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: June 30, 2003
[ ] 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 August 13, 2003, the Registrant
had 10,930,409 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. Consolidated Financial Statements ................................................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................19
Item 3. Controls and Procedures..........................................................26
PART II. OTHER INFORMATION................................................................................26
Item 1. Legal Proceedings................................................................26
Item 2. Changes in Securities............................................................26
Item 3. Defaults upon Senior Securities..................................................27
Item 4. Submission of Matters to a Vote of Security Holders..............................27
Item 5. Other Information................................................................27
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 No.
Report of Independent Public Accountants 4
Consolidated Balance Sheets at June 30, 2003 (unaudited) and December 31, 2002 5
Consolidated Statements of Operations for the three months ended June 30, 2003 and 2002 (unaudited) 6
Consolidated Statements of Operations for the six months ended June 30, 2003 and 2002 (unaudited) 7
Consolidated Statement of Stockholders' Equity for the six months ended June 30, 2003 (unaudited) 8
Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 (unaudited) 9
Notes to consolidated financial statements 11
3
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of I-trax, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
I-trax, Inc. (a Delaware corporation) and Subsidiaries as of June 30, 2003, and
the related condensed consolidated statements of operations for the three month
and six month periods ended June 30, 2003 and the consolidated statements of
stockholders' equity and cash flows for the six month period ended June 30,
2003. These financial statements are the responsibility of the company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the condensed financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed financial statements referred to above for them to be
in conformity with accounting principles generally accepted in the United States
of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet as of December 31,
2002, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended (not presented herein); and in our
report dated March 5, 2003, we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2002, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
July 23, 2003
4
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
2003 December 31,
(unaudited) 2002
------------ ------------
Current assets:
Cash $ 361,138 $ 360,166
Deposit on potential acquisition -- 200,000
Accounts receivable, net 462,197 597,635
Prepaid expenses 131,825 77,569
Other current assets 22,815 20,960
------------ ------------
Total current assets 977,975 1,256,330
------------ ------------
Office equipment, furniture, leasehold improvements and software development
costs, net 703,173 412,779
Deferred marketing costs, net 1,057,777 1,284,445
Goodwill 8,424,062 8,424,062
Intangible assets, net 2,187,429 2,748,087
Debt issuance cost, net 134,223 249,273
Security deposits 31,564 31,564
------------ ------------
Total assets $ 13,516,203 $ 14,406,540
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Credit line payable 300,000 300,000
Accounts payable 688,551 918,791
Accrued expenses 536,887 743,151
Due to officers, directors and other related parties 107,330 225,000
Notes payable - other, net of discount 275,546 --
Capital lease payable 60,649 60,047
Deferred revenue 124,737 1,379,922
Debenture payable, net of discount 705,359 --
Other current liabilities -- 13,423
------------ ------------
Total current liabilities 2,799,059 3,640,334
------------ ------------
Capital lease obligation, net of current portion 61,473 96,765
Promissory notes and debenture payable, net of discount 373,390 1,245,876
Due to officers and directors 780,230 1,024,598
------------ ------------
Total liabilities 4,014,152 6,007,573
------------ ------------
Total liabilities
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,
10,930,409 and 9,372,727 shares issued and outstanding, respectively 10,929 9,372
Additional paid in capital 44,043,641 39,236,119
Accumulated deficit (34,552,519) (30,846,524)
------------ ------------
Total stockholders' equity 9,502,051 8,398,967
------------ ------------
Total liabilities and stockholders' equity $ 13,516,203 $ 14,406,540
============ ============
See accompanying notes to consolidated financial statements (unaudited).
5
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
Three months Three months
ended ended
June 30, June 30,
2003 2002
------------------ -----------------
Revenue:
Technology licenses $ 395,354 $ 135,000
Services 655,842 463,660
----------- -----------
Total revenue 1,051,196 598,660
----------- -----------
Cost of revenue:
Technology licenses 24,690 10,834
Services 317,462 354,319
----------- -----------
Total cost of revenue 342,152 365,153
----------- -----------
Gross profit 709,044 233,507
Operating expenses:
General and administrative 188,197 440,995
Salary and related benefits 465,594 935,295
Research and development -- 103,320
Depreciation and amortization 440,616 627,535
Marketing and publicity 1,522,852 156,636
----------- -----------
Total operating expenses 2,617,259 2,263,781
----------- -----------
Operating loss (1,908,215) (2,030,274)
----------- -----------
Other expenses:
Amortization of debt issuance costs (179,753) (54,576)
Interest expense and financing costs (654,354) (306,211)
----------- -----------
Total other expenses (834,107) (360,787)
----------- -----------
Net loss $(2,742,322) $(2,391,061)
=========== ===========
Loss per common share:
Basic and diluted $ (.28) $ (.26)
=========== ===========
Weighted average number of shares outstanding: 9,873,184 9,307,164
=========== ===========
See accompanying notes to consolidated financial statements (unaudited).
6
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
Six months ended Six months ended
June 30, June 30,
2003 2002
------------------ -----------------
Revenue:
Technology licenses $ 1,310,056 $ 179,500
Services 1,357,271 825,517
------------------ -----------------
Total revenue 2,667,327 1,005,017
------------------ -----------------
Cost of revenue:
Technology licenses 40,704 21,668
Services 617,528 605,650
------------------ -----------------
Total cost of revenue 658,232 627,318
------------------ -----------------
Gross profit 2,009,095 377,699
Operating expenses:
General and administrative 496,701 986,311
Salary and related benefits 1,324,457 1,954,997
Research and development -- 222,820
Depreciation and amortization 877,164 847,522
Marketing and publicity 1,604,609 327,092
------------------ -----------------
Total operating expenses 4,302,931 4,338,742
------------------ -----------------
Operating loss (2,293,836) (3,961,043)
------------------ -----------------
Other expenses:
Amortization of debt issuance costs (237,278) (90,960)
Costs in connection with uncompleted acquisition (200,000) --
Interest expense and financing costs (974,881) (490,970)
------------------ -----------------
Total other expenses (1,412,159) (581,930)
------------------ -----------------
Net loss $ (3,705,995) $ (4,542,973)
================== =================
Loss per common share:
Basic and diluted $ (.39) $ (.52)
================== =================
Weighted average number of shares outstanding: 9,620,206 8,782,304
================== =================
See accompanying notes to consolidated financial statements (unaudited).
7
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
Common Stock Additional Total
----------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
-------------- ------------- ---------------- -------------- ---------------
Balances at December 31, 2002 9,372,727 $ 9,372 $ 39,236,119 $(30,846,524) $ 8,398,967
Issuance of compensatory stock options 27,942 27,942
Mark to market of warrants granted for
investor relations services and stock
options granted to a former employee -- -- (4,097) -- (4,097)
Fair market value of detachable warrants and
additional beneficial conversion
value in connection with re-pricing of
convertible debenture -- -- 1,007,833 -- 1,007,833
Issuance of common stock for services 205,833 206 330,842 -- 331,048
Contribution in the form of common stock
given by shareholders for services
rendered to the Company 437,900 437,900
Sale of common stock, net of costs 613,986 614 1,003,572 -- 1,004,186
Issuance of warrants for services -- -- 645,000 -- 645,000
Fair value of detachable warrants issued in
connection with convertible note 68,000 68,000
Issuance of common stock for conversion of
related party debt and assigned debt 668,152 668 1,168,602 -- 1,169,270
Issuance of common stock for conversion of
deferred salaries 69,711 69 121,928 -- 121,997
Net loss for the six months ended June 30, 2003 -- -- -- (3,705,995) (3,705,995)
------------ ------------ ------------ ------------ ------------
Balances at June 30, 2003
10,930,409 $ 10,929 $ 44,043,641 $(34,552,519) $ 9,502,051
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements (unaudited).
8
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
Six months
ended Six months ended
June 30, 2003 June 30, 2002
------------------ -----------------
Operating activities:
Net loss $(3,705,995) $(4,542,973)
Adjustments to reconcile net loss to net cash used in operating activities:
Accretion of discount on notes payable charged to interest 254,539 230,830
expense
Accretion of beneficial conversion value of debenture 525,556 197,636
Amortization of option liability (13,423) (67,115)
Amortization of debt issuance costs 237,278 90,960
Amortization of deferred marketing costs 226,668 --
Depreciation and amortization 650,496 847,522
Expenses for compensatory stock options and warrants 23,845 163,200
Issuance of securities for services 1,413,946 (83,400)
Write off of deposit on cancelled acquisition 200,000 --
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in:
Accounts receivable 135,438 (19,275)
Prepaid expenses (54,256) 82,923
Other current assets (1,855) (20,525)
(Decrease) increase in:
Accounts payable (230,240) 59,668
Accrued expenses 79,896 56,609
Deferred revenue (1,255,185) 216,563
----------- -----------
Net cash used in operating activities (1,513,292) (2,787,377)
----------- -----------
Investing activities:
Proceeds from repayment of note receivable -- 52,500
Cash used for property, equipment and software development costs (380,232) (12,866)
Proceeds from partial release of security deposit -- 31,825
Net cash to acquire WellComm Group, Inc. -- (2,045,065)
----------- -----------
Net cash used in investing activities (380,232) (1,973,606)
----------- -----------
Financing activities:
Principal payments on capital leases (34,690) (38,312)
Proceeds from credit line payable -- 125,000
Repayment to related parties (140,000) (65,000)
Proceeds from officers, directors and other related parties 740,000 --
Proceeds from sale of common stock 1,004,186 1,943,476
Proceeds from notes payable 325,000 --
Proceeds from sale of debenture option -- 161,078
Costs of issuance of debenture -- (150,000)
Proceeds from issuance of debenture -- 1,838,922
----------- -----------
Net cash provided by financing activities 1,894,496 3,815,164
----------- -----------
Net increase (decrease) in cash 972 (945,819)
Cash at beginning of period 360,166 1,029,208
----------- -----------
Cash at end of period $ 361,138 $ 83,389
=========== ===========
Supplemental disclosure of non-cash flow information: Cash paid during the
period for:
Interest $ -- $ 6,099
=========== ===========
(Continues on following page.)
9
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Continues from previous page.)
Six months
Six months ended ended
June 30, 2003 June 30, 2002
----------------- ----------------
Schedule of non-cash investing and financing activities:
Issuance of 1,488,000 shares of common stock and granting of 112,000 stock
options in connection with acquisition of WellComm Group,
Inc $ -- $ 10,480,000
=========== ===========
Issuance of common stock and warrants for finder fee $ -- $ --
=========== ===========
Issuance of common stock for conversion of related party debt and $1,169,270 $ --
=========== ===========
assigned debt
Issuance of common stock for conversion of deferred salaries $ 121,997 $ --
=========== ===========
See accompanying notes to consolidated financial statements (unaudited).
10
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--ORGANIZATION
I-trax, Inc. (the "Company") provides focused disease management and
comprehensive health management solutions designed to improve the health of the
populations it serves while reducing the cost of medical care. The Company was
incorporated in the State of Delaware on September 15, 2000. The Company's
common stock is traded on the American Stock Exchange under the symbol "DMX."
As of June 30, 2003, the Company had three wholly owned subsidiaries: I-trax
Health Management Solutions, Inc. ("Health Management"), a corporation, iSummit
Partners, LLC and WellComm Group, LLC, each a single member limited liability
company.
NOTE 2--INTERIM RESULTS AND BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted 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
June 30, 2003 and the results of the operations and cash flows for the three and
six months ended June 30, 2003. The results for the three and six months ended
June 30, 2003 are not necessarily indicative of the results to be expected for
any subsequent quarter or the entire fiscal year ending December 31, 2003. The
balance sheet at December 31, 2002 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 accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations.
For the six months ended June 30, 2003, the Company capitalized software
development costs amounting to $375,545 since technological feasibility has been
achieved.
Loss per common share is computed pursuant to 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 June 30, 2003 and 2002, 5,444,093 and
2,038,051, respectively, of options and warrants 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, 2002 included in the Company's report on Form 10-KSB for the year
ended December 31, 2002 filed on April 15, 2003.
For comparability, certain 2002 amounts have been reclassified, where
appropriate, to conform to the financial statement presentation used in 2003.
Effective January 3, 2003, the Company completed a 1-for-5 reverse stock split.
Accordingly, all information for 2002 presented herein has been adjusted
retroactively to reflect this reverse stock split.
11
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. by issuing 1,488,000 shares of common stock
valued at $9,746,400, granting 112,000 options valued at $733,600 to acquire
common stock at a nominal exercise price and paying approximately $2,200,000 in
cash. The aggregate acquisition price amounted to approximately $12,680,000. The
financial statements include the operations of WellComm from February 1, 2002
forward.
The following unaudited pro forma results of operations of the Company give
effect to the acquisition of WellComm for the six months ended June 30, 2002 as
if the acquisition was consummated at the beginning of that period.
Six months
ended
June 30, 2002
-----------------
Total revenue $ 1,258,796
=================
Total expenses $ 5,786,062
=================
Net loss $ (4,527,243)
=================
Pro forma net loss per share: $ (.48)
=================
Basic and Diluted
Weighted average number of shares outstanding: 9,391,296
Basic and Diluted =================
NOTE 4--RELATED PARTY TRANSACTIONS
At December 31, 2002, the Company had loans outstanding to certain officers and
directors amounting to $1,024,598 and $225,000 to a relative of the Company's
Chief Operating Officer.
During February 2003, pursuant to two promissory notes, two members of the
Company's Board of Directors, advanced $200,000 to the Company for working
capital. The notes accrue interest at 8% per year and mature in February 2004.
In addition, during the six months ended June 30, 2003, the Company's Chief
Executive and Operating Officers, along with a member of the Company's Board of
Directors, advanced the Company a total of $540,000 for working capital at an
interest rate of 8% per year. The Company's Chief Executive and Operating
Officers have committed to continue to support the Company until it generates
positive cash flow from operations, but at least through July 1, 2004.
During June 2003, certain officers, members of the Company's Board of Directors
and a venture capital fund managed by the Company's Chief Executive Officer
converted at a $1.75 per share a total of $909,421, comprised of loans and
advances of $790,697 and accrued interest of $118,724, into 519,667 shares of
common stock. In addition, certain of the same parties assigned additional loans
in the principal amount of $246,342 and accrued interest of $13,507 thereon, to
an investor relations firm, which thereafter converted the assigned loans into
common stock also at $1.75 per share. The price of the conversions was
determined with reference to a private placement of common stock to third
parties completed by the Company contemporaneously with the conversions as
disclosed in Note 9 below.
12
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4--RELATED PARTY TRANSACTIONS (cont'd)
During February 2003, the Company repaid $140,000 of the $225,000 loan
outstanding to a relative of the Company's Chief Operating Officer.
At June 30, 2003, based on repayment terms agreed upon with certain related
parties, the Company classified $780,230 of outstanding loans and advances as a
non-current liability because they are not due within the next twelve months.
The Company recorded $27,349 and $13,792, and $56,735 and $28,084 of interest
expense for the three months and six months ended June 30, 2003 and 2002,
respectively, associated with these related party loans and advances.
NOTE 5--NOTES PAYABLE--OTHER
In April 2003, the Company borrowed $100,000 from a shareholder pursuant to a
convertible promissory note. The note, with an eleven-month term, accrues
interest at 6% per annum and a default interest rate of 12% per annum. The
principal and related accrued and unpaid interest is convertible by the
shareholder into common stock at anytime at $1.50 per share. As consideration
for this loan, the Company also granted the shareholder a warrant to acquire
100,000 shares of common stock at an exercise price of $1.50 per share. The
value assigned to the warrant of $68,000 is recorded as a discount to the
promissory note using the relevant fair value of the debt and the warrant to the
actual proceeds from the convertible promissory note. The discount is being
accreted to interest expense over the life of the convertible promissory note.
For the three months ended June 30, 2003, the discount accreted to interest
expense associated with the convertible promissory note amounted to $18,546. At
June 30, 2003 the carrying value of the note amounted to $50,546 and is included
in "Notes payable - other" on the accompanying balance sheet.
Pursuant to a promissory note dated April 10, 2003, the Company borrowed
$150,000 from a shareholder with an interest rate of 12% per annum, requiring
monthly payments of $25,000 plus accrued interest with a final payment due on
December 31, 2003. As of June 30, 2003, the outstanding principal balance is
$125,000. For the three months ended June 30, 2003, interest expense amounted to
approximately $3,750.
On May 29, 2003, the Company borrowed $100,000 from a shareholder. The loan is
due on September 29, 2003 and is accruing 12% during the four-month period it is
expected to be outstanding. For the three months ended June 30, 2003, interest
expense associated with such loan amounted to approximately $12,000.
NOTE 6--PROMISSORY NOTES PAYABLE
On March 2, 2001 the Company borrowed $692,809 from an investor group that
included $75,000 from a venture capital fund managed by the Company's Chief
Executive Officer. The loan bears interest at 8% per annum, with a default rate
of 12% per annum, and is due on March 2, 2006. The Company also granted this
investor group warrants to purchase 364,694 shares of common stock at $0.50 per
share, which were exercised in the first quarter of 2002.
The value assigned to detachable warrants of $459,854 is being accreted to
interest expense over the five-year term of the underlying promissory notes. For
the three and six months ended June 30, 2003 and 2002, the amount accreted to
interest expense was $22,677 and $22,677, and $45,354 and $45,354, respectively.
At June 30, 2003, the carrying value of the notes amounted to $373,390 and is
included in the "Promissory notes" in the accompanying consolidated balance
sheet.
13
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6--PROMISSORY NOTES PAYABLE (cont'd)
In June 2003, as part of certain related parties converting and assigning debt
as discussed in Note 4 above, the venture capital fund managed by the Company's
Chief Executive Officer, with the consent of the Company, assigned the fund's
loan in the principal amount of $75,000 and a portion of the accrued interest
amounting to $6,669 thereon, to an investment relations firm, which thereafter
converted the assigned loan into common stock at $1.75 per share. The balance of
the accrued interest not assigned amounting to $6,098 was converted into 3,484
shares of common stock also at $1.75 per share. The price of the conversion was
determined with reference to a private placement of common stock to third
parties completed by the Company contemporaneously with the conversion as
disclosed in Note 9 below.
NOTE 7--CONVERTIBLE DEBENTURE
The Company 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 the purchase agreement, the Company also
issued Palladin a warrant to purchase an aggregate of up to 307,692 shares of
common stock at an exercise price of $5.50 per share. The outstanding principal
and any interest under the debenture are payable in full on or before February
3, 2004. Further, outstanding principal and any accrued interest may be
converted at any time at the election of Palladin into common stock. The
original conversion price of the debenture was $5.00 per share. In accordance
with the terms of the debenture, the price was reset to $3.03 in February 2003
and to $1.75 in June 2003. In accordance with the terms of the warrant, the
exercise price of the warrant was reset from $5.50 to $1.75 in June 2003.
The initial value assigned to the warrant of $890,272 was recorded as a discount
to the debenture and is being accreted to interest expense over the life of the
debenture. As a result of the reset of the exercise price of the warrant in June
2003, the Company recorded $203,077 of interest expense for the additional
market value of the warrant on the date of the reset. For the three and six
months ended June 30, 2003, and 2002, the Company recorded $314,362 and
$111,285, and $222,570 and $222,570, respectively, of interest expense
associated with the accretion of the original discount and the reset of the
warrant. The Company also recorded $203,897 and $118,581, and $322,478 and
$237,162 of interest expense for the three months and six months ended June 30,
2003 and 2002, respectively, for the amortization of the portion of the
beneficial conversion value of the debenture. Upon the initial sale of the
debenture, the Company recorded a beneficial conversion value of $948,651. The
beneficial conversion value was increased by $682,528 as a result of the reset
in June 2003. The beneficial conversion value represents the difference between
the fair market value of the common stock on the date the debenture was sold (or
the date the conversion price is changed) and the price at which the debt could
be converted into common stock. As of June 30, 2003, the carrying value of the
debenture amounted to $705,359 and it's classified as a current liability in the
accompanying consolidated balance sheet.
Lastly, in connection with facilitating the transaction with Palladin, the
Company initially recorded $416,610 of debt issuance costs comprised of $130,000
of cash, 6,200 shares of common stock valued at $40,610 and a warrant to acquire
40,000 shares of common stock at $5.00 per share valued at $246,000 delivered to
a third party that brokered the transaction. In connection with the reset in
June 2003 of the conversion price of Palladin's debenture and the exercise price
of Palladin's warrant, the Company also, in accordance with a contractual
commitment: (1) reset the exercise price of the warrant originally granted to
the third party from $5.00 to $1.75 per share, resulting in a charge to
operations of $26,400 for additional debt issuance costs; and (2) increased the
shares issuable under the warrant by 74,285 shares of common stock, resulting in
a further charge to operations of $95,828. For the three and six months ended
June 30, 2003 and 2002 such amortization, inclusive of these one-time charges
amounted to $179,753, $57,525 and $115,050 and $115,050, respectively.
14
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Significant Customers
Financial instruments, which may expose the Company to concentrations of credit
risk, consist primarily of accounts receivable. As of June 30, 2003, two
customers represented 32% and 10%, respectively of the total accounts
receivable. For the three and six months ended June 30, 2003, the Company had
one customer, which accounted for 36% and 40% of total revenue, respectively.
Risk Based Contracts
The Company enters into risk-based contracts in certain disease management
arrangements. 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. As of June 30,
2003, the Company is not a party to any risk-based contracts.
NOTE 9--STOCKHOLDERS' EQUITY
Issuance of Common Stock
During May and June 2003 the Company issued an aggregate of 205,833 shares of
common stock to four investor relations firms. The common stock, valued at
$331,048, based on the market price of the Company's common stock on the date of
issuance, has been charged to operations for the three months ended June 30,
2003.
During May 2003, certain shareholders of the Company contributed loans (which
were thereafter converted into common stock) and common stock such that an
investor relations firm retained by the Company received an aggregate of 290,000
shares of common stock as compensation for services. The benefit that the
Company has received from these contributions amounted to $437,900, based on the
market price of the Company's common stock on the date of the contribution, and
was charged to operations.
During June 2003 the Company sold an aggregate of 613,986 shares of common stock
at $1.75 per share yielding net proceeds (after direct costs including 40,167
shares of common stock) of $1,004,186.
During June 2003, the Company issued 519,667 shares of common stock in
connection with the conversion of related party debt and accrued interest
thereon amounting to $909,421 based on the market price of the Company's common
stock on the date of issuance.
15
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During June 2003, the Company issued 148,485 shares of common stock in
connection with the conversion of assigned debt to an investor relations firm
amounting to $259,849 based on the market price of the Company's common stock on
the date of issuance.
NOTE 9--STOCKHOLDERS' EQUITY (cont'd)
Issuance of Common Stock (cont'd)
During June 2003, the Company issued 69,711 shares of common stock in connection
with the conversion of deferred salaries amounting to $121,997 based on the
market price of the Company's common stock on the date of issuance.
Issuance of Warrants
During May and June 2003, the Company granted fully vested, non-forfeitable
warrants to purchase 375,000 shares of common stock with exercise prices ranging
from $1.50 to $1.76 (based on market value at the date of issuance) to two
individuals and an institution for investor relations services pursuant to three
separate consulting agreements expiring in May and June 2004. The value of such
warrants, utilizing the Black-Scholes model amounted to $645,000. Such amount
has been charged to operations for the three months ended June 30, 2003.
During May 2003 pursuant to the approval of the Board of Directors, the Company
granted an aggregate of 450,000 warrants with an exercise price of $1.80 per
share (based on market value at the date of issuance) to its Chief Executive and
Operating Officers for their continued financial support and for their
guarantees to continue to support the Company through January 2004. The granting
of such warrants did not result in any charges to operations since they are
granted to employees.
In April 2003, the Company borrowed $100,000 from a shareholder pursuant to a
convertible promissory note. The note, with an eleven-month term, accrues
interest at 6% per annum and a default interest rate of 12% per annum. The
principal and related accrued and unpaid interest is convertible at anytime by
the shareholder at $1.50 per share. As consideration for this loan, the Company
also granted the shareholder a warrant to acquire 100,000 shares of common stock
at an exercise price of $1.50 per share. The value assigned to the warrant of
$68,000 is recorded as a discount to the convertible promissory note using the
relevant fair value of the debt and the warrants to the actual proceeds from the
convertible promissory note and is being accreted to interest expense over the
life of the note.
In connection with the reset in June 2003 of the conversion price of Palladin's
debenture and the exercise price of Palladin's warrant, the Company also, in
accordance with a contractual commitment, reset the exercise price of the
warrant originally granted to the third party from $5.00 to $1.75 per share and
amended the warrant to increase the number of shares issuable thereunder by
74,285 shares of common stock. This reset of the exercise and the amendment to
the warrant resulted in a charge to operations of $95,828.
16
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9--STOCKHOLDERS' EQUITY (cont'd)
Issuance of Warrants (cont'd)
The following table summarizes the Company's activity as it relates to its
warrants for the six months ended June 30, 2003:
Balance outstanding at January 1, 2003 2,132,953
Quarter ended March 31, 2003:
Granted --
Exercised --
-----------------
Balance outstanding at March 31, 2003 2,132,953
-----------------
Quarter ended June 30, 2003:
Granted 999,285
Exercised --
-----------------
Balance outstanding at June 30, 2003 3,132,238
=================
Stock Options
The table below summaries the activity in the Company's stock option plans for
the six months ended June 30, 2003:
Non-Qualified Non-Plan
Incentive Options Options Non-Qualified Total
Options
------------------------- -------------------- -------------------- -------------------- --------------------
Outstanding as of
January 1, 2003 735,829 535,973 439,000 1,710,802
Granted 20,000 40,000 -- 60,000
Exercised -- -- -- --
Forfeited/Expired (127,971) (40,000) -- (167,971)
-------------------- -------------------- -------------------- --------------------
Outstanding as of March
31, 2003 627,858 535,973 439,000 1,602,831
-------------------- -------------------- -------------------- --------------------
Granted 130,000 300,000 300,000 730,000
Exercised -- -- -- --
Forfeited/Expired (13,976) (10,000) (23,976)
-------------------- -------------------- -------------------- --------------------
Outstanding as of June 743,882 825,973 739,000 2,308,855
30, 2003
===================================================================================
-------------------- -------------------- -------------------- --------------------
Vesting Dates:
December 31, 2003 125,144 139,004 189,164 453,312
December 31, 2004 170,456 201,665 101,665 473,786
December 31, 2005 88,796 83,165 75,006 246,967
December 31, 2006 45,836 50,504 -- 96,340
December 31, 2007 -- 333 -- 333
Thereafter -- -- 20,000 20,000
As of June 30, 2003, there were outstanding an aggregate of 1,018,117 of
exercisable plan and non-plan options with exercise prices ranging from $.01 to
$10.00.
17
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9--STOCKHOLDERS' EQUITY (cont'd)
Stock Options (cont'd)
The Company accounts for its employee incentive stock option plans and warrants
issued to employees using the intrinsic value method in accordance with the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," as permitted by SFAS No.
123. Had the Company determined compensation expense base on the fair value at
the grant dates for those awards consistent with the method of SFAS 123, the
Company's net loss per share would have been increased to the following pro
forma amounts:
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
----------------- ----------------- ---------------- ----------------
Net loss as reported $(2,742,322) $(2,391,061) $(3,705,995) $(4,542,973)
Add back intrinsic value of the -- -- -- 0
options issued to employee and
charged to operations -- -- -- 163,20
Deduct total stock based employee 5 3 4 8
compensation expense determined
under fair value based methods for
all awards (1,400,36) (634,38) (2,113,13) (1,516,66)
----------- ----------- ----------- -----------
Pro forma net loss $(4,142,687) $(3,025,444) $(5,819,129) $(5,896,441)
=========== =========== =========== ===========
Basic and diluted net loss per
share as reported $ (.28) $ (.26) $ (.39) $ (.55)
----------- ----------- ----------- -----------
Pro forma basic and diluted net
loss per share $ (.42) $ (.33) $ (.60) $ (.67)
=========== =========== =========== ===========
NOTE 10--AGREEMENT TO ACQUIRE DxCG, INC.
On November 8, 2002, the Company entered into a merger agreement to acquire
DxCG, Inc. for a total purchase price of approximately $10,000,000, of which the
Company intended to pay $6,000,000 in cash and $4,000,000 in common stock. Under
the terms of this agreement and at the time this agreement was executed, the
Company deposited $200,000 into an escrow account. This sum was intended to be
released to DxCG if DxCG terminated the merger agreement because the Company
failed to satisfy certain conditions to closing, including third party financing
for the cash portion of the purchase price. The Company did not secure the
financing by January 31, 2003 and accordingly such agreement was terminated
resulting in the Company charging the $200,000 to earnings in the first quarter
2003.
NOTE 11--SUBSEQUENT EVENT
Private Placement Memorandum
During August 2003, the Company expects to commence a private placement in order
to raise additional funds.
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, 2002, incorporated into our Form 10-KSB, filed on April 15,
2003.
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 I-trax, Inc. 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.
Our Business
I-trax enables better healthcare through personalized health management
programs.
We believe that our personalized disease and life-style management
solutions enable organizations to evolve from fragmented care management
practices into a cohesive and efficient system of healthcare. Our solutions are
fully integrated, use a single-data platform that allows all caregivers to share
records, and enable our clients to provide true coordination of care. We believe
that by facilitating real-time communication between all stakeholders within
today's complex healthcare system, our solutions reduce costs and enable the
best possible delivery of care.
Health-e-LifeSM Program
We deliver our solutions through our proprietary Health-e-LifeSM Program.
The Program is designed to deliver lifestyle, disease and risk reduction
interventions to an entire population by utilizing predictive science,
technology, clinical expertise and care coordination.
Predictive Science
Our Health-e-LifeSM Program incorporates predictive science to analyze our
clients' medical claims and pharmacy and clinical data to predict future
healthcare costs. We believe this is an essential step to effective disease and
life-style management. Experts agree that predictive science provides a
comprehensive advantage to health plans, employers and providers, and leads to
cost effective medical management and greater profitability. Using predictive
science, we analyze our clients' entire populations to accurately predict our
clients' future healthcare costs, including avoidable costs, the health
conditions that will drive those costs and the people within our clients'
populations who are at risk for those conditions. Armed with this information,
I-trax is able to target the most appropriate resources to achieve the best
savings and return on investment.
Technology Solutions
All technology components of our Health-e-LifeSM Program utilize a single
data platform--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.
Further, our web accessible solutions include portals for key stakeholders
in the care delivery process--consumers, physicians and care managers--thus
permitting real-time sharing of information and support the adherence to our
health and disease intervention programs. The key technology we use for
effective care coordination include:
19
o Health-e-Coordinator(TM), a web-based care management application;
o MyFamilyMD(TM), a consumer health management portal;
o CarePrime(R), a clinical care application for physicians and
clinicians; and
o I-talk(TM), interactive smart voice technology.
Interventions and Clinical Expertise
Our personalized health and disease interventions include intensive
programs for individuals who suffer from, or are at high risk for, active or
chronic disease and tailored programs for individuals who are at low risk.
Depending on the individual's level of risk, our custom tailored interventions
include self-help programs available through the web or person-assisted programs
administered through our Care Communication Center, which is staffed by skilled
nurses and other health professionals 24 hours per day, 7 days per week. All
interventions include life-style and risk reduction programs that follow
evidence-based clinical guidelines to optimize health, fitness, productivity and
quality of life.
We have designed and are implementing interventions for a number of
specific chronic conditions, including congestive heart failure (CHF), coronary
artery disease (CAD), asthma, diabetes, cancer management, cystic fibrosis lower
back pain and chronic obstructive pulmonary disease (COPD).
Care Communication Center
Our Care Communications Center is staffed with registered nurses and other
healthcare professionals 24 hours per day, 7 days per week. Through the Center,
we effect targeted interventions to improve the health management of the
populations we serve. The Center helps consumers make informed decisions about
their health and provides ongoing support for those with chronic diseases. Our
demand management and nurse triage services incorporate nationally recognized,
evidence-based clinical guidelines to ensure that all caregivers and consumers
are following the best practices.
Listing on the American Stock Exchange
Effective January 3, 2003 we completed a 1-for-5 reverse stock split. Our
board of directors and stockholders authorized the reverse stock split in
connection with the then pending application to list our common stock on the
American Stock Exchange. We began trading on the American Stock Exchange on
January 15, 2003 under the symbol "DMX."
Corporate Overview
I-trax was incorporated in the State of Delaware on September 15, 2000. We
currently have three wholly owned subsidiaries: I-trax Health Management
Solutions, Inc. (formerly known as I-Trax.com, Inc.) ("Health Management"), a
corporation, and iSummit Partners, LLC and WellComm Group, LLC, each a single
member limited liability company. We conduct our operations through Health
Management and WellComm Group, LLC.
Our Customers
As of the date of this filing, we serve approximately 64 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.
We continue to focus our marketing efforts on the following markets:
health plans and health insurers; self-insured employers; military, government
and public health agencies; college and university student health services; and
hospital and health systems.
20
Results of Operations
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30,
2002
Revenue for the three months ended June 30, 2003 was $1,051,196, an
increase of $452,536 or 76% from $598,660 for the three months ended June 30,
2002. Total revenue was comprised of two components: (1) prevention and care
services revenue of $655,842; and (2) technology license and services revenue of
$395,354, of which approximately $375,000 represents revenue from the exclusive
license of CarePrime(R) and MyFamilyMD(TM) we granted to UICI and certain
related software development work. We contracted this revenue in the third
quarter of 2002 and we are recognizing it based on delivering required
deliverables. We expect that in future periods we will generate a significant
portion of our revenue from delivery of care services through our Health-e-Life
ProgramSM.
Cost of revenue for the three months ended June 30, 2003 was $342,152, a
decrease of 6% from $365,153 for the three months ended June 30, 2002. The small
decrease is attributable to streamlining our personnel costs required to service
our prevention and care services contracts. We expect that in future periods our
cost of revenue will increase or decrease in proportion to volume of business
because we expect to derive a significant portion of our future revenue from
prevention and care services contracts, which require human involvement
proportionate to the size of the contract.
Outsourced and certain internal research and development costs of $188,045
were capitalized for the three months ended June 30, 2003 as compared to
$103,320, which we expensed for the three months ended June 30, 2002. We
expensed such costs during the quarter ended June 30, 2002 since the products
had not reached technological feasibility and therefore could not be
capitalized. We expect to continue to spend funds on improving our services and
adding functionality to our technology products including to the MyFamilyMD(TM)
application by adding MedWizard(R) tools, on CarePrime(TM) application, which
interacts with MyFamilyMD(TM) and its MedWizard(R) tools, and on
Health-e-Coordinator(TM) application by adding additional disease capabilities.
Commencing in the first quarter of 2003, we have begun to capitalize development
costs, which are primarily developer's salaries and outsourced expenses. As of
June 30, 2003, we have capitalized an aggregate of $375,545.
General and administrative expenses (excluding salary and related benefits
which are discussed separately below) decreased from $440,995 for the three
months ended June 30, 2002 to $188,197 for the three months ended June 30, 2003,
a decrease of 57%. Our ability to reduce general and administrative expenses is
attributable to increased efficiencies and the implementation of stringent
budgetary controls. Additionally, during the quarter we successfully negotiated
the settlement of certain payables. We believe that we currently have the
resources to handle increased revenue with minimal incremental fixed costs.
Salary and related benefits were $465,594 for the three months ended June
30, 2003 as compared to $935,295 for the three months ended June 30, 2002. The
decrease in salary and related benefits from the three months ended June 30,
2002 to the three months ended June 30, 2003 was $469,701 or 50%. Again, the
reduction in salary and related benefits expenses is a direct result of our
continued efforts to consolidate positions and improve efficiencies.
Depreciation and amortization expenses were $440,616 for the three months
ended June 30, 2003, as compared to $627,535 for the three months ended June 30,
2002. The decrease is primarily attributable to the write down of certain
intangible assets during December 2002 thereby reducing future amortization
charges.
Marketing and publicity expenses were $1,522,852 for the three months
ended June 30, 2003 as compared to $156,636 for the three months ended June 30,
2002. The increase of 872% or $1,366,216 is a direct result of our ongoing
marketing and investor relations campaigns to promote I-trax and our products
and to penetrate the disease management market. Of the total expense of
$1,522,852 for the quarter ended June 30, 2003, $1,467,395 was non-cash. The
non-cash charges resulted from I-trax issuing common stock, granting warrants
and having certain of its shareholders contribute shares to an investor
relations firm as consideration for services rendered to us.
Interest expense and financing costs for the three months ended June 30,
2003 was $654,354, increasing by $348,143 or 114% from $306,211 for the three
months ended June 30, 2002. For the three months ended June 30,
21
2003, interest expense includes charges for the amortization of the value
assigned to the original beneficial conversion value of debenture and the
associated warrants, with additional charges and amortization for additional
beneficial conversion value resulting from the June 2003 reset of the conversion
price of the debenture and the exercise price of the associated warrants. The
charges for the quarter for all of these items amounted to $517,449. 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. The remaining balance of interest expense of approximately $137,000 is
associated with interest on other debt and the amortization of warrants granted
to certain shareholders for loans made to us.
Amortization of debt issuance and conversion costs was $179,753 and
$54,576 for the three months ended June 30, 2003 and 2002, respectively. These
costs were incurred in selling the $2,000,000 debenture to Palladin and are
being amortized over the two-year life of the debenture. During the three months
ended June 30, 2003, we took a charge of $122,228 in connection with the reset
of the exercise price of the warrant granted to the party that brokered the
transaction along with increasing the number of shares covered by the warrant as
per the broker agreement.
Our net loss was $2,742,322 for the three months ended June 30, 2003 as
compared to a net loss of $2,391,061 for the three months ended June 30, 2002,
an increase of 15%.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Revenue for the six months ended June 30, 2003 was $2,667,327, an increase
of $1,662,310 or 165% from $1,005,017 for the six months ended June 30, 2002.
Total revenue was comprised of two components: (1) prevention and care services
revenue of $1,357,271; and (2) technology license and services revenue of
$1,310,056, of which approximately $1,076,000 represents revenue from the
exclusive license of CarePrime(R) and MyFamilyMD(TM) we granted to UICI and
certain related software development work. We contracted this revenue in the
third quarter of 2002 and we are recognizing it based on delivering required
deliverables. We expect that in future periods we will generate a significant
portion of our revenue from delivery of care services through our Health-e-Life
ProgramSM.
Cost of revenue for the six months ended June 30, 2003 was $658,232, an
increase of 5% from $627,318 for the six months ended June 30, 2002. The
increase is attributable to the personnel costs required to service our
prevention and care services contracts. We expect that in future periods our
cost of revenue will increase or decrease in proportion to volume of business
because we expect to derive a significant portion of our future revenue from
prevention and care services contracts, which require human involvement
proportionate to the size of the contract.
Outsourced and certain internal research and development costs amounting
to $375,545 were capitalized for the six months ended June 30, 2003 as compared
to $222,820, which we expensed for the six months ended June 30, 2002. We
expensed such costs during the six months ended June 30, 2002 since the products
had not reached technological feasibility and therefore could not be
capitalized. We expect to continue to spend funds on improving our services and
adding functionality to our technology products including to the MyFamilyMD(TM)
application by adding MedWizard(R) tools, on CarePrime(TM) application, which
interacts with MyFamilyMD(TM) and its MedWizard(R) tools, and on
Health-e-Coordinator(TM) application by adding additional disease capabilities.
Commencing in the first quarter of 2003, we began to capitalize certain costs,
which are primarily developer salaries and out-sourced costs.
General and administrative expenses (excluding salary and related benefits
which are discussed separately below) decreased from $986,311 for the six months
ended June 30, 2002 to $496,701 for the six months ended June 30, 2003, a
decrease of 50%. Our ability to reduce general and administrative expenses is
attributable to increased efficiencies and the implementation of stringent
budgetary controls. Additionally, during the six months ended June 30, 2003, we
successfully negotiated the settlement of certain payables. We believe that we
currently have the resources to handle increased revenue with minimal
incremental fixed costs.
Salary and related benefits were $1,324,457 for the six months ended June
30, 2003 as compared to $1,954,997 for the six months ended June 30, 2002. The
decrease in salary and related benefits from the six months
22
ended June 30, 2002 to the six months ended June 30, 2003 was $630,540 or 32%.
Again, the reduction in salary and related benefits expenses is a direct result
of our continued efforts to consolidate positions and improve efficiencies.
Depreciation and amortization expenses were $877,164 for the six months
ended June 30, 2003, as compared to $847,522 for the six months ended June 30,
2002.
Marketing and publicity expenses were $1,604,609 for the six months ended
June 30, 2003 as compared to $327,092 for the six months ended June 30, 2002.
The increase of 390% or $1,277,517 is a direct result of our ongoing marketing
and investor relations campaigns to promote I-trax and our products and to
penetrate the disease management market. Of the total expense of $1,604,609 for
the six months ended June 30, 2003, $1,467,395 was non-cash. The non-cash
charges resulted from I-trax issuing common stock, granting warrants and having
certain of its shareholders contribute shares to an investor relations firm for
services rendered to us.
Interest expense and financing costs for the six months ended June 30,
2003 was $974,881, increasing by $483,911 or 99% from $490,970 for the six
months ended June 30, 2002. For the six months ended June 30, 2003, interest
expense includes charges for the amortization of the value assigned to the
original beneficial conversion value of debenture and the associated warrants,
with additional charges and amortization for additional beneficial conversion
value resulting from the June 2003 reset of the conversion price of the
debenture and the exercise price of the associated warrants. The charges for the
six months for all of these items amounted to $748,125. 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. The remaining balance of interest expense of approximately $227,000 is
associated with interest on other debt and the amortization of warrants granted
to certain shareholders for loans.
Amortization of debt issuance and conversion costs was $237,278 and
$90,960 for the six months ended June 30, 2003 and 2002, respectively. These
costs were incurred in selling the $2,000,000 debenture to Palladin and are
being amortized over the two-year life of the debenture. During the three months
ended June 30, 2003, the Company took a one-time charge of $122,228 in
connection with the re-pricing of the warrants granted to the party, which
brokered the transaction along with increasing the number of shares covered by
the warrant as per the broker agreement.
During the quarter ended March 31, 2003, in connection with the
termination of our agreement to acquire DxCG, Inc., a Boston-based predictive
modeling company, we charged $200,000 to earnings. This sum was released to DxCG
following DxCG's termination of the merger agreement because certain conditions
to closing were not satisfied, including third party financing for the cash
portion of the purchase price.
Our net loss was $3,705,995 for the six months ended June 30, 2003 as
compared to a net loss of $4,542,973 for the six months ended June 30, 2002, a
decrease of 18%.
Liquidity and Capital Resources
Working Capital Deficiency
As of June 30, 2003, we had a working capital deficiency of $1,821,084.
Through June 30, 2003 and the date of this report, we have been able to finance
these deficits with loans from our senior management team, their affiliates, a
director and through the continued sale of equity. Although we continue to run
cash flow deficits as of the date of this report, we also 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 the third quarter of 2003.
Additionally, during the six months ended June 30, 2003 and through the
date of this report, our Chief Executive and Operating Officers, along with
certain stockholders advanced to us in the form of loans $740,000 for working
capital. Our Chief Executive and Operating Officers have committed to continue
to fund us until we generate positive cash flow from operations, but at least
through July 1, 2004.
23
Sources and Uses of Cash
Despite our negative cash flows from operations, which amounted to
$1,513,292 for the six months ended June 30, 2003 and $2,787,377 for the six
months ended June 30, 2002, we have been able to secure funds to support our
operations. During the six months ended June 30, 2002, we secured funding by
selling equity securities and a debenture, which aggregated approximately
$3,800,000. Of the $3,800,000, we used approximately $2,200,000 to acquire
WellComm and the remainder to fund operations. During the six months ended June
30, 2003, we borrowed, (net of repayments) $925,000 from officers, related
parties and certain shareholders. Additionally, during June of 2003, we raised
approximately $1,000,000 in a private placement. The funds were used primarily
to fund operating activities and to continue the investment in our technology.
As of June 30, 2003, our current liabilities were $2,799,059, of which
$107,330 is due to related parties. The remainder of current liabilities of
approximately $2,700,000 is made up, primarily, of trade payables of
approximately $690,000, accrued expenses of approximately $540,000, $300,000
credit line payable, which was assumed with the acquisition of WellComm,
approximately $125,000 of deferred revenue, carrying value $700,000 of
convertible debenture (with a face value of $2,000,000 maturing in February
2004) and $275,000 of loans from shareholders. We have good relationships with
all of our vendors.
As of June 30, 2003, the face value of our long-term debt amounted to
$617,809 (but carrying value of $373,390) held by a group of investors led by
Psilos Group Partners, L.P., for which principal and interest is not due until
March 2006. Additionally, $780,230 is owed to officers and directors for
advances made to the Company. This amount has been classified as non-current
since neither us nor the officers and directors expect these advances to be
repaid within the next twelve months unless circumstances change.
Under a private placement initiated in June 2003, we raised approximately
$1,000,000 in cash, converted approximately $1,169,270 in related party loans,
of which $1,037,038 represented principal and $132,232 represented interest, and
converted $121,997 of deferred salaries by selling or issuing, applicable,
common stock. In this offering, we issued a total of 1,311,682 shares.
During the quarter ended June 30, 2003, we also issued stock for services.
Specifically, we issued 205,833 shares of common stock for investor relations
services valued at $331,048.
During May 2003, certain of our shareholders contributed loans (which were
thereafter converted into common stock) and common stock such that an investor
relations firm retained by us received an aggregate of 290,000 shares of common
stock as compensation for services. The benefit that we have received from these
contributions amounted to $437,900, based on the market price of our common
stock on the date of the contribution, and was charged to operations.
During May and June 2003, we granted 375,000 warrants with exercise prices
ranging from $1.50 to $1.76 to two individuals and an institution for investor
relations services pursuant to three separate consulting agreements expiring in
May and June 2004. The value of such warrants, utilizing the Black-Scholes
model, amounted to $645,000. Such amount has been charged to operations for the
three months ended June 30, 2003.
During May 2003 pursuant to the approval of our Board of Directors, we
granted an aggregate of 450,000 warrants with an exercise price of $1.80 per
share to our Chief Executive and Operating Officers for their continued
financial support and for their guarantees to continue to support us through
July 2004. The granting of such warrants did not result in any charges to
operations since they are deemed to be granted to our employees and accordingly
are treated similar to incentive stock options.
In April 2003, we borrowed $100,000 from a shareholder pursuant to a
convertible promissory note. The note, with an eleven-month term, accrues
interest at 6% per annum and a default interest rate of 12% per annum. The
principal and related accrued and unpaid interest is convertible by the
shareholder into common stock at $1.50 per share at any time. As consideration
for this loan, we also granted the shareholder a warrant to acquire 100,000
shares of common stock at an exercise price of $1.50 per share. The value
assigned to the warrant of $68,000 is
24
recorded as a discount to the convertible promissory note using the relevant
fair value of the debt and the warrants to the actual proceeds from the
convertible promissory note.
Critical Accounting Policies
Impairment of Goodwill and Intangible
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.
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
25
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.
We recognize service revenue as the services are rendered. We contracts
with our customers to provide services based on an established monthly fee, a
per-call charge or a combination of both.
Although as of the date of these financials, we have not entered into any
risk-based contracts, we expect that we will do so in the very near future.
These types of contracts are generally for terms of three to five years, provide
for an automatic renewal and typically provide that a percentage of our fees may
be refundable ("performance based") based on achieving a targeted percentage
reduction in the customer's healthcare costs.
Material Equity Transactions
Through June 30, 2003 we have 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
Effective as of April 1, 2003, we issued a convertible promissory note in
the principal amount of $100,000 and convertible into common stock at $1.50 per
share and a warrant to acquire 100,000 shares of our common stock at $1.50 per
share to a an existing stockholder. The shareholder 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 June 2, 2003, we issued warrants to acquire 250,000 shares
of our common stock at $1.50 per share to two consultants as consideration for
investor relations services. We recorded an accounting expense of $430,000 in
connection with this issuance. Each of the consultants 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 May 23, 2003, we issued a warrant to acquire 125,000
shares of our common stock at $1.76 per share to seven principals of an
investment bank as consideration for investment banking services. We recorded an
accounting expense of $215,000 in connection with this issuance. Each of the
principals is an accredited
26
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 May 15,2003 we issued 200,000 shares of our common stock
to a consultant as consideration for investor relations and other services. We
recorded an investor relations expense of $241,348 in connection with this
issuance. The consultant 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.
As of June 30, 2003, we issued a total of 1,311,682 shares of common stock
at $1.75 per share pursuant to a private placement initiated on June 2, 2003 in
exchange for cash, loans and interest accrued on such loans, and accrued
salaries. 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.
In June 2003, in accordance with a contractual commitment, we reset the
exercise price of the warrant originally granted to a third party from $5.00 to
$1.75 per share and amended the warrant to increase the number of shares
issuable thereunder by 74,285 shares of common stock. In undertaking this
offering, we relied on an exemption from registration under Section 4(2) of the
Securities Act and Regulation D thereunder.
Item 3. Defaults upon Senior Securities
We did not default upon any senior securities during the quarter ended
June 30, 2003.
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of stockholders in Philadelphia, Pennsylvania
on May 21, 2003. Of the 9,372,727 shares outstanding as of the record date,
6,578,387 shares were present or represented by proxy at the meeting. At this
meeting the following actions were voted upon:
(1) To elect the following directors to serve for a term ending upon the
2004 Annual Meeting of Stockholders or until their successors are elected and
qualified:
For Against
------------------- ------------------
John Blazek 6,529,988 2,000
David R. Bock 6,573,487 2,000
Philip D. Green 6,529,988 2,000
Dr. Michael M.E. Johns 6,529,988 2,000
Dr. Arthur N. Leibowitz 6,573,487 2,000
Frank A. Martin 6,529,988 2,000
Dr. David Nash 6,573,487 2,000
John R. Palumbo 6,529,988 2,000
Dr. Carol Rehtmeyer 6,529,588 2,000
R. Dixon Thayer 6,573,487 2,000
William S. Wheeler 6,573,487 2,000
(2) Ratify the appointment of Goldstein Golub Kessler LLP as the
Company's independent auditors for the fiscal year ending December 31, 2003.
For Against Abstain
--------------------- ----------------------- -------------------
6,489,776 86,811 1,800
Item 5. Other Information
None.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification Pursuant to 18 U.S.C section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 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 April 22, 2003 to report a Regulation FD disclosure.
We filed a current report on Form 8-K with the Securities and Exchange
Commission on May 19, 2003 to report a Regulation FD disclosure.
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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: August 14, 2003 By: /s/ Frank A. Martin
--------------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
29