UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: March 31, 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
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(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 May 13, 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]
INDEX
Page No.
PART I. FINANCIAL INFORMATION......................................................................3
Item 1. Financial Statements .............................................................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................19
PART II. OTHER INFORMATION........................................................................27
Item 1. Legal Proceedings................................................................27
Item 2. Changes in Securities............................................................27
Item 3. Defaults upon Senior Securities..................................................28
Item 4. Submission of Matters to a Vote of Security Holders..............................28
Item 5. Other Information................................................................28
Item 6. Exhibits and Reports on Form 8-K.................................................28
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
I-TRAX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Page Number
Balance sheets at March 31, 2002 and December 31, 2001 4
Statements of operations for the three months ended March 31, 2002 and 2001 5
Statement of stockholders' equity for the three months ended March 31, 2002 6
Statements of cash flows for the three months ended March 31, 2002 and 2001 7
Notes to financial statements 9
3
I-TRAX, INC. AND SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
ASSETS
March 31, December 31,
2002 2001
----------------- -----------------
Current assets:
Cash $ 754,902 $1,029,208
Accounts receivables, net 389,782 --
Prepaid expenses 215,865 99,245
Other current assets 17,494 1,915
Note receivable 34,937 72,437
----------------- -----------------
Total current assets 1,412,980 1,202,805
----------------- -----------------
Office equipment and furniture, net 513,024 279,635
Goodwill 9,536,001 2,224,726
Intangible assets, net 4,788,421 --
Debt issuance costs, net 400,226 --
Security deposits 50,412 66,896
----------------- -----------------
Total assets 16,701,064 $3,774,062
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 685,813 $ 619,612
Accrued expenses 303,604 276,750
Credit line payable 175,000 --
Due to officers 689,598 739,598
Capital lease payable 81,451 42,878
Deferred revenue 217,896 148,830
----------------- -----------------
Total current liabilities 2,153,362 1,827,668
----------------- -----------------
Capital lease obligation, net of current portion 75,387 55,901
Promissory notes and debenture payable, net of discount 1,447,487 312,327
----------------- -----------------
Total liabilities 3,676,236 2,195,896
----------------- -----------------
Commitments and contingencies (Note 8)
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,
46,328,982 and 34,939,466 issued and outstanding, respectively 46,328 34,939
Additional paid in capital 37,374,849 22,964,778
Accumulated deficit (24,396,349) (21,421,551)
----------------- -----------------
Total stockholders' equity 13,024,828 1,578,166
----------------- -----------------
Total liabilities and stockholders' equity $16,701,064 $ 3,774,062
================= =================
See accompanying notes to financial statements (unaudited).
4
I-TRAX, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
Three months Three months
ended ended
March 31, March 31,
2002 2001
----------------- -----------------
Revenue $ 406,357 $ 189,940
----------------- -----------------
Operating expenses:
Cost of revenue 262,165 15,546
General and administrative 1,401,818 1,605,273
Research and development 119,500 227,264
Acquired in process research and development -- 1,642,860
Depreciation and amortization 219,987 102,300
Marketing and advertising 170,456 66,137
----------------- -----------------
Total operating expenses 2,173,926 3,659,380
----------------- -----------------
Operating loss (1,767,569) (3,469,440)
----------------- -----------------
Other income (expenses):
Miscellaneous income -- 6,636
Debt issuance costs (36,384) --
Interest income -- 2,161
Interest expense (1,170,845) (256,582)
----------------- -----------------
Total other income (expenses) (1,207,229) (247,785)
----------------- -----------------
(Loss) before provision for income taxes (2,974,798) (3,717,225)
----------------- -----------------
Provision for income taxes -- --
----------------- -----------------
Net (loss) $ (2,974,798) $ (3,717,225)
================= =================
Loss per common share:
Basic and diluted $ (.07) $ (.17)
================= =================
Weighted average number of shares outstanding: 41,595,896 21,429,040
================= =================
See accompanying notes to financial statements (unaudited).
5
I-TRAX, INC. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
Total
Common Stock Additional Stockholders'
----------------------------- Paid-in Accumulated Equity
Shares Amount Capital Deficit (Deficiency)
------------- ------------- ---------------- -------------- ---------------
Balances at December 31, 2001 34,939,496 $ 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 -- -- 2,000,000 -- 2,000,000
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 111,000 111 391,299 -- 391,410
Sale of Common Stock, net of $7,150 in costs 2,010,000 2,010 1,470,840 -- 1,472,850
Issuance of Common Stock and warrants as
consideration for services rendered 75,000 75 157,125 -- 157,200
Issuance of Common Stock in connection with
exercise of warrants 1,753,486 1,753 (1,753) -- --
Mark-to-market of options granted to
officers in lieu of canceling note and
pledge agreement during 2001 -- -- (80,000) -- (80,000)
Net loss for the three months ended March
31, 2002 -- -- -- (2,974,798) (2,974,798)
------------- ------------- ---------------- -------------- ---------------
Balances at March 31, 2002 46,328,982 $ 46,328 $ 37,374,849 $ (24,396,349) $ 13,024,828
============= ============= ================ ============== ===============
See accompanying notes to financial statements (unaudited).
I-TRAX, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
Three months Three months
ended ended
March 31, 2002 March 31, 2001
------------------ -----------------
Operating activities:
Net loss $(2,974,798) $(3,717,225)
Adjustments to reconcile net loss to net cash used for operating activities:
Accretion of discount on notes payable charged to interest expense 103,361 210,331
Beneficial conversion value of debenture 1,031,800 --
Depreciation and amortization 256,372 140,307
Issuance of various securities for services 145,344 14,001
Write-off of in progress research and development acquired
in iSummit Partners, LLC acquisition -- 1,642,860
Decrease (increase) in:
Accounts receivable 87,965 170,493
Prepaid expenses (83,468) 14,419
Other current assets (15,579) (11,428)
(Decrease) increase in:
Accounts payable 2,708 114,896
Accrued expenses (165,939) 374,197
Deferred revenue 69,066 (188,142)
------------------ -----------------
Net cash used for operating activities (1,543,168) (1,235,291)
------------------ -----------------
Investing activities:
Proceeds from partial repayment of note receivable 37,500 --
Deposit on acquisition of intellectual property -- (100,000)
Proceeds from partial release of security deposit 16,484 13,387
Net cash to acquire WellComm Group, Inc. (2,045,065) --
------------------ -----------------
Net cash used for investing activities (1,991,081) (86,613)
------------------ -----------------
Financing activities:
Principal payments on capital leases (12,907) (11,071)
Proceeds from issuance of promissory notes -- 617,809
Repayment to related party (50,000) --
Proceeds from related parties -- 475,000
Proceeds from sale of Common Stock 1,472,850 120,000
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 3,259,943 1,201,738
------------------ -----------------
Net (decrease) increase in cash (274,306) (120,166)
Cash and cash equivalents at beginning of period 1,029,208 132,806
------------------ -----------------
Cash and cash equivalents at end of period $ 754,902 $ 12,640
================== =================
Supplemental disclosure of non-cash flow information:
Cash paid during the period for:
Interest $ -- $ --
================== =================
Income taxes $ -- $ --
================== =================
(Continued on following page.)
I-TRAX, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(Continued from previous page.)
Three months Three months
ended ended
March 31, 2002 March 31, 2001
------------------ -----------------
Schedule of non-cash investing activities:
Issuance of 3,368,000 shares of Common Stock in connection
with acquisition of MyFamilyMD $ -- $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 $ 391,410 $ --
================== =================
See accompanying notes to financial statements (unaudited).
8
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE 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 the 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 March 31, 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. It 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 3. The Company conducts its operation
through Health Management and WellComm Group, LLC.
NOTE 2--INTERIM RESULTS AND BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As of March 31, 2002, the Company's
accumulated deficit was $24,396,349. Additionally, as of March 31, 2002, the
Company had a working capital deficiency of $740,382. In addition, 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.
As of March 31, 2002 and through the date of the filing of this report, the
Company has been able to secure financing to support its working capital needs.
Such support has been received from unrelated parties. In the near future,
additional cash will be required to enable the Company to continue the
development of its core products, liquidate its short-term liabilities and
continue to implement its marketing strategy in its markets.
Management is optimistic that it will be able to raise additional capital if
necessary. There can be no assurance, however, that it will be able to do so. In
the fourth quarter of 2001 and the first quarter of 2002, the Company executed
several sales contracts and two joint marketing agreements with organizations
that have the ability to market the Company's products and services to their
existing clients. The Company expects that these key agreements will generate
revenue in 2002 and that in the second half of 2002 the Company will have
sufficient cash flow to fund its cash flow deficits.
Regardless of these positive events, the Company will require additional capital
to fund its operations until these agreements and contracts materialize into
cash. These facts raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include adjustments
relating to the recoverability and realization of assets and classification of
liabilities that might be necessary should the Company be unable to continue in
operation.
9
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2--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
March 31, 2002 and the results of the operations and cash flows for the three
months ended March 31, 2002. The results for the three months ended March 31,
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 March 31,
2002 and 2001, 11,930,245 and 5,092,727, respectively, of options, warrants and
convertible 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 3--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, by issuing 7,440,000 shares of Common Stock,
granting 560,000 options with a nominal exercise price and paying $2,175,056 in
cash. In addition, the Company also issued 80,000 shares to an employee for
introducing the Company to WellComm. The aggregate acquisition price amounted to
approximately $12,660,000. The value of the common stock issued and stock
options granted was determined based on the average market price of the
Company's common stock immediately before and after the acquisition were agreed
to and announced. The WellComm acquisition was a two-step reorganization
pursuant to the Merger Agreement by and among the Company, WC Acquisition, Inc.,
an Illinois corporation and a wholly owned subsidiary of the Company
("Acquisition"), WellComm, and WellComm's two main shareholders. The initial
step of the reorganization transaction involved a merger of 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 the Company, in which merger the Company continued as the
surviving corporation. For accounting purposes, the effective date of the
acquisition is January 31, 2002.
The Company trax also agreed to deliver to the WellComm stockholders additional
contingent merger consideration either in cash or in 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.
Such new services must commence by February 5, 2003, but have not been commenced
as of March 31, 2002. Any additional shares distributed will be recognized as
compensation expense in the period earned.
10
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3--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 complete its portfolio of product
offerings by combining technology and service. The Company also expects to
reduce costs through economies of scale.
The financial statements include the operations of WellComm from February 1,
2002 (the effective date of acquisition) 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 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,
$390,000 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 ended
March 31
2002 2001
-------------- --------------
Sales $ 660,136 $ 868,145
============== ==============
Expenses $ 3,657,917 $ 4,599,045
============== ==============
Net loss $(2,997,781) $(3,697,900)
============== ==============
Earnings per share:
Basic and Diluted $ (.06) $ (.12)
============== ==============
Weighted average shares outstanding:
Basic and Diluted 45,180,951 29,429,040
============== ==============
11
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4--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 its 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, 1,289,184 of the total 4,222,500 shares were
canceled because of unexpected costs the Company incurred in building out the
technology it had acquired from iSummit. iSummit is a passive wholly owned
entity of the Company, which holds certain intellectual property of the Company
and it does not engage in any operations. For accounting purposes, the Company
has reversed 464,592 of the total shares surrendered with a recorded value of
$724,764, since the remaining 854,500 shares were contingently issuable upon
meeting certain revenue targets, which were missed and therefore not recorded.
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 months ended March 31, 2001 as if the acquisition was consummated
at January 1, 2001.
Total revenue $ 189,940
===============
Total expenses $ 3,957,165
===============
Net loss $(3,767,225)
===============
Pro forma basic and diluted net loss per share (.16)
===============
Weighted average number of shares outstanding 23,113,040
===============
NOTE 5--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. Sums outstanding under the
line of credit bear interest at .5% over the National Prime Rate, as published
by the Wall Street Journal (4.75% at December 31, 2001), and are payable
monthly. The line of credit expires in August 2002 and it is collateralized by
all assets of WellComm. As of March 31, 2002, there was $175,000 outstanding
against this line of credit.
12
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6--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 $.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 quarter ended March
31, 2002 and the Company issued an aggregate 1,753,486 shares of Common Stock
(net of exercise price).
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 expenses over the
five-year term of the underlying promissory notes. For the three months ended
March 31, 2002 and 2001, the amount accreted to interest expense was $22,677 and
$11,239, respectively.
NOTE 7--CONVERTIBLE DEBENTURE
The Company funded the cash portion of the acquisition price of WellComm 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 deferred interest under the Debenture are payable
in full on or before February 3, 2004. Palladin can also convert the outstanding
principal and any deferred 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 million
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 agreed to register all of the shares of Common Stock
underlying the Debenture and the Warrant on a registration statement.
13
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7--CONVERTIBLE DEBENTURE (cont'd)
The Company valued the Warrant at $968,200 using the Black-Scholes pricing
model, thereby allocating a portion of the proceeds from the debt to the Warrant
using the relevant fair value of the debt and warrants to the actual proceeds
from the Debenture. The Company recorded $968,200 as a discount to the Debenture
and this amount will be accreted to interest expense over the life of the
Debenture. The Company also recorded $1,031,800 charge to interest expense for
the beneficial conversion value of the Debenture since the Debenture was
convertible immediately upon issuance. The beneficial conversion value
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). 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 200,0000 at $1.00 per share to an unrelated party. These
costs will be amortized over the life of the Debenture. For the three months
ended March 31, 2000, amortization expense amounted to $16,384.
NOTE 8--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 is 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 March 31, 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.
14
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9--STOCKHOLDERS' EQUITY
Equity Compensation Plans and Non-Plan Stock Options
The Company has two equity compensation plans adopted in 2000 and 2001. The
purpose of the plans is to provide the opportunity to 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.
There are 3,000,000 shares of Common Stock authorized under the 2000 plan and
6,000,000 shares of Common Stock authorized under the 2001 plan. The number of
available shares subject to 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 (3%) of the shares of Common Stock then outstanding and (b)
1,000,000 shares. The 2002 increase raised the number of shares available under
the 2001 plan 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 shares under the 2000 plan
and 400,000 shares and under the 2001 plan.
2000 Plan Grants
Through March 31, 2002, the Board has granted an aggregate of 2,617,223 options,
with exercise prices ranging 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.
2001 Plan Grants
Through March 31, 2002, the Board has granted an aggregate of 3,545,132 options
under 2001 plan. During the quarter ended March 31, 2002, the Company granted of
979,500 options to employees and a director. Exercise prices range from $.55 to
$1.25 (depending on fair market value of the stock on the date of grant).
Non-Plan Stock Option Grants
Through March 31, 2002, the Company has granted an aggregate of 855,000 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). No such grants were made during the quarter ended March 31, 2002.
15
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9--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 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. 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 months
ended March 31, 2002, the Company marked-to-market these options and recorded a
reduction in compensation expense of $80,000.
During the quarter ended March 31, 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 quarter ended March 31,
2002, the Company recorded a charge to earnings of $74,700 as an investor
relations expense for the valuing of these warrants.
During the quarter ended March 31, 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.
Pursuant to a private placement commenced in February 2002, the Company sold
1,900,000 shares through March 31, 2002, yielding proceeds of $1,425,000.
In connection with facilitating the transaction with Palladin as discussed in
Note 7, 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.
16
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS
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 prepared preliminary transition
impairment analysis as required by SFAS NO. 142 and it does not appear that an
impairment of recorded goodwill exists.
The changes in the carrying amount of goodwill for the three months March 31,
2002, is as follows:
Total
Balance as of January 1, 2002 $2,224,726
Goodwill acquired during the quarter 7,311,275
Impairment losses --
---------------
Balance as of March 31, 2002 $9,536,001
===============
The components of identifiable intangible assets, which are included as a
separate line item on the consolidated balance sheet, are as follow:
As of March 31, 2002
------------------------------------
Gross Carrying Accumulated
Amount Amortization
---------------- ----------------
Amortized intangible assets:
Non-compete covenants 1,370,000 (57,084)
Customer relationships 3,586,707 (102,270)
---------------- ----------------
Total $ 4,956,707 $ (159,354)
================ ================
Amortization expense for the three months ended March 31, 2002 was $168,086.
Estimated amortization expense for the remainder of fiscal 2002 and the five
succeeding years is $1,486,584, $1,604,676 and $1,604,676, $292,485 and 0,
respectively.
Pro forma net loss for the three months ended March 31, 2001
Amount Per share
Reported net loss $(3,717,225) $ (.17)
Add back goodwill amortization 102,300 .01
-------------- -------------
Adjusted net loss $(3,614,925) $ (.16)
============== =============
17
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10--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
is not expected to have a material impact on the financial statements of the
Company.
NOTE 11--SUBSEQUENT EVENT
In April and May 2002, the Company sold in a private placement an aggregate of
760,833 shares of Common Stock for $570,625 pursuant to a private placement
commenced in February 2002.
18
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 upon
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 continue as a going concern and our
ability to execute contracts for disease management services and software
technology.
Unaudited results of operations for the three-month period ended March
31, 2002 are compared to the unaudited results of operations for the comparable
period ended March 31, 2001. Results of operations are based on the historical
financial information available 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. As of March 31, 2002, our working capital
deficiency was $740,382. During the past two years, cash flow deficits from
operations have amounted to approximately $400,000 per month. Through March 31,
2002 and the date of this report, we has been able to finance these deficits.
Most recently, we secured financing from unrelated parties, and in the past,
from our Chief Executive Officer, a Member of our Office of the President and
other employees. In the near future, additional cash will be required to 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 also to fund cash flow deficits; however, there can
be no assurance that we will be able to do so.
During the fourth quarter of 2001 and first quarter of 2002, we entered
into strategic marketing agreements with organizations that have the ability to
market our products and services to their existing clients. We expects that
these key agreements will generate revenue in 2002 and that in the second half
of 2002 we will have sufficient cash flow to fund our cash flow deficits.
Nonetheless, we may require additional funding to fund our cash flow deficits
until then. The financial statements do not include adjustments relating to the
recoverability and realization of assets and classification of liabilities that
might be necessary should we be unable to continue operations.
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 pursuant to Section 251(g) of Delaware General Corporation
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 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 I-trax greater flexibility in
its 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.
19
I-trax acquired iSummit effective as of February 7, 2001 in an exchange
transaction pursuant to a Contribution and Exchange Agreement dated as of
September 22, 2000, as amended. In the contribution and exchange, I-trax issued
a total of 4,222,500 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. At closing, of the total 4,222,500 shares I-trax agreed to
issue, 2,086,250 shares were delivered to the owners of iSummit and 2,136,250
shares were deposited with an escrow agent. Effective as of December 31, 2001, a
total of 1,289,184 shares held in escrow were returned to I-trax and canceled.
Accordingly, the aggregate number of shares issued by I-trax to acquire iSummit
has been reduced to 2,933,316 shares. This number may be further reduced by an
additional 50,000 shares, as negotiations regarding such a further reduction are
ongoing. Since February 7, 2001, iSummit has been a passive, wholly owned entity
of I-trax with certain intellectual property as its only assets.
Business Overview
We have 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. Our mission is to combine real time Internet-based
software technology and targeted personal interventions by healthcare
professionals to improve the quality of care, increase patient satisfaction,
improve clinical outcomes, reduce practice variances, improve operating
efficiencies and lower medical costs.
Our products range from stand-alone software applications to total
health management solutions. The stand-alone software applications assist
physicians, patients and the entire healthcare community in assessing,
preventing and managing all stages of disease and wellness. Currently, the
stand-alone software applications include four clinical applications:
AsthmaWatch(R), an asthma tracking tool, Health-e-Coordinator(TM), a disease
management tool, C-trax(TM), a cardiovascular point-of-care tool, and
eImmune(TM), an immunization management system; and two web portals:
MyFamilyMD(TM) for consumers and CarePrime(TM) for physicians. We license our
software applications as client-managed integrated applications or as an
application service provider from its secure web hosting facility.
Our population health management solutions assist public health
agencies, hospitals, health plans, self-insured employers, and colleges and
universities to manage the healthcare of their populations as outsourced
services through us. We deliver these service solutions by integrating
Health-e-Coordinator(TM) disease management tool, our web portals Care Prime(TM)
and MyFamilyMD(TM) and its patient contact center staffed by skilled nurses and
other healthcare professionals 24 hours per day, 7 days per week. Our service
solutions are flexible and adoptable. Without significant modifications to our
software applications, our solutions address the specific needs of several
segments of the healthcare industry, including, as examples, university and
college student health plans, indigent care coordination and disease management
initiatives and disease management of acutely ill patient with co-morbidities.
Acquisition of WellComm Group
On February 6, 2002, we acquired all of the issued and outstanding
common stock of WellComm Group, Inc. ("WellComm"), as stipulated in the Merger
Agreement dated January 28, 2002, by issuing 7,440,000 shares of Common Stock,
granting 560,000 options with a nominal exercise price and paying $2,175,056 in
cash. In addition, we also issued 80,000 shares to an employee for introducing
us to WellComm. The aggregate acquisition price amounted to approximately
$12,760,000. The value of Common Stock issued and stock options granted was
determined based on the average closing price of our Common Stock immediately
before and after agreed to and announced acquisition.
Of the total purchase price, we have allocated approximately $1,370,000
to non-compete covenants, $3,680,000 to customer relationships, $390,000 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 whereas customer relationships will be amortized over a
three-year life.
20
WellComm is a disease management 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.
The WellComm acquisition was two-step reorganization pursuant to a
Merger Agreement dated as of January 28, 2002 by and among us, WC Acquisition,
Inc. ("Acquisition"), an Illinois corporation and our wholly owned subsidiary,
WellComm, John Blazek and Carol Rehtmeyer. The initial step of the
reorganization transaction involved a merger of 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 transaction described in Rev. Rule
2001-46, 2001-42 Internal Revenue Bulletin 321 (Sep. 24, 2001), and thus a
tax-free reorganization pursuant to Section 368 of the Internal Revenue Code of
1986, as amended.
The financial statements include the operations of WellComm from
February 1, 2002 (the effective date of acquisition) forward. The purchase price
has been based on the estimated fair values of the assets acquired and
liabilities assumed. We are in the process of obtaining third-party valuations
of certain intangible assets and therefore the allocation of the purchase price
is preliminary.
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. Such new services must commence by February 5, 2003, but have not
been commenced as of March 31, 2002. If the additional contingent merger
consideration is paid in shares of Common Stock, the shares will valued at the
lesser of $1.23 per share and the average of the closing price of Common Stock
for twenty 20 consecutive trading days ending on the day prior to the day a
contingent merger consideration payment is due. Any additional shares
distributed will be recognized as compensation expense in the period earned.
After the merger, each of Mr. Blazek and Ms. Rehtmeyer joined us as
Members of the Office of the President and Ms. Ludwig joined us as a Vice
President pursuant to employment agreements with Health Management. In addition,
Mr. Blazek and Ms. Rehtmeyer were elected to our Board of Directors.
We granted to the WellComm stockholders the following registration
rights under the Securities Act of 1933, as amended, with respect to the shares
of Common Stock issued in the merger: (a) two demand registration rights
exercisable after February 5, 2005; and (b) unlimited "piggy back" registration
rights (subject to underwriter cut back) in the event we registers Common Stock
for our own account.
We funded the acquisition of WellComm by selling a 6% convertible
senior debenture in the aggregate principal amount of $2,000,000 (the
"Debenture") to Palladin Opportunity Fund LLC pursuant to a Purchase Agreement
dated as of 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 "Warrant"). 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 (each such date, a "Reset 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.
Finally, pursuant to a related registration rights agreement, we agreed to
21
register all of the shares of Common Stock underlying the Debenture and the
Warrant on a registration statement on Form SB-2.
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(TM) and C-Trax(TM) to Walter Reed Army
Medical Center in accordance with prior contractual obligations. Further, during
this period, we re-focused our efforts to changing from developing custom
software applications for few clients to: (1) commercializing existing software
applications including eImmune(TM), AsthmaWatch(R) and C-Trax(TM), (2)
web-enabling new applications including MyFamilyMD(TM), CarePrime(TM) 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 result of operations presented in this report reflects the result
of operations of WellComm, which for accounting purposes, we acquired effective
as of January 31, 2002.
Three Months Ended March 31, 2002 Compared To Three Months Ended March
31, 2001
Total revenues for the three months ended March 31, 2002 were $406,357
representing an increase of $216,417 or 113% from $189,940 for the three months
ended March 31, 2001. The total revenues for three months ended March 31, 2002
were comprised of $361,857, representing WellComm's service revenues derived
from disease management and call center contracts, and $44,500, representing our
technology revenues derived from the sale of a software license to eImmune(TM)
which was installed at Walter Reed Army Medical Center. For the remainder of
this year and beyond, we expects 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 or (2) delivery of a
complete population health and disease management solutions, encompassing
technology and services.
Cost of revenue amounted to $262,165 for the three months ended March
31, 2002, an increase of 1,586% from $15,546 for the three months ended March
31, 2001. The increase is directly attributable to the personnel costs required
to staff WellComm's disease management and call center contracts. We expect that
our cost of sales will fluctuate in future periods because technology only
contracts will yield a low cost of sales whereas disease management contracts
requiring services will increase the cost of sales. We also expect, based on our
current pipeline of contracts, that a significant portion of our future revenue
will be derived from application service provider contracts with colleges and
universities, self-insured employers, health plans.
Product development costs amounted to $119,500 for the three months
ended March 31, 2002 as compared to $227,264 for the three months ended March
31, 2001, a decrease of 47%. The decrease was attributable in significant part
to the fact that during the quarter ended March 31, 2001 we subcontracted the
development of a software component 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 in this quarter and 2001 were
expensed.
General and administrative expenses decreased 18% from $1,605,273 for
the three months ended March 31, 2001 to $1,401,818 for the three months ended
March 31, 2002, even though the expenses for the quarter ended March 31, 2002
include approximately $197,000 of expenses assumed by us as a result of our
acquisition of WellComm. The net decrease is primarily attributable to our
personnel reductions and stringent budgetary controls implemented in the fourth
quarter of 2001. We anticipate that for the balance of 2002, our spending will
increase slightly from that in the quarter ended March 31, 2002 because this
quarter reflects only two months of WellComm's expenses. We believe that with
22
the addition of WellComm's personnel, we have the resources to handle increased
revenue with minimal incremental costs.
Acquired in progress research and development was $1,642,860 for the
quarter ended March 31, 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 $219,987 for the
three months ended March 31, 2002 as compared to $102,300 for the three months
ended March 31, 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 $170,456 for the three months
ended March 31, 2002 as compared to $66,137 for the three months ended March 31,
2001. The increase of 157% was caused by our engagement of investor relations
consultants along with increasing our marketing efforts to promote our disease
management solutions following the WellComm acquisition.
Interest expense for the three months ended March 31, 2002 amounted to
$1,170,845 increasing by $914,263 or 356% from $256,582. The net increase is
primarily attributable to taking a charge to interest expense for the beneficial
conversion value associated with the sale of a $2,000,000 convertible debenture
to Palladin using the proceeds to fund the cash portion of the WellComm
acquisition. Generally, the beneficial conversion value represents the benefit
to the investor that results from purchasing an immediately convertible
debenture with a conversion price that is less than fair market value on the
date of purchase after first allocating a portion of the proceeds from the
debenture to the associated warrants.
Our net loss amounted to $2,974,798 for the quarter ended March 31,
2002 as compared to a loss of $3,717,225 for the three months ended March 31,
2001. For both periods, we had significant transaction related charges. For the
quarter ended March 31, 2002, we incurred a one-time charge of approximately
$1,000,000 on account of the beneficial conversion value associated with the
Debenture. For the quarter ended March 31, 2001, we incurred a one-time charge
of $1,600,000 on account of acquired in process research and development in the
acquisition of iSummit.
Liquidity and Capital Resources
Working Capital Deficiency
We ended the quarter with approximately $760,000 in cash on our balance
sheet. As of March 31, 2002, we had a working capital deficiency of $740,382.
Since March 31, 2002, we have raised an additional $570,000 through May 15,
2002. We are optimistic, although no assurances exist, that if we require
additional funding before our operations produce positive cash flow, we will
raise such funding.
Sources and Uses of Cash
Despite our negative cash flows from operations, which amounted to
approximately $1,550,000 for the quarter ended March 31, 2002 and $1,250,000 for
the quarter ended March 31, 2001, we have been able to secure funds to support
our operations. During the third quarter of 2001 and first quarter of 2002, such
funds were received from unrelated investors. Prior to the fourth quarter of
2001, we received such funds from Frank A. Martin, our Chief Executive Officer,
Gary Reiss, a Member of our Office of the President, and certain other senior
officers. We believe that additional cash will be required to finish the
development of our products and to implement our marketing strategy.
For the quarter ended March 31, 2002, we funded our cash needs from
financing activities, primarily from sales of Common Stock, amounting to
approximately $1,500,000. We also received $2,000,000 from the sale of a 6%
convertible debenture that we used to acquire WellComm. In the future, we expect
to rely less on equity financings and more on cash flows from operations. We
expect that WellComm operations will provide a portion of our future operating
cash flow. For the quarter ended March 31, 2001, we financed our operations by
borrowings approximately $700,000 from an unrelated party and $475,000 from our
23
officers and by selling $120,000 of Common Stock.
With regards to investing activities, the only material event for the
quarter ended March 31, 2002 was the payment of approximately $2,000,000 to fund
the cash portion of the WellComm's acquisition price.
As of March 31, 2002, our current liabilities were approximately
$2,150,000, 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 pay
management loans until we begins to generate cash flows from operations and
obtain the consent of Palladin pursuant to the terms of the Debenture and
related documents. The remainder of current liabilities of approximately
$1,450,000 is made up, primarily, of trade payables of approximately $685,000,
accrued expenses of approximately $303,000, $175,000 credit line payable which
was assumed with the acquisition of WellComm and approximately $220,000 of
deposits on future contracts. We have good relationships with 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. We expect that we will be
able to repay these obligations if they are not converted into equity prior to
their due date.
Related Party Transactions
During the quarter ended March 31, 2001, Mr. Martin and Mr. Reiss
periodically advanced funds to fund our working capital deficiency. As of March
31, 2002, we owed these individuals $689,598 (inclusive of accrued interest).
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. 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 $.55, we recorded the intrinsic value of $.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 three months ended March 31, 2002, we marked-to-market these options and
recorded a reduction in compensation expense of $80,000.
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.
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Impairment of Goodwill
We have evaluated goodwill for impairment indicators and will continue
to do so in the future. Our judgments regarding the existence of impairment
indicators are based on legal factors, market conditions and operational
performance of our acquired businesses. Future events could cause us to conclude
that impairment indicators exist, requiring a write-down of goodwill, which may,
in turn, negatively affect our earnings for any particular period.
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 bifurcate 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.
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Material Equity Transactions
For the three months ended March 31, 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 has valued all such transaction
pursuant to the various accounting rules and that they ultimately represent the
economic substance of each transaction.
26
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
7--Commitments and Contingencies to I-trax's financial statements above.
Item 2. Changes in Securities
In January 2002, we sold 110,000 shares of Common Stock at $.50 per
share pursuant to a private placement initiated in 2001. All participants were
accredited investors. In undertaking this offering, we relied on an exemption
from registration under Section 4(2) of the Securities Act and Regulation D
thereunder. We filed a Form D with the Securities and Exchange Commission in
connection with the issuance of Common Stock in this transaction.
Effective January 4, 2002, four institutional investors and one employee
exercised warrants using a "cashless" feature of the warrants, and upon this
exercise received 1,753,486 shares of Common Stock. The shares of Common Stock
were valued at $1.496 for purposes of the warrants' "cashless" feature. In
undertaking this offering, we relied on an exemption from registration under
Section 4(2) of the Securities Act.
We acquired WellComm effective as of February 6, 2001 in a two-step
merger transaction pursuant to a Merger Agreement dated as of January 28, 2002,
as amended. We issued a total of 7,440,000 shares of Common Stock to acquire
WellComm. We recorded an accounting expense of $1.31 per share in connection
with this issuance. In undertaking this offering, we relied on an exemption from
registration under Section 4(2) of the Securities Act.
Effective February 4, 2002, we sold a 6% senior convertible debenture,
initially convertible into 2,000,000 shares of Common Stock at a conversion
price of $1.00 per share, and a warrant to acquire 1,538,461 shares of Common
Stock, at an exercise price of $1.10 per share, to an institutional investor. In
undertaking this offering, we relied on an exemption from registration under
Section 4(2) of the Securities Act.
As of March 31, 2002, we sold 1,899,999 shares of Common Stock at $.75
per share pursuant to a private placement initiated on February 7, 2002. All
participants were accredited investors. In undertaking this offering, we relied
on an exemption from registration under Section 4(2) of the Securities Act and
Regulation D thereunder. We filed a Form D with the Securities and Exchange
Commission in connection with the issuance of our common stock in this
transaction.
Effective as of March 20, 2002, we issued 75,000 shares of Common Stock
to two companies as consideration for investor relations services. We recorded
an accounting expense of $1.10 per share in connection with this issuance. The
companies are accredited investor. In undertaking this issuance, we relied on an
exemption from registration under Section 4(2) of the Securities Act and
Regulation D thereunder.
Effective as of March 20, 2002, we issued 31,000 shares of Common Stock
and a warrant to acquire 200,000 share of Common Stock to an investment banker
as consideration for services rendered in connection with the WellComm
financing. For purposes of this issuance, each issued share of Common Stock was
valued at $1.31 per share. The exercise price under the warrant is $1.00 per
share. The investment baker is an accredited investor. In undertaking this
issuance, we relied on an exemption from registration under Section 4(2) of the
Securities Act and Regulation D thereunder.
Effective as of March 20, 2002, we issued 80,000 shares of Common Stock
to an employee as consideration for services rendered in connection with the
WellComm acquisition. For purposes of this issuance, each issued share of Common
Stock was valued at $1.31 per share. In undertaking this issuance, we relied on
an exemption from registration under Section 4(2) of the Securities Act.
27
Item 3. Defaults upon Senior Securities
We did not default upon any senior securities during the quarter ended
March 31, 2002.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matters to a vote of its stockholders during the
quarter ended March 31, 2002.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
We filed a current report on Form 8-K with the Securities and Exchange
Commission on January 29, 2002 to report certain material transactions occurring
in the fourth quarter of 2002 and in January 2002.
We filed a current report on Form 8-K with the Securities and Exchange
Commission on February 8, 2002 to report the sale of a 6% senior convertible
debenture and a warrant to acquire 1,538,461 shares of Common Stock to an
institutional investor pursuant to a purchase agreement dated February 4, 2002.
We filed a current report on Form 8-K with the Securities and Exchange
Commission on February 13, 2002 to report the issuance of a press release
regarding our 2001 financial performance.
We filed a current report on Form 8-K with the Securities and Exchange
Commission on February 22, 2002 to report the closing of acquisition of WellComm
Group, Inc. pursuant to a Merger Agreement dated January 28, 2002.
28
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 20, 2002 By: /s/ Frank A. Martin
--------------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
29