------------
Net (loss) (1,695,631) (1,653,487)
================== =================
Loss per common share:
Basic and diluted (.04) (.05)
================== =================
Weighted average number of shares outstanding: 46,956,852 29,749,306
================== =================
See accompanying notes to consolidated financial statements (unaudited).
5
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
Nine months Nine months
ended ended
September 30, September 30,
2002 2001
----------------- -----------------
Revenue
Technology licenses $ 545,840 $ 588,136
Services 1,230,677 --
----------------- -----------------
Total revenue 1,776,517 588,136
----------------- -----------------
Operating expenses:
Cost of revenue 952,241 82,231
General and administrative 4,254,448 4,452,175
Research and development 320,220 466,154
Acquired in process research and development 1,642,860
Depreciation and amortization 1,197,236 461,334
Marketing and advertising 366,505 140,595
----------------- -----------------
Total operating expenses 7,090,650 7,245,349
----------------- -----------------
Operating loss (5,314,133) (6,657,213)
----------------- -----------------
Other income (expenses):
Miscellaneous income -- 8,804
Amortization of debt and conversion costs (145,536) (869,168)
Interest income -- 31,249
Interest expense (778,935) (493,718)
----------------- -----------------
Total other income (expenses) (924,471) (1,322,833)
----------------- -----------------
Loss before provision for income taxes (6,238,604) (7,980,046)
----------------- -----------------
Provision for income taxes -- --
----------------- -----------------
Net loss $ (6,238,604) $ (7,980,046)
================== =================
Loss per common share:
Basic and diluted (.15) (.31)
================== =================
Weighted average number of shares outstanding: 41,038,703 25,049,685
================== =================
See accompanying notes to consolidated financial statements (unaudited).
6
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
Total
Additional Stockholders'
Common Stock Paid-in Accumulated Equity
-----------------------------
Shares Amount Capital Deficit
------------- ------------- ---------------- -------------- ---------------
Balances at December 31, 2001 34,939,466 $ 34,939 $ 22,964,778 $ (21,421,551) $ 1,578,166
Fair market value of detachable warrants
issued in connection with debenture and
beneficial conversion value -- -- 1,838,923 -- 1,838,923
Issuance of common stock and granting of
options in connection with the
acquisition of WellComm Group, Inc. 7,440,000 7,440 10,472,560 -- 10,480,000
Issuance of common stock and warrants as
consideration for finder fee 111,000 111 391,297 -- 391,408
Sale of common stock, net of $7,150 in costs 2,637,500 2,638 1,940,838 -- 1,943,476
Issuance of common stock and warrants as
consideration for services rendered 75,000 75 97,725 -- 97,800
Issuance of common stock in connection with
exercise of warrants (see Note 7) 1,753,486 1,753 (1,753) -- --
Issuance of compensatory stock options -- -- 163,200 163,200
Mark-to-market of options granted to
officers in lieu of canceling note and
pledge agreement during 2001 -- -- (250,000) -- (250,000)
Net loss for the nine months ended September
30, 2002 -- -- -- (6,238,604 (6,238,604)
------------- ------------- ---------------- -------------- ---------------
Balances at September 30, 2002 46,956,452 $ 46,956 $ 37,617,568 $ (27,660,155) $ 10,004,369
============= ============= ================ ============== ===============
See accompanying notes to consolidated financial statements (unaudited).
7
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
Nine months Nine months
ended ended
September 30, September 30,
2002 2001
---------------- ----------------
Operating activities:
Net loss $ (6,238,604) $ (7,980,046)
Adjustments to reconcile net loss to net cash used for operating activities:
Accretion of discount on notes payable charged to interest expense 364,791 371,563
Beneficial conversion value of debenture 316,217 --
Issuance of compensatory stock options 163,200
Amortization of option liability (107,385)
Depreciation and amortization 1,239,958 576,207
Amortization of debt and conversion costs 145,536
Issuance of securities for services, net of marked to market
adjustments (152,200) 1,003,166
Write-off of in process research and development acquired
in iSummit Partners, LLC acquisition -- 1,642,860
Decrease (increase) in:
Accounts receivable 174,858 136,071
Prepaid expenses (18,649) 14,686
Other current assets (26,081) 4,051
(Decrease) increase in:
Accounts payable 253,618 306,314
Accrued expenses 112,954 639,854
Deferred revenue 2,668,063 (262,374)
---------------- ----------------
Net cash used for operating activities (1,103,724) (3,547,648)
---------------- ----------------
Investing activities:
Proceeds from repayment of note receivable 67,500 275,000
Deposit on acquisition of intellectual property -- (100,000)
Cash used to acquire property and equipment (25,732) (1,990)
Cash used for security deposit (1,996) --
Proceeds from partial release of security deposit 47,166 53,388
Net cash to acquire WellComm Group, Inc. (2,045,065) --
---------------- ----------------
Net cash used for investing activities (1,958,127) 226,398
---------------- ----------------
Financing activities:
Principal payments on capital leases (64,677) (30,404)
Proceeds from credit line payable 125,000 --
Proceeds from issuance of promissory notes 692,809
Repayment to related parties (65,000) (480,000)
Proceeds from related parties 700,000 1,636,039
Proceeds from issuance of convertible promissory notes 270,000
Proceeds from sale of Common Stock 1,943,476 1,100,000
Costs in connection with issuance of debenture (150,000) --
Proceeds from issuance of debenture and warrants 2,000,000 --
---------------- ----------------
Net cash provided by financing activities 4,488,799 3,188,444
---------------- ----------------
Net increase in cash 1,426,948 (132,806)
Cash and cash equivalents at beginning of period 1,029,208 132,806
---------------- ----------------
Cash and cash equivalents at end of period $ 2,456,156 $ --
================ ================
Supplemental disclosure of non-cash flow information: Cash paid during the
period for:
Interest $ 10,978 $ 7,783
================ ================
Income taxes -- --
================ ================
(Continued on following page.)
8
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
(Continued from previous
page.)
Nine months Nine months
ended ended
September 30, September 30,
2002 2001
---------------- ----------------
Schedule of non-cash investing activities:
Issuance of 3,368,000 shares of common stock in connection with
acquisition of iSummit Partners, LLC $ -- $ 5,254,080
================ ================
Issuance of 7,440,000 shares of common stock and granting of 560,000
in connection with acquisition of WellComm Group, Inc. $ 10,480,000 $ --
================ ================
Issuance of common stock and stock options for finder fee $ 391,408 $ --
================ ================
Schedule of non-cash financing activities:
Issuance of common stock in connection with conversion of
convertible promissory notes $ -- $ 2,551,784
================ ================
Issuance of common stock in connection with conversion of advances
form officers $ -- $ 275,000
================ ================
Issuance of common stock in connection with conversion of accounts
payable $ -- $ 76,798
================ ================
See accompanying notes to consolidated financial statements (unaudited).
9
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--ORGANIZATION
I-trax, Inc. (the "Company") was incorporated in the State of Delaware on
September 15, 2000. On February 5, 2001, the Company and I-trax Health
Management Solutions, Inc. (formerly known as I-Trax.com, Inc.) ("Health
Management") completed a holding company reorganization. The holding company
reorganization was accomplished through a merger under Delaware law. At the
effective time of the reorganization, all of the stockholders of Health
Management became stockholders of the Company and Health Management became a
wholly owned subsidiary of the Company. The Company's common stock is quoted on
the Over-the-Counter Bulletin Board under the symbol "IMTX."
As of September 30, 2002, the Company had one wholly owned subsidiary, Health
Management, and two single member limited liability companies, iSummit Partners,
LLC and WellComm Group, LLC. The Company acquired iSummit Partners, LLC in
February 2001. iSummit Partners, LLC does not conduct any operations but
maintains ownership of certain intellectual property. The Company formed
WellComm Group, LLC to conduct the activities of WellComm Group, Inc., which the
Company acquired on February 6, 2002 as further described in Note 4. The Company
conducts its operation through Health Management and WellComm Group, LLC.
NOTE 2--RESTATEMENT
In connection with the revision of the accounting treatment of a convertible
debenture sold by the Company in February 2002, it was determined that the
beneficial conversion feature, in the amount of $948,651, should have been
accreted to interest expense over the life of the debenture rather than charged
in full at the time that the debenture was sold. In addition, it was determined
the value of option granted associated with the debt issuance, in the amount of
$161,077, should have been recognized as a liability and amortized as a
reduction to interest expense over the life of the option. As a result, interest
expense for the quarter has increased by $68,540, and the long-term liability
was decreased by $741,559.
Additionally, it was discovered that the Company should have taken a charge to
earnings in the amount of $163,200 for certain stock options granted to a former
employee in the first quarter of the year.
A summary of the effects of the restatement on the Company's consolidated
financial statements as of September 30, 2002 and for the three and nine months
then ended are as follows:
As of September 30, 2002
-----------------------------------
Consolidated balance sheets: Previously
Reported Restated
--------------- ---------------
Total current liabilities $ 6,014,992 $ 6,068,684
Total liabilities 7,946,805 7,258,938
Total stockholders' equity 9,316,502 10,004,369
For the three months ended For the nine months ended
September 30, 2002 September 30, 2002
-------------------------------- -----------------------------------
Consolidated statements of operations: Previously Previously
Reported Restated Reported Restated
-------------- ------------- ---------------- --------------
Total operating expenses $ -- $ -- $6,927,450 $7,090,650
Operating loss (5,150,933) (5,314,133)
-- --
Total other income (expenses) (274,001) (342,541) (1,773,415) (924,471)
Net loss (1,627,061) (1,695,631) (6,924,348) (6,238,604)
Basic and diluted loss per share (.03) (.04) (.17) (.15)
10
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3--INTERIM RESULTS AND BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates continuity of
operations, realization of assets, and liquidation of liabilities in the normal
course of business. As of September 30, 2002, the Company's accumulated deficit
was $27,660,155 and its working capital deficiency was $3,148,237. In addition,
the Company has had negative cash flows from operations of $4,900,000 and
$4,600,000 for the years ended December 31, 2001 and 2000, respectively, and
$1,103,724 for the nine months ended September 30, 2002. As a result of these
factors, the auditor's report on the December 31, 2001 financial statements
included a paragraph indicating that there was substantial doubt about the
Company's ability to continue as a going concern.
We expect that in the near future additional cash will be required to fund these
deficits and enable us to continue the development of our core products to meet
customer demand, liquidate our short-term liabilities and continue to implement
our marketing strategy. The Company has, is and will continue to explore
opportunities to obtain funds to meet the projected shortfall. As part of that
effort, the Company is intensifying its sales efforts to continue to grow its
revenues and has engaged investment professionals to assist the Company in
raising capital through debt or equity sales.
The Company's ability to continue as a going concern depends on successfully
closing new sales contracts and securing financing arrangements either through
equity transactions or debt agreements. The Company has been able to raise the
funds necessary to cover operating needs, investment activities and working
capital requirements through borrowings (including from executive officers) and
issuance of equity securities. Although there can be no assurance that the
Company will continue to be able to fund its cash requirements using such
methods, management is cautiously optimistic that the Company will be able to
secure additional funding.
11
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3--INTERIM RESULTS AND BASIS OF PRESENTATION (cont'd)
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
for interim financial information, the instructions to Form 10-QSB and Items 303
and 310(B) of Regulation S-B. In the opinion of management, the unaudited
financial statements have been prepared on the same basis as the annual
financial statements and reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the financial position as of
September 30, 2002 and the results of the operations and cash flows for the
three and nine months ended September 30, 2002. The results for the three and
nine months ended September 30, 2002 are not necessarily indicative of the
results to be expected for any subsequent quarter or the entire fiscal year
ending December 31, 2002. The balance sheet at December 31, 2001 has been
derived from the audited financial statements at that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
in the United States of America have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations.
Loss per common share is computed pursuant to Financial Accounting Standards
Board, "SFAS No. 128," "Earnings Per Share." Basic loss per share is computed as
net income (loss) available to common shareholders divided by the weighted
average number of common shares outstanding for the period. Diluted loss per
share reflects the potential dilution that could occur from common shares
issuable through stock options, warrants, and convertible debt. As of September
30, 2002 and 2001, 9,182,778 and 5,092,727, respectively, of options, warrants
and shares issuable upon conversion of certain debt were excluded from the
diluted loss per share computation, as their effect would be anti-dilutive.
These unaudited financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto for the year ended
December 31, 2001 as included in the Company's report on Form 10-KSB for the
fiscal year ended December 31, 2001 filed on April 4, 2002.
NOTE 4--ACQUISITION OF WELLCOMM GROUP, INC.
On February 6, 2002, the Company acquired all of the issued and outstanding
common stock of WellComm Group, Inc. ("WellComm"), as stipulated in the Merger
Agreement dated January 28, 2002, as amended, by issuing 7,440,000 shares of
Common Stock, granting 560,000 options to acquire Common Stock at a nominal
price and paying $2,175,056 in cash. In addition, the Company issued 80,000
shares of common stock to an employee for introducing the Company to WellComm.
The aggregate acquisition price amounted to approximately $12,660,000. The value
of common stock issued and stock options granted was determined based on the
average market price of common stock immediately before and after the
acquisition was agreed to and announced. For accounting purposes, the effective
date of the acquisition is January 31, 2002.
The Company agreed to deliver to the WellComm shareholders additional contingent
merger consideration either in cash or in common stock. The additional
contingent merger consideration will equal to 10% of revenues that may be
generated by sales of new services to an existing WellComm client during a
12-month period beginning on the date such new services begin to be delivered.
Such new services must commence by February 5, 2003, but have not been commenced
as of September 30, 2002. Any additional shares distributed will be recognized
as compensation expense in the period earned.
12
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4--ACQUISITION OF WELLCOMM GROUP, INC. (cont'd)
WellComm is a disease management company that offers a wide array of expertise
including a nurse contact center specializing in disease management, triage,
health information survey, and research services for the healthcare industry.
The Company acquired WellComm in order to enhance its portfolio of product
offerings by combining technology and services. The Company expects to reduce
costs through economies of scale.
The financial statements include the operations of WellComm from February 1,
2002 forward. The purchase price has been based on the estimated fair values of
the assets acquired and liabilities assumed. The Company is in the process of
obtaining third-party valuations of certain intangible assets and therefore the
following allocation of the purchase price is preliminary.
Of the total purchase price, the Company has initially allocated approximately
$1,370,000 to non-compete covenants, $3,680,000 to customer relationships,
$290,000 to net assets acquired with the remainder of approximately $7,320,000
assigned to goodwill. Non-compete covenants will be amortized on a straight-line
basis over a four-year life and customer relationships will be amortized over a
three-year life.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the acquisition date.
Current assets $ 614,000
Property and equipment 190,000
Intangible assets 5,050,000
Goodwill 7,320,000
----------------
Total assets acquired $ 13,174,000
================
Current liabilities $ 485,000
Long term debt 29,000
----------------
Total liabilities assumed 514,000
----------------
Net assets acquired $ 12,660,000
================
The following unaudited pro forma results of operations of the Company give
effect to the acquisition of WellComm as though the transaction had occurred on
January 1 of each period.
Three months Nine months ended
ended September September 30,
30,
2001 2002 2001
----------------- ---------------- ----------------
Sales $ 1,812,247 $ 2,030,298 $ 5,171,682
================== ================ =================
Expenses $ 2,910,129 $ 8,288,321 $ 11,223,828
================== ================ =================
Net loss $ (1,097,882) $ (6,258,023) $ (6,052,146)
================== ================ =================
Earnings per share: $ (.03) $ (.13) $ (.18)
Basic and Diluted ================== ================ =================
Weighted average shares outstanding: 37,749,306 49,038,703 33,049,685
Basic and Diluted ================== ================ =================
13
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5--ACQUISITION OF ISUMMIT PARTNERS, LLC
Effective February 7, 2001, the Company acquired iSummit Partners, LLC, doing
business as MyFamilyMD, by issuing a total of 4,222,500 shares of Common Stock
to the owners of iSummit in exchange for all of the issued and outstanding
limited liability company membership interests of iSummit. For purposes of
recording the acquisition, of the total 4,222,500 shares, the Company originally
recorded 3,368,000 shares (valued at $1.56 per share or $5,254,080)
(non-contingent) as consideration. Furthermore, of the total 4,222,500 shares,
854,500 shares would have been released to the former owners of iSummit, and
recorded as an expense for accounting purposes, upon the Company reaching
certain revenue targets generated by iSummit's products. Contemporaneously with
recording 3,368,000 shares, the Company recorded goodwill of $3,590,341 after
allocating $1,642,860 to in-progress research and development (representing
undeveloped software) and $20,879 to tangible assets. The allocation of purchase
price was prepared based on a formal valuation by an independent appraiser.
Effective December 31, 2001, of the total 4,222,500 shares, 1,289,184 were
cancelled because the Company incurred unanticipated technology development
costs and suffered a revenue shortfall related to iSummit' technology. For
accounting purposes, the Company reversed 464,592 of the total shares
surrendered with a recorded value of $724,764 and the remaining 854,500 shares
issuable upon meeting certain revenue targets were not recorded because the
revenue targets were missed.
The Company has amortized goodwill through December 31, 2001. Accordingly, from
February 7, 2001 (date of acquisition) through December 31, 2001, the Company
recorded amortization expense of $640,851.
The following summary table sets forth the pro-forma statements of operations
for the three and nine months ended September 30, 2001 as if the acquisition was
consummated at January 1, 2001.
Three months Nine months
ended ended
September 30, September 30,
2001 2001
---------------- -----------------
Total revenue $ 127,726 $ 588,136
================ =================
Total expenses $ 1,746,578 $ 8,618,182
================ =================
Net loss $ (1,618,852) $ (8,030,046)
================ =================
Pro forma basic and diluted net loss per share $ (.05) $ (.29)
================ =================
Weighted average number of shares outstanding 32,652,714 27,953,093
================ =================
14
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6--RELATED PARTY TRANSACTIONS
During the three months ended September 30, 2002, certain members of the
Company's Office of the President advanced funds to the Company for working
capital. Such advances amounted to $350,000, are due in 90 days and bear
interest at a rate of 8% per annum. Additionally, in September 2002, a relative
of a member of the Company's Office of the President advanced to the Company
$350,000, which the Company agreed to repay within 90 days with interest at a
rate of 8% per annum.
As of September 30, 2002, the Company was advanced a total of $1,374,598 by
related parties. The following table presents all amount owed by the Company to
related parties and all related activity.
Balance at January 1, 2002 $ 739,598
Less: repayments during the quarter ended March 31, 2002 (50,000)
---------------
Balance at March 31, 2002 689,598
Less: repayment during the quarter June 30, 2002 (15,000)
---------------
Balance at June 30, 2002 674,598
Plus: advances made during the quarter ended September 30, 2002 700,000
---------------
Balance at September 30, 2002 $ 1,374,598
===============
NOTE 7--CREDIT LINE
The Company, by virtue of acquiring WellComm, assumed a revolving line of credit
that allows the Company to borrow up to $308,108. Amounts outstanding under the
line of credit bear interest at 0.5% over the National Prime Rate, as reported
by the Wall Street Journal and are payable monthly. As of September 30, 2002,
$300,000 was outstanding under the line of credit. The line of credit is
collateralized by WellComm's assets. The line was due on August 2002, and has
been extended through December 31, 2002. The Company is currently restructuring
this line of credit.
NOTE 8--PROMISSORY NOTES PAYABLE
On March 2, 2001 the Company entered into an Amended and Restated Promissory
Note and Warrant Purchase Agreement with Psilos Group Partners, L.P., its
affiliates and a venture capital fund managed by the Company's Chief Executive
Officer (collectively, the "Psilos Investor Group") pursuant to which the Psilos
Investor Group agreed to loan the Company up to $1,000,000. As consideration,
the Company granted the Psilos Investor Group detachable warrants to acquire
common stock at $0.10 per share. The loan bears interest at 8% per annum, with a
default rate of 12% per annum, and is due five years from original date of
issuance. As of December 31, 2001, the Psilos Investor Group funded an aggregate
of $692,809 of the $1,000,000 and received warrants to purchase 1,823,473 shares
of common stock. These warrants were exercised during the first quarter of 2002
and the Company issued an aggregate 1,753,486 shares of common stock (net of
exercise price).
15
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8--PROMISSORY NOTES PAYABLE (cont'd)
The Company valued the issued detachable warrants at $459,854 using the
Black-Scholes pricing model, thereby allocating a portion of the proceeds from
the debt to the warrants utilizing the relevant fair value of the debt and
warrants to the actual proceeds from the debt. This amount was recorded as a
discount to the related promissory notes and netted against the related debt.
Furthermore, the discount is being accreted to interest expense over the
five-year term of the underlying promissory notes. For the three months ended
September 30, 2002 and 2001, the amount accreted to interest expense was $22,677
and $22,677, respectively. For the nine months ended September 30, 2002 and
2001, the amount accreted to interest expense was $68,021 and $50,557,
respectively.
NOTE 9--CONVERTIBLE DEBENTURE
The Company funded the cash portion of WellComm's acquisition price by selling a
6% convertible senior debenture in the aggregate principal amount of $2,000,000
(the "Debenture") to Palladin Opportunity Fund LLC ("Palladin") pursuant to a
Purchase Agreement dated February 4, 2002. Pursuant to the Purchase Agreement,
the Company also issued a warrant to Palladin to purchase an aggregate of up to
1,538,461 shares of common stock (the "Warrant"). The outstanding principal and
any accrued interest under the Debenture are payable in full on or before
February 3, 2004. Palladin can also convert the outstanding principal and any
accrued interest at any time into Common Stock at an initial conversion price of
$1.00 per share. The initial conversion price is subject to "reset" as of the
date that is 12 months and 18 months after the issue date (each such date, a
"Reset Date"). With respect to each Reset Date, the conversion price will only
be reduced if the average of closing bid prices for the Common Stock during a
period of 20 consecutive trading days ending on the date which immediately
precedes the applicable Reset Date is less than the then applicable conversion
price, in which case, the reset conversion price will be reset to equal such
average. The Warrant entitles Palladin to purchase shares of the Company's
common stock at the price of $1.10 per share.
Pursuant to the Purchase Agreement, Palladin also received an option to purchase
an additional 6% convertible senior debenture in the face amount of $1,000,000
and receive an additional warrant to purchase an aggregate of up to 769,230
shares of Common Stock. Finally, pursuant to a related registration rights
agreement, the Company registered all of the shares of Common Stock underlying
the Debenture and the Warrant in a registration statement on Form SB-2, which
was declared effective by the Securities and Exchange Commission in July 2002.
The Company valued the Warrant at $890, 272 using the Black-Scholes pricing
model, and the option at $161, 077, thereby allocating a portion of the proceeds
from the debt to the Warrant and the option using the relevant fair value of the
debt, the warrants, and the option to the actual proceeds from the Debenture.
The Company recorded $890,272 as a discount to the Debenture and this amount
will be accreted to interest expense over the life of the Debenture. The Company
recorded $161,077 as an option liability and this amount will be amortized
against interest expense over the life of the option. The Company also recorded
$948,651 as a discount to the Debenture representing the beneficial conversion
feature of the debenture and that amount will be amortized to interest expense
over the life of the Debenture. The beneficial conversion value generally
represents the difference between the fair market value of the common stock on
the date the Debenture was sold and the amount of proceeds characterized as debt
divided by the number of shares the face amount of the Debenture ($2,000,000)
would be convertible into (2,000,000 shares). For the three-month period ended
September 30, 2002, amortization and accretion on these items was as follows:
$118,581 associated with the beneficial conversion feature; $111,284 associated
with the value of the warrants; and $40,269 associated with the option
liability. For the nine-month period ended September 30, 2002 amortization and
accretion on these items was as follows: $316,217 associated with the beneficial
conversion feature; $296,757 associated with the value of the warrants; and
$107,385 associated with the option liability. Lastly, in connection with
facilitating the transaction with Palladin, the Company recorded $416,610 of
debt issuance costs comprised of $130,000, 31,000 shares of common stock and a
warrant to acquire 200,000 shares at $1.00 per share to an unrelated party.
These costs will be amortized over the life of the Debenture. For the three and
nine-months ended September 30, 2002, amortization expense amounted to $54,576
and $145,536 respectively.
16
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10--COMMITMENTS AND CONTINGENCIES
Nature of Business
The Company is subject to risks and uncertainties common to growing technology
companies, including rapid technological developments, reliance on continued
development and acceptance of the Internet and health care applications
utilizing the Internet, intense competition and a limited operating history.
Threatened Litigation
In 1998, a former Chief Executive Officer, stockholder and creditor of Health
Management (the "Plaintiff") commenced an action in New Jersey state court
against, among others, the present Chief Executive Officer of Health Management.
Health Management is identified in the caption as a defendant. The complaint
alleges breach of contract, breach of fiduciary duty, breach of the covenant of
good faith and fair dealing, securities fraud, common law fraud, negligent
misrepresentation and racketeering activity. See Nazir Memon v. Frank Martin, et
al, CAM-L-04026-98. The allegations in this action reference circumstances
relating to Health Management's prior line of business of physician practice
management. In 1999, the court entered two orders dismissing the action "without
prejudice" for procedural reasons. Furthermore, in 1999 the Plaintiff filed for
bankruptcy protection. As part of the bankruptcy proceedings, the Plaintiff, the
present Chief Executive Officer and Health Management entered into a stipulation
limiting the period within which the Plaintiff can bring a new action alleging
Plaintiff's claims. Plaintiff sought to reactivate his prior state court action
in January 2001 (within the stipulated period), rather than commence a new
action. The stipulated time period for commencing a new action has expired. By
Opinion-Letter/Order dated August 22, 2001, the New Jersey Superior Court, Civil
Division, ruled that Plaintiff was barred from reactivating the civil action by
the bankruptcy stipulation. The Plaintiff is appealing the Civil Division
Opinion-Letter/Order and the appeal is pending. As of September 30, 2002, the
Company made no accrual for accounting purposes because the Plaintiff's success
in this matter is not deemed probable nor could the Company reasonably estimate
any adverse effect based on the current facts.
Risk Based Contracts
Although as of the date of these financials the Company has not entered into any
risk-based contracts, the Company expects that it will do so in the very near
future. These contracts are generally for terms of three to five years and
provide that a percentage of the Company's fees may be refunded to a client if
the Company does not save the client a certain percentage of the expenses
incurred by individuals whose health is managed by the Company.
NOTE 11--STOCKHOLDERS' EQUITY
Equity Compensation Plans and Non-Plan Stock Options
The Company has two equity compensation plans, which were adopted in 2000 and
2001. The purpose of the plans is to provide the opportunity for grants of
incentive stock options, nonqualified stock options and restricted stock to
employees of the Company and its subsidiaries, certain consultants and advisors
who perform services for the Company or its subsidiaries and non-employee
members of the Company's Board of Directors. The 2001 plan has several
additional features, including, a salary investment option grant program that
permits eligible employees to reduce their salary voluntarily as payment of
two-thirds of the fair market value of the underlying stock subject to the
option, with the remaining one-third of the fair market value payable as the
exercise price for the option and, if specifically implemented, automatic grant
program for non-employee members of the Board of Directors at periodic
intervals.
17
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 11--STOCKHOLDERS' EQUITY (cont'd)
Equity Compensation Plans and Non-Plan Stock Options (cont'd)
There are 3,000,000 shares of common stock authorized for issuance under the
2000 plan and 6,000,000 shares of common stock authorized for issuance under the
2001 plan. The number of shares authorized for issuance under the 2001 plan
increases automatically on the first day of each year beginning with the year
2002 by an amount equal to the lesser of (a) three percent of the shares of
common stock then outstanding and (b) 1,000,000 shares. As a result, effective
January 1, 2002, the number of shares of common stock available for issuance
under the 2001 plan increased from 5,000,000 to 6,000,000.
The maximum aggregate number of shares of common stock that can be granted to
any individual during any calendar year is 350,000 under the 2000 plan and
400,000 and under the 2001 plan.
2000 Plan Grants
As of September 30, 2002, an aggregate of 2,210,000 options were outstanding
under the 2000 plan. Exercise prices of these options range from $1.00 to $2.00
per share (depending on the fair market value of the stock on the date of
grant). No grants were made pursuant to this plan during the quarter ended
September 30, 2002.
2001 Plan Grants
As of September 30, 2002, an aggregate of 3,316,632 options were outstanding
under the 2001 plan. Exercise prices of these options range from $0.55 to $1.25
(depending on fair market value of the stock on the date of grant). No grants
were made pursuant to this plan during the quarter ended September 30, 2002.
Non-Plan Stock Option Grants
As of September 30, 2002, the Company had outstanding an aggregate of 1,795,000
options outside of any stock option plan with exercise prices ranging from $0.55
to $2.00 per share (depending on fair market value of the stock on the date of
grant). For the quarter ended March 31, 2002, the Company charged operations for
$163,200 related to the issuance of options to a former employee.
The table below summaries the activity in the Company's stock option plan for
the nine months ended September 30, 2002:
Non-Plan
Incentive Non-Qualified Non-Qualified
Options Options Options Total
---------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2002 2,317,500 2,636,855 1,045,000 5,999,355
Activity for the nine months ended
September 30, 2002
Granted 858,000 201,500 750,000 1,809,500
Exercised -- -- -- --
Forfeited\Expired (85,000) (402,223) (487,223)
---------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 3,090,500 2,436,132 1,795,000 7,321,632
18
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 11--STOCKHOLDERS' EQUITY (cont'd)
Issuance of Common Stock and Warrants
In connection with signing of their employment agreements, the Company's Chief
Executive Officer and a current member of the Company's Office of the President
purchased from the Company a total of 500,000 shares of Common Stock at a price
of $2 per share. The shares were purchased pursuant to a subscriptions agreement
and a note and pledge agreement. The note was for a principal amount of $999,500
(net of a $500 bonus), bearing interest at approximately 6% per annum, and
provided that the unpaid principal amount was due in five consecutive annual
installments beginning on December 29, 2001. Effective during the second quarter
2001 and with Board approval, the note and pledge agreements were canceled and
the shares were returned. In April 2001, these executive officers received an
aggregate of 700,000 incentive stock options pursuant to the 2001 Plan. Pursuant
to FASB Interpretation 44, variable accounting at the end of each interim period
must be applied to these options since they are deemed a re-pricing of the
canceled note and pledge agreements. Accordingly, since the Common Stock fair
market value was $1.25 at December 31, 2001 and these options are exercisable at
$.55, the Company recorded the intrinsic value of $.70 per option or $350,000 of
compensation expense. The Company will continue to mark-to-market these options
at the end of each respective interim period until they are exercised. For the
three and nine months ended September 30, 2002, the Company marked-to-market
these options and recorded a reduction in compensation expense of $140,000 and
$250,000, respectively. For the quarter ended March 31, 2002, the Company
charged operations for $163,200 related to the issuance of options to a former
employee.
During the nine months ended September 30, 2002, pursuant to various agreements
and board approval, the Company issued an aggregate of 75,000 shares of common
stock to various consultants for services received. The common stock was valued
at the fair market value of the stock on the date of issuance or $82,500 in the
aggregate. In addition, in July 2001, the Company granted an investment banker
180,000 five year warrants with an exercise price of $0.75 for services from
July 2001 to July 2002. Pursuant to EITF 96-18, the Company, at the end of each
reporting period, must value these warrants. For the nine months ended September
30, 2002, the Company recorded a charge to earnings of $44,100 as an investor
relations expense for the valuing of these warrants. During the nine months
ended September 30, 2002 the Company sold in a private placement an aggregate of
110,000 shares of common stock for $47,850, net of $7,150 of direct costs. This
private placement was commenced in November 2001. Additionally, pursuant to a
private placement commenced in February 2002, the Company sold 2,527,500 shares
for the nine months ended September 30, 2002, yielding proceeds of $1,895,625.
In connection with facilitating the transaction with Palladin as discussed in
Note 8, the Company issued 31,000 shares of common stock, a warrant to acquire
200,000 shares of common stock at an exercise price of $1.00 per share and paid
$130,000 to an unrelated party as a finder fee. The total consideration amounted
to $416,610 and has recorded as a debt issuance cost and will be amortized over
the life of the Debenture.
19
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 11--STOCKHOLDERS' EQUITY (cont'd)
Issuance of Common Stock and Warrants (cont'd)
The following table summarizes the Company's activity as it relates to its
warrants for the nine months ended September 30, 2002:
Balance outstanding at January 1,2002 8,517,509
Quarter ended March 31, 2002
Granted 1,738,461
Exercised (1,881,160)
-------------------
Balance outstanding at March 31, 2002 8,374,810
Quarter ended June 30, 2002
Granted --
Exercised --
-------------------
Balance outstanding at June 30, 2002 8,374,810
Quarter ended September 30, 2002
Granted --
Exercised --
-------------------
Balance outstanding at September 30, 2002 8,374,810
===================
Outstanding warrants are exercisable at prices ranging from $.15 to $1.10.
NOTE 12-- GOODWILL AND INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses
financial accounting and reporting for business combinations and supercedes APB
Opinion No. 16, "Business Combinations." Changes made by SFAS No. 141 include
(1) requiring the purchase method of accounting be used for all business
combinations initiated after September 30, 2001, and (2) established specific
criteria for the recognition of intangible assets separately from goodwill.
These provisions are effective for business combinations for which the date of
acquisition is subsequent to September 30, 2001. SFAS No. 142 addresses the
accounting for goodwill and intangible assets subsequent to their acquisition.
The provisions for SFAS No. 142 will be effective for fiscal years beginning
after December 15, 2001. The Company has completed its initial transition
impairment assessment as required by SFAS No. 142 and concluded that no
impairment of recorded goodwill exists.
The changes in the carrying amount of goodwill for the nine months September 30,
2002, is as follows:
Total
----------------
Balance as of January 1, 2002 $ 2,224,726
Goodwill acquired during the nine months 7,311,275
Impairment losses --
----------------
Balance as of September 30, 2002 $ 9,536,001
=================
20
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 12-- GOODWILL AND INTANGIBLE ASSETS (cont'd)
The components of identifiable intangible assets, which are included as a
separate line item on the consolidated balance sheet, are as follow:
As of September 30, 2002
------------------------------------
Gross Carrying Accumulated
Amount Amortization
---------------- ----------------
Amortized intangible assets:
Non-compete covenants 1,370,000 (228,336)
Customer relationships 3,586,707 (818,160)
----------------- -----------------
Total $ 4,956,707 (1,046,496)
================= ==================
Amortization expense for the three and nine months ended September 30, 2002
amounted to $392,436 and $1,046,496, respectively. Estimated amortization
expense for the remainder of fiscal 2002 and the remaining years is $376,590,
$1,537,560, $1,537,560, and $458,501.
The reconciliation of reported net loss adjusted for the adoption of SFAS No.
142 is as follows:
Nine months ended Three months ended
September 30, 2001 September 30, 2001
Amount Per share Amount Per share
---------------- ---------------- ---------------- ----------------
Reported net loss $ (7,980,046) $ (.31) $ (1,653,487) $ (.05)
Add back goodwill amortization 461,334 .01 179,496 --
---------------- ---------------- ---------------- ----------------
Adjusted net loss $ (7,518,712) $ (.30) $ (1,473,991) $ (.05)
================= ================ ================= =================
NOTE 13--NEW ACCOUNTING PRONOUNCEMENTS
In October 2001, the FASB issued SFAF No. 144 " Accounting for the Impairment or
Disposal of Long-Lived Assets" which addresses the financial accounting and
reporting for the impairment or disposal of long-lived assets and supercedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
assets to be Disposed Of." SFAS 144 is effective for fiscal years beginning
after December 15, 2001 and the interim periods within. The adoption of SFAS 144
did not have a material impact on the financial statements of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission on FASB Statements 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Under certain provisions of SFAS No. 145, gains and losses related to the
extinguishment of debt should no longer be segregated on the income statement as
extraordinary items net of the effects of income taxes. Instead, those gains and
losses should be included as a component of income before income taxes. The
provisions of SFAS No. 145 are effective for fiscal years beginning after May
15, 2002 with early adoption encouraged. To date, the Company has not recorded
any gains or losses on its statements of operations as extraordinary items.
21
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 13--NEW ACCOUNTING PRONOUNCEMENTS (cont'd)
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred rather than when a company commits to such an
activity and also establishes fair value as the objective for initial
measurement of the liability. The provisions of SFAS 146 are effective for exit
or disposal activities initiated after December 31, 2002.
NOTE 14--SUBSEQUENT EVENTS
Agreement to Acquire DxCG, Inc.
On November 8, 2002, the Company entered into a merger agreement (the
"Agreement") to acquire DxCG, Inc. ("DxCG") for a total purchase price of
approximately $10,000,000, of which $6,000,000 will be in cash and $4,000,000 in
common stock. DxCG is a leading provider of predictive modeling solutions that
enable healthcare providers, payors and employers to forecast healthcare costs.
Under the terms of the Agreement and at the time the Agreement was executed, the
Company deposited $200,000 in an escrow account. This amount will be released to
DxCG if DxCG terminates the Agreement following the Company's failure to satisfy
certain conditions to closing.
The closing of the transaction is contingent on the Company securing third party
financing for the cash portion of the purchase price. The number of shares of
common stock that the Company will issue will be determined by dividing
$4,000,000 by the average of the closing purchase price of the Company's common
stock over a period of ten consecutive trading days ending the trading day
immediately preceding the closing date. The Company expects to close the
acquisition in January 2003.
The acquisition will be accounted for as a purchase. As such, the purchase will
be allocated to the estimated fair values of the assets acquired and liabilities
assumed. The Company will obtain a third-party valuation of certain intangible
assets.
Joint Marketing Agreement with UICI, Inc.
Effective October 31, 2002, UICI, Inc. and the Company entered into a Joint
Marketing Agreement. Under this agreement, each party will, using its reasonable
discretion, market to its clients the other party's products and services. In
connection with the agreement, I-trax issued UICI a seven year warrant to
acquire up to 2,000,000 shares of common stock at $1.10 per share. The Company
and UICI are also parties to a license and maintenance agreement entered into on
September 30, 2002, pursuant to which the Company granted UICI an exclusive
license to certain software in the student market and a non-exclusive license to
such software for use by UICI for its other businesses.
22
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
The following discussions of the financial condition and related
results of operations of I-trax, Inc. and its subsidiaries should be reviewed in
conjunction with our financial statements and related notes appearing on the
preceding pages as well as our audited financial statements for the fiscal year
ended December 31, 2001, incorporated into our Form 10-KSB, filed on April 4,
2002.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements, which are based on
our current expectations and involve a number of risks and uncertainties. In
order for us to utilize the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, investors are hereby cautioned that these
statements may be affected by important factors, which are set forth below and
elsewhere in this report, and consequently, actual operations and results may
differ materially from those expressed in these forward-looking statements. The
important factors include our ability to execute new contracts for disease and
demand management services and software license agreements and, most
importantly, our ability to continue as a going concern.
Unaudited results of operations for the three and nine month periods
ended September 30, 2002 are compared to the unaudited results of operations for
the comparable periods ended September 30, 2001. Results of operations are based
on our historical financial information as of the dates indicated and are not
necessarily indicative of results to be attained for any future period.
Our financial statements have been prepared assuming that it will
continue as a going concern since as of September 30, 2002, our working capital
deficiency was $3,148,237. Further, during the past two years, cash flow
deficits from operations have amounted to approximately $400,000 per month.
Through September 30, 2002 and the date of this report, we have been able to
finance these deficits by sales of common stock to unrelated parties and loans
from our senior management team and their affiliates, including several members
of our Office of the President and our Chief Executive Officer. We expect that
in the near future additional cash will be required to fund these deficits and
enable us to continue the development of our core products to meet customer
demand, liquidate our short-term liabilities and continue to implement our
marketing strategy. We are optimistic that we will be able to raise additional
capital to fund these initiatives and to fund our cash flow deficits, however,
there can be no assurance that we will be able to do so.
Our Business
I-trax has historically developed enterprise and client server
applications for collecting disease specific data at the point-of-care for
several large hospitals and medical centers. In 2001, we expanded our product
lines by developing additional software applications, adding services and
completing several strategic acquisitions. We now offer total population health
management solutions: we combine health information and care coordination
services to provide a portfolio of integrated health management solutions to
payers, providers and employers to improve the quality of health and wellness
for populations.
Our solutions enable health care organizations to transition from
fragmented care management practices to a coordinated, informed approach to care
through focused care management and real time communication with all
stakeholders which yields reduced costs, and the best delivery of care.
Our Products
Our products are divided into the following portfolios: stand-alone
technology solutions, care services and total care coordination solutions. The
specific products in each portfolio are:
Stand Alone Technology Solutions
o AsthmaWatch(R) - a point-of-care respiratory disease management
system.
o C-Trax(TM) - a point-of-care cardiovascular care and information
management tool.
o CarePrime(R) - a point-of-care physician web portal.
o eImmune(R) - a point-of-care immunization and related adverse
events management system.
23
o MyFamilyMD(TM) - a patient education and communication web
portal.
o Health-e-Coordinator(TM) - care coordination and disease
management tool.
Our technology capabilities also include:
o Medicive(R) Medical Enterprise Data System, a proprietary
software architecture developed to collect, store, retrieve and
analyze a broad range of information used in the healthcare
industry.
o Extensive experience in data management and reporting.
o Extensive experience in providing customer interfaces.
o Extensive experience in design and modification of technology to
meet the needs of all healthcare stakeholders.
We license our software applications as client-managed integrated
applications or as an application service provider from our secure web hosting
facility.
Care Services
o NurseLine - 24 hours per day, 7 days per week demand management
and nurse triage service staffed by skilled nurses.
o Health Service Center - 24 hours per day, 7 days per week
healthcare contact center staffed by various levels of healthcare
professionals and para-professionals designed to address a broad
range of clinical issues or questions. These services may include
Health Risk Assessment design, delivery and analysis, special
projects and program support.
o Customer Contact Management - 24 hours per day, 7 days per week
customer contact center designed to manage and support healthcare
organization's marketing and communication center needs. Services
range from physician and service referrals, class registration
and web-based information centers to member satisfactions
surveys.
Our care services also include:
o Guaranteed 24 hours per day, 7 days per week access to a
healthcare professional.
o Experience in encouraging client behavior changes and crisis
management.
o Satisfaction of the client's needs through communication with
appropriate stakeholders.
o Internal quality assurance and quality information processes to
ensure consistent and appropriate care delivery.
Care Coordination
o Population Health Management - management of the healthcare needs
of populations for public health agencies, hospitals, health
plans, self-insured employers, and colleges and universities.
o Disease Management - management of the healthcare needs of
populations with chronic diseases such as asthma, coronary artery
disease, congestive heart failure and diabetes.
Our care coordination capabilities also include:
o Automated risk stratification of defined populations.
o Access to automated evidence based best practices for all
stakeholders.
o Integration of disease co-morbidities into a seamless plan of
care for those with complex health needs.
o Identification and integration with existing health management
systems, including technology and service integration, to avoid
duplication and omission of timely services.
24
o Providing access to information and support for all stakeholders
by traditional means, such as telephone, letter and fax, as well
as by technology-based means, such as email and electronic
alerts.
o Assisting clients to determine the best combination of service
and technology for their population management needs.
Our Customers
We currently serve approximately 48 customers. Our customers include
physician groups, hospitals, health plans, including plans providing Medicaid
and Medicare covered services, universities and colleges and agencies and
branches of the United States government.
During the fourth quarter of 2001 and first quarter of 2002, we entered
into strategic agreements with several large organizations, which we are
optimistic will have the ability to market our products and services to their
existing and new clients. We expect that upon full implementation of these
agreements, we will be able to offer our products to a larger client base.
Finally, we are cautiously optimistic that our sales and marketing
efforts will continue to increase our revenue through the fourth quarter of 2002
and beyond. And we are further cautiously optimistic that increased revenue in
the forthcoming periods will generate sufficient cash flow to fund our
operations, thus eliminating the need for additional financing activities.
Significant Transactions
On September 30, 2002, we entered into a license and maintenance
agreement with UICI, Inc., a company listed on the New York Stock Exchange.
Pursuant to the agreement, I-trax granted to UICI an exclusive license to
certain I-trax software, including MyFamilyMD(TM) and CarePrime(R), in the
student market and a non-exclusive license to such software for use by UICI for
its other businesses. I-trax also agreed to maintain the licensed software. The
agreement is valued at approximately $3,000,000.
The license agreement resulted from a relationship between I-trax and
UICI's wholly owned subsidiary, Student Resources, based in St. Petersburg,
Florida. Student Resources and I-trax entered the student health market in
second quarter of 2002 by offering colleges and universities a web-based
service, utilizing MyFamilyMD(TM) and CarePrime(R), to connect students to their
college or university health centers, providing them online access to secure and
confidential electronic appointment requests, lab results, prescription refill
requests and explanation of benefits. The solution enables students to build
their personal health record, utilize private and secure messaging and receive
targeted health education content, and complete required school health forms
online.
I-trax and Student Resources piloted the student health product at six
colleges and universities: Albany Medical College, Carnegie Mellon University,
Creighton University, Florida State University, Kent State University and
Medical College of Georgia. Together, these schools represent an enrolled
student population of more than 77,000.
On October 31, 2002, UICI and I-trax entered into a Joint Marketing
Agreement. Under this agreement, each party will, using its reasonable
discretion, market to its clients the other party's products and services. In
connection with the agreement, I-trax issues UICI a seven year warrant to
acquire up to 2,000,000 shares of common stock at $1.10 per share.
Corporate History Overview
I-trax was incorporated in the State of Delaware on September 15, 2000
at the direction of the Board of Directors of I-trax Health Management
Solutions, Inc. ("Health Management"), I-trax's then parent company. On February
5, 2001, I-trax became the holding company of Health Management at the closing
of reorganization under Delaware corporate law. The holding company
reorganization was described in greater detail in I-trax's registration
statement on Form S-4 (Registration Number 333-48862). At the effective time of
the reorganization, all of the stockholders of Health Management became the
stockholders of I-trax and Health Management became a wholly
25
owned subsidiary of I-trax. Further, all outstanding shares of Health Management
were converted into shares of I-trax in a non-taxable transaction. Health
Management no longer files reports with the Securities and Exchange Commission,
and the price for its common stock is no longer quoted on the Over-the-Counter
Bulletin Board. However, I-trax does file reports with the Securities and
Exchange Commission, and the price of its Common Stock is quoted on the
Over-the-Counter Bulletin Board under the symbol "IMTX." I-trax's shares are
represented by the same stock certificates that represented Health Management's
shares prior to the holding company reorganization.
The holding company structure has allowed us greater flexibility in our
operations and expansion and diversification plans, including in the acquisition
of iSummit Partners, LLC, doing business as "MyFamilyMD," on February 7, 2001
and WellComm Group, Inc. on February 6, 2002.
We acquired iSummit effective February 7, 2001 in an exchange
transaction pursuant to a Contribution and Exchange Agreement dated as of
September 22, 2000, as amended. After post closing adjustments, I-trax issued a
total of 2,903,409 shares of Common Stock to the owners of iSummit and the
owners contributed to I-trax all of the issued and outstanding ownership
interests in iSummit. Since February 7, 2001, iSummit has been a passive, wholly
owned entity of I-trax with certain intellectual property as its only assets.
On February 6, 2002, we acquired WellComm Group, Inc. WellComm is a
healthcare services company that offers a broad array of expertise including a
nurse contact center specializing in disease management, triage, health
information survey, and research services for the healthcare industry. For the
fiscal year ended December 31, 2001, WellComm recognized revenue of $5,287,702
and earnings before provision for income taxes of $327,159. For the fiscal year
ended December 31, 2000, WellComm recognized revenue of $979,142 and a loss of
$119,954.
To acquire WellComm, we issued 7,440,000 shares of common stock,
granted 560,000 options with a nominal exercise price and paid $2,175,056 in
cash. We also issued 80,000 shares to an employee for introducing us to
WellComm. The aggregate acquisition price was approximately $12,660,000. The
value of issued common stock and stock options was determined based on the
average closing price of our common stock immediately before and after we agreed
to and announced the acquisition.
Of the total purchase price, we allocated approximately $1,370,000 to
covenants not to compete, $3,680,000 to customer relationships, $290,000 to
acquired net assets and $7,320,000 to goodwill. We are amortizing covenants not
to compete on a straight-line basis over four years and customer relationships
over three years.
The WellComm acquisition was a two-step reorganization pursuant to a
Merger Agreement dated January 28, 2002 by and among us, WC Acquisition, Inc.,
our wholly owned subsidiary, WellComm, John Blazek and Carol Rehtmeyer, Ph.D.
The initial step of the reorganization transaction involved a merger of WC
Acquisition with and into WellComm, in which merger WellComm continued as the
surviving corporation. The second step of the reorganization transaction
involved a statutory merger of WellComm with and into us, in which merger we
continued as the surviving corporation. The parties to the Merger Agreement
intend to treat the initial step and the second step of the reorganization as
part of an integrated plan, such that the two steps constitute a single,
tax-free reorganization.
We also agreed to deliver to the WellComm stockholders additional
contingent merger consideration either in cash or, at the election of John
Blazek as a representative of the WellComm stockholders, in shares of common
stock. The additional contingent merger consideration will be equal to 10% of
revenues that may be generated by sales of new services to an existing WellComm
client during a 12-month period beginning on the date such new services begin to
be delivered. To date, I-trax has not been required to issue additional
contingent merger consideration.
We funded the acquisition of WellComm by selling a 6% convertible
senior debenture in the aggregate principal amount of $2,000,000 to Palladin
Opportunity Fund, LLC pursuant to a Purchase Agreement dated February 4, 2002.
Pursuant to the Purchase Agreement, we also issued Palladin a warrant to
purchase an aggregate of up to 1,538,461 shares of common stock at an exercise
price of $1.10 per share. The outstanding principal and any deferred interest
under the debenture are payable in full on or before February 3, 2004. Further,
outstanding principal and any deferred interest may be converted at any time at
the election of Palladin into common stock at an
initial conversion price of $1.00 per share. The initial conversion price is
subject to "reset" as of the dates that are 12 months and 18 months after the
issue date. With respect to each reset date, the conversion price will only be
reduced if the closing bid price for common stock, averaged during a period of
20 consecutive trading days ending on the date that immediately precedes the
applicable reset date, is less than the then applicable conversion price, in
which case, the reset conversion price will equal to this average.
Under the Purchase Agreement, Palladin also received an option to
purchase an additional 6% convertible senior debenture in the face amount of $1
million and received an additional warrant to purchase an aggregate of up to
769,230 shares of common stock. The terms of the optional debenture and warrant
will be substantially similar to those of the Debenture and the Warrant.
We registered all of the shares of common stock underlying the Palladin
debenture and warrant on a registration statement on Form SB-2. The registration
statement is now effective.
Results of Operations
For the two years ended December 31, 2001, we did not generate
significant sales. During the period, we expended a predominant portion of our
resources to build and deliver eImmune(R) and C-Trax(TM) to Walter Reed Army
Medical Center in accordance with prior contractual obligations. Further, during
this period, we changed our focus from developing custom software applications
for few clients to:
(1) commercializing existing software applications including
eImmune(R), AsthmaWatch(R) and C-Trax(TM);
(2) web-enabling new applications including MyFamilyMD(TM),
CarePrime(R) and Health-e-Coordinator(TM); and
(3) marketing these products as a total population health
management solution.
This process began in May 2000 when we brought together our current
management team. The process continued in 2001 and in the first quarter of 2002,
when, in response to demand in the marketplace, we acquired WellComm to
supplement our technology solutions with disease management services. We now
focus our marketing efforts on three main markets: (1) college and university
student health services; (2) the Department of Defense/public health sector; and
(3) health plans and self-insured employers.
The results of operations presented in this report reflect the results
of operations of WellComm, which for accounting purposes, we acquired effective
as of February 1, 2002.
Three Months Ended September 30, 2002 Compared To Three Months Ended
September 30, 2001
Total revenues for the three months ended September 30, 2002 were
$771,500 representing an increase of over 500% from $127,726 for the three
months ended September 30, 2001. The total revenues for three months ended
September 30, 2002 were comprised of $405,160 of service revenues derived from
care services and care coordination contracts, which we assumed effective
February 1, 2002 as a result of the WellComm acquisition and $366,340 of
technology revenues derived from the sale of licenses of eImmune(R),
AsthmaWatch(R) and Health-e-Coordinator(TM). For the remainder of this year and
beyond, we expect to generate revenues from (1) licensing our software
applications on a subscription basis to customers that rely on their own
capabilities to deliver disease management service, (2) delivery of care
services, and (3) delivery of complete population health and disease management
solutions.
Cost of revenue amounted to $324,923 for the three months ended
September 30, 2002, an increase of $278,816 from $46,107 for the three months
ended September 30, 2001. The increase is directly attributable to the personnel
costs required to service our care services and care coordination contracts. We
expect that in future periods our cost of sales will increase or decrease in
proportion to volume of business. This is because we expect to derive a
significant portion of our future revenue from care services and care
coordination contracts, which require human involvement proportionate to the
expected size of the contract.
27
Research and development costs amounted to $97,400 for the three months
ended September 30, 2002 as compared to $115,831 for the three months ended
September 30, 2001, a decrease of 16%. We expect to continue to spend funds on
adding functionality to our products especially to MyFamilyMD(TM) by adding
MedWizards(R), on CarePrime(TM), which interacts with MyFamilyMD(TM) and its
MedWizards(R), and on Health-e-Coordinator(TM) by adding additional disease
capabilities. All product development costs in this quarter and 2001 were
expensed.
General and administrative expenses decreased by 3% from $1,356,426 for
the three months ended September 30, 2001 to $1,313,140 for the three months
ended September 30, 2002, even though the expenses for the quarter ended
September 30, 2002 include approximately $343,000 of expenses assumed by us as a
result of our acquisition of WellComm. The net decrease in expenses is primarily
attributable to the continued personnel reductions and stringent budgetary
controls implemented in the fourth quarter of 2001 and a $40,000 expense
reduction for marking to market certain options granted to key executives. We do
not anticipate increasing spending during the balance of 2002. We believe that
with the addition of WellComm's personnel, we have the resources to handle
increased revenue with minimal incremental costs.
Depreciation and amortization expense amounted to $349,714 for the
three months ended September 30, 2002 as compared to $179,517 for the three
months ended September 30, 2001. The increase is primarily attributable to the
amortization of intangible assets recorded as a result of the WellComm
acquisition.
Marketing and advertising expenses were $39,413 for the three months
ended September 30, 2002 as compared to $35,229 for the three months ended
September 30, 2001. The increase of $4,184 was caused by an increase in investor
relations spending and increased marketing efforts to promote our disease
management solutions following the WellComm acquisition.
Interest expense for the three months ended September 30, 2002 amounted
to $287,965 increasing by $223,928 or 350% from $64,037 for the three months
ended September 30, 2001. For the three-month period ended September 30, 2002,
interest expense includes the amortization and accretion on items related to the
$2,000,000 Debenture as follows: $118,581 associated with the beneficial
conversion feature; $111,284 associated with the value of the warrants; and
$40,270 associated with the option liability.
Our net loss amounted to $1,695,631for the quarter ended September 30,
2002 as compared to a loss of $1,653,487 for the three months ended September
30, 2001, a change of approximately 3%.
Nine months ended September 30, 2002 compared to nine months ended
September 30, 2001
Total revenues for the nine months ended September 30, 2002 were
$1,776,517, an increase of $1,188,381 or 202% from 588,136 for the nine months
ended September 30, 2001. The total revenues for the nine months ended September
30, 2002 were comprised of $1,230,677 in service revenues derived from care
services and care coordination contracts, which we assumed effective February 1,
2002 as a result of the WellComm acquisition, and $545,840 of technology
revenues derived from the sale of a software licenses to eImmune(R),
AsthmaWatch(R), and Health-e-Coordinator(TM). For the remainder of this year and
beyond, we expect to generate revenues from (1) licensing our software
applications on a subscription basis to customers that rely on their own
capabilities to deliver disease management service, (2) delivery of care
services, and (3) delivery of complete population health and disease management
solutions.
Cost of revenue amounted to $952,241 for the nine months ended
September 30, 2002, an increase of 105% from $82,231 for the nine months ended
September 30, 2001. The increase is directly attributable to the personnel costs
required to staff the care services and care coordination contracts, which we
assumed on February 1, 2002. We expect that our cost of sales will fluctuate in
future periods because technology-only contracts yield a low cost of sales
whereas care services and care coordination contracts are labor intensive. We
also expect, based on our current projections, that we will derive a significant
portion of our future revenue from application service provider contracts with
self-insured employers and health plans.
Research and development costs amounted to $320,220 for the nine months
ended September 30, 2002 as compared to $466,154 for the nine months ended
September 30, 2001, a decrease of 31%. The decrease was
28
attributable in significant part to a development subcontract for a software
component during the nine months ended September 30, 2001 because we did not
have the work force to complete the build-out. We expect to continue to spend
funds on adding functionality to our products especially to MyFamilyMD(TM) by
adding MedWizards(R), on CarePrime(TM), which interacts with MyFamilyMD(TM) and
its MedWizards(R), and on Health-e-Coordinator(TM) by adding additional disease
capabilities. All product development costs for the nine months ended September
30, 2002 and 2001 were expensed.
General and administrative expenses decreased 4% from $4,452,175 for
the nine months ended September 30, 2001 to $4,254,448 for the nine months ended
September 30, 2002, which includes approximately $850,000 of expenses assumed by
us as a result of our acquisition of WellComm. The net decrease is primarily
attributable to personnel reductions and stringent budgetary controls
implemented in the fourth quarter of 2001 and a $250,000 expense reduction for
marking to market certain options granted to key executives. We do not
anticipate increasing spending in 2002. We believe that with the addition of
WellComm's personnel, we have the resources to handle increased revenue with
minimal incremental costs.
Acquired in process research and development amounted to $1,642,860 for
the nine months ended September 30, 2001. This amount was directly attributable
to the acquisition of iSummit on February 7, 2001. An independent third-party
valuation company derived this amount after a detailed analysis of all the
underlying facts.
Depreciation and amortization expense amounted to $1,197,236 for the
nine months ended September 30, 2002 as compared to $461,334 for the nine months
ended September 30, 2001. The increase is primarily attributable to the
amortization in connection with the intangible assets recorded as a result of
the WellComm acquisition.
Marketing and advertising expenses were $366,505 for the nine months
ended September 30, 2002 as compared to $140,595 for the nine months ended
September 30, 2001. The increase of 160% was caused by an increase in investor
relations spending and increased marketing efforts to promote our disease
management solutions following the WellComm acquisition.
Interest expense for the nine months ended September 30, 2002 amounted
to $778,935 increasing by $285,217 or 58% from $493,718 for the nine months
ended September 30, 2001. For the nine-month period ended September 30, 2002
interest expense includes the amortization and accretion on items related to the
$2,000,000 debenture as follows: $316,217 associated with the beneficial
conversion feature; $296,757 associated with the value of the warrants; and
$107,385 associated with the option liability.
Our net loss amounted to $6,238,604 for the nine months ended September
30, 2002 as compared to a loss of $7,980,046 for the nine months ended September
30, 2001, a decrease of 22%. For both periods, we had significant transaction
related charges. For the nine months ended September 30, 2001, we incurred a
one-time charge of $1,642,860 on account of acquired in process research and
development in the iSummit acquisition and $869,168 for certain securities
issuances and conversion costs.
Liquidity and Capital Resources
Working Capital Deficiency
We ended the quarter with approximately $2,500,000 in cash on our
balance sheet. As of September 30, 2002, we had a working capital deficiency of
$3,148,237. During the quarter ended September 30, 2002, we were advanced, by
certain executives and certain relatives of such executives a total of $700,000.
These advances bear interest at a rate of 8% per annum.
We continue to make progress towards producing positive cash flow from
operations and we expect, although no assurances exist, that we will reach
operating cash flow break even in 2003.
Sources and Uses of Cash
Despite our negative cash flows from operations, which amounted to
approximately $1,103,724 for the nine months ended September 30, 2002 and
$3,547,648 for the nine months ended September 30, 2001, we have been
29
able to secure funds to support our operations. During the nine months ended
September 30, 2002, such funds were received by selling equity securities and a
debenture, which aggregated approximately $4,000,000. Of the total $4,000,000
received, approximately $2,100,000 was used to acquire WellComm and the
remainder to fund operations. Additionally, we received $2,500,000 pursuant to
our agreement with UICI, which represents a deposit on the delivery of a license
for MyFamilyMD(TM), CarePrime(R) and Health-e-Coordinator to UICI. For the nine
months ended September 30, 2001, we received approximately $375,000 from our
Chief Executive Officer, Frank A. Martin, Gary Reiss, a Member of our Office of
the President, and certain other senior officers. Additionally, during the nine
months ended September 30, 2001, we borrowed approximately $963,000 of which
$270,000 was subsequently converted into equity. Lastly, the Company sold common
stock yielding net proceeds of $1,100,000, which was also used to fund
operations.
As of September 30, 2002, our current liabilities were approximately
$6,014,992, of which approximately $700,000 is due to Messrs. Martin and Reiss
for which no repayment terms have been established. We do not expect to repay
management loans until we begin to generate cash flows from operations and
obtain the consent of Palladin pursuant to the terms of the Palladin's debenture
and related documents. The remainder of current liabilities of approximately
$5,314,992 is made up, primarily, of trade payables of approximately $936,723,
accrued expenses of approximately $582,497, $300,000 credit line payable, which
was assumed with the acquisition of WellComm, and approximately $2,816,893 of
deposits on future contracts. We have good relationships with all of our
vendors.
Our long-term debt is made up of 6% convertible senior debenture in the
aggregate principal amount of $2,000,000 held by Palladin, for which principal
and deferred interest is not due until February 3, 2004, and $692,809 held by a
group of investors led by Psilos Group Partners, L.P., which includes Nantucket
Healthcare Ventures I, L.P., a venture fund managed by Mr. Martin for which
principal and interest is not due until March 2006.
Related Party Transactions
During the three months ended September 30, 2002, certain members of
our Office of the President advanced funds to us for working capital. Such
advances amounted to $350,000, are due in 90 days and bear interest at a rate of
8% per annum. Additionally, in September 2002, a relative of a member of our
Office of the President advanced us $350,000, which we agreed to repay within 90
days with interest at a rate of 8% per annum.
30
As of September 30, 2002, we were advanced a total of $1,374,598 by
related parties. The following table presents all amount owed by us to related
parties and all related activity.
Balance at January 1, 2002 $ 739,598
Less: repayments during the quarter ended March 31, 2002 (50,000)
---------------
Balance at March 31, 2002 689,598
Less: repayment during the quarter June 30, 2002 (15,000)
---------------
Balance at June 30, 2002 674,598
Plus: advances made during the quarter ended September 30, 2002 700,000
---------------
Balance at September 30, 2002 $ 1,374,598
===============
In connection with signing of their employment agreements, Mr. Martin
and Mr. Reiss purchased from us a total of 500,000 shares of common stock at
price of $2 per share. The shares were purchased pursuant to a subscriptions
agreement and a note and pledge agreement. The note was for a principal amount
of $999,500 (net of a $500 bonus), bearing interest at approximately 6% per
annum, and provided that the unpaid principal amount was due in five consecutive
annual installments beginning on December 29, 2001. Effective during the second
quarter 2001 and with Board approval, the note and pledge agreements were
canceled and the share were returned.
In April 2001, these executive officers received an aggregate of
700,000 incentive stock options pursuant to the 2001 Equity Compensation Plan.
Pursuant to FASB Interpretation 44, variable accounting at the end of each
interim period must be applied to these options since they are deemed a
re-pricing of the canceled note and pledge agreements. Accordingly, since the
Common Stock fair market value was $1.25 at December 31, 2001 and these options
are exercisable at $0.55, we recorded the intrinsic value of $0.70 per option or
$350,000 of compensation expense. We will continue to mark-to-market these
options at the end of each respective interim period until they are exercised.
For the nine months ended September 30, 2002, we marked-to-market these options
and recorded a reduction in compensation expense of $250,000.
Critical Accounting Policies
Legal Contingencies
We are currently involved in a certain threatened litigation. As
discussed in Note 13 of our consolidated financial statements, as of December
31, 2001, we have not accrued a loss contingency because the plaintiff's success
in this matter is not deemed probable nor could I-trax reasonably estimate any
adverse effect based on the current facts. We do not believe this proceeding
will have a material adverse effect on our consolidated financial position. It
is possible, however, that future results of operations for any particular
quarterly or annual period could be negatively and materially affected by
changes in our assumptions, of the effectiveness of our strategies, related to
these proceedings.
Impairment of Goodwill
We operate in an industry that is rapidly evolving and extremely
competitive. It is reasonably possible that our accounting estimates with
respect to the useful life and ultimate recoverability of our carrying basis of
goodwill and intangible assets could change in the near term and that the effect
of such changes on the financial statements could be material. At September 30
2002, the recorded amount of carrying basis including goodwill is not impaired,
although we cannot assure that our future results will confirm this assessment,
or that a significant write-down or write-off of goodwill or intangible assets
will not be required in the future.
31
Revenue Recognition
We derive our revenue pursuant to different type contracts, including
perpetual software licenses, subscription licenses and custom development
services, all of which may also include support services revenue such as
licensed software maintenance, training, consulting and web hosting
arrangements. As described below, significant management judgments and estimates
must be made and used in connection with the revenue recognized in any
accounting period. Material differences may result in the amount and timing of
our revenue for any period if our management made different judgments or
utilized different estimates.
We license our software products for a specific term or on a perpetual
basis. Most of our license contracts also require maintenance and support. We
apply the provisions of Statement of Position 97-2, "Software Revenue
Recognition," as amended by Statement of Position 98-9 "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions" to all
transactions involving the sale of software products and hardware transactions
where the software is not incidental. For hardware transactions where software
is not incidental, we do not unbundle the fee and we do not apply separate
accounting guidance to the hardware and software elements. For hardware
transactions where no software is involved we apply the provisions of Staff
Accounting Bulletin 101 "Revenue Recognition." In addition, we apply the
provisions of Emerging Issues Task Force Issue No. 00-03 "Application of AICPA
Statement of Position 97-2 to Arrangements that Include the Right to Use
Software Stored on Another Entity's Hardware" to our hosted software service
transactions.
We recognize revenue from the sale of software licenses when persuasive
evidence of an arrangement exists, the product has been delivered, the fee is
fixed and determinable and collection of the resulting receivable is reasonably
assured. Delivery generally occurs when product is delivered to a common
carrier.
At the time of the transaction, we assess whether the fee associated
with our revenue transactions is fixed and determinable and whether or not
collection is reasonably assured. We assess whether the fee is fixed and
determinable based on the payment terms associated with the transaction. If a
significant portion of a fee is due after our normal payment terms, which are 30
to 90 days from invoice date, we account for the fee as not being fixed and
determinable. In these cases, we recognize revenue as the fees become due.
We assess collection based on a number of factors, including past
transaction history with the customer and the credit-worthiness of the customer.
We do not request collateral from our customers. If we determine that collection
of a fee is not reasonably assured, we defer the fee and recognize revenue at
the time collection becomes reasonably assured, which is generally upon receipt
of cash.
For arrangements with multiple obligations (for example, undelivered
maintenance and support), we allocate revenue to each component of the
arrangement using the residual value method based on the fair value of the
undelivered elements. This means that we defer revenue from the arrangement fee
equivalent to the fair value of the undelivered elements.
We recognize revenue for maintenance services ratably over the contract
term. Our training and consulting services are billed based on hourly rates, and
we generally recognize revenue as these services are performed. However, at the
time of entering into a transaction, we assess whether or not any services
included within the arrangement require us to perform significant work either to
alter the underlying software or to build additional complex interfaces so that
the software performs as the customer requests. If these services are included
as part of an arrangement, we recognize the entire fee using the percentage of
completion method. We estimate the percentage of completion based on our
estimate of the total costs estimated to complete the project as a percentage of
the costs incurred to date and the estimated costs to complete.
Although as of the date of these financials, the Company has not
entered into any risk-based contracts, the Company expects that in the very near
future it will do so. These types of contracts are generally for terms of three
to five years with provisions subsequent to renewal and typically provide that a
percentage of the Company's fees may be refundable ("performance based") based
on achieving a targeted percentage reduction in the customer's healthcare costs.
32
Material Equity Transactions
For the nine months ended September 30, 2002, we executed equity
transactions with related and unrelated parties in connection with the raising
funds for working capital along with issuing securities in lieu of compensation
for services received. We believe that we have valued all such transaction
pursuant to the various accounting rules and that they ultimately represent the
economic substance of each transaction.
Item 3. Controls and Procedures
Within the 90-day period prior to the filing of this report, we carried
out an evaluation under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer of the effectiveness of our
disclosure controls and procedures. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are effective to ensure that information we are required
to disclose in reports filed or submitted under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. Subsequent to
the date of this evaluation, there were no significant changes in our internal
controls or in other factors that could significantly affect the disclosure
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any material pending legal proceeding.
Litigation threatened against Health Management is described in Note
10--Commitments and Contingencies to I-trax's financial statements above.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
We did not default upon any senior securities during the quarter ended
September 30, 2002.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Consulting Agreement dated as of July 1, 2002, as amended, between
I-trax, Inc. and William S. Wheeler.
10.2 License and Maintenance Agreement dated as of September 30, 2002,
between I-trax, Inc. and UICI, Inc. (Incorporated by reference to
Exhibit 10.1 to I-trax, Inc.'s Current Report on Form 8-k for filed on
October 8, 2002.)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
We filed a current report on Form 8-K with the Securities and Exchange
Commission on October 8, 2002, reporting the signing of a License and
Maintenance Agreement with UICI, Inc. on September 30, 2002.
34
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
I-TRAX, INC.
Date: May 13, 2003 By: /s/ Frank A. Martin
--------------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
35
CERTIFICATION
I, Frank A. Martin, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of I-trax, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Frank A. Martin
-------------------
Frank A. Martin
Chief Executive Officer
36
CERTIFICATION
I, Anthony Tomaro, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of I-trax, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Anthony Tomaro
------------------
Anthony Tomaro, CPA
Chief Financial Officer
37