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: September 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 latest practicable date: As of November 11, 2003, the
Registrant had 13,004,965 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. Condensed Consolidated Financial Statements .....................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................21
Item 3. Controls and Procedures.........................................29
PART II. OTHER INFORMATION..................................................29
Item 1. Legal Proceedings...............................................29
Item 2. Changes in Securities...........................................29
Item 3. Defaults upon Senior Securities.................................29
Item 4. Submission of Matters to a Vote of Security Holders.............29
Item 5. Other Information...............................................29
Item 6. Exhibits and Reports on Form 8-K................................30
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
I-TRAX, INC.
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Page No.
Report of Independent Public Accountants 4
Consolidated Balance Sheets at September 30, 2003 (unaudited) and
December 31, 2002 5
Consolidated Statements of Operations for the three months ended
September 30, 2003 and 2002 (unaudited) 6
Consolidated Statements of Operations for the nine months ended
September 30, 2003 and 2002 (unaudited) 7
Consolidated Statement of Stockholders' Equity for the nine months
ended September 30, 2003 (unaudited) 8
Consolidated Statements of Cash Flows for the nine months ended
September 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 September 30, 2003,
and the related condensed consolidated statements of operations for the three
month and nine month periods ended September 30, 2003 and the consolidated
statements of stockholders' equity and cash flows for the nine month period
ended September 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
October 15, 2003
4
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
2003 December 31,
(unaudited) 2002
---------------- -----------------
Current assets:
Cash $ 245,257 $ 360,166
Due from life insurance company 500,000 --
Deposit on potential acquisition -- 200,000
Accounts receivable, net 564,167 597,635
Prepaid expenses 243,346 77,569
Other current assets 25,344 20,960
---------------- -----------------
Total current assets 1,578,114 1,256,330
---------------- -----------------
Office equipment, furniture, leasehold improvements and software development
costs, net 924,830 412,779
Deferred marketing costs, net 944,443 1,284,445
Goodwill 8,424,062 8,424,062
Intangible assets, net 1,907,100 2,748,087
Debt issuance cost, net 76,698 249,273
Security deposits 31,564 31,564
---------------- -----------------
Total assets $ 13,886,811 $ 14,406,540
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Credit line payable 300,000 300,000
Accounts payable 711,400 918,791
Accrued expenses 442,559 743,151
Due to officers, directors and other related parties 547,560 225,000
Notes payable - other, net of discount 119,092 --
Capital lease payable 60,680 60,047
Deferred revenue -- 1,379,922
Debenture payable, net of discount 1,101,192 --
Other current liabilities -- 13,423
---------------- -----------------
Total current liabilities 3,282,483 3,640,334
---------------- -----------------
Capital lease obligation, net of current portion 33,813 96,765
Promissory notes and debenture payable, net of discount 397,500 1,245,876
Due to officers and directors 315,000 1,024,598
---------------- -----------------
Total liabilities 4,028,796 6,007,573
---------------- -----------------
Commitments and contingencies (Note 9)
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,
11,893,038 and 9,372,727 shares issued and outstanding, respectively 11,892 9,372
Additional paid in capital 46,008,482 39,236,119
Accumulated deficit (36,162,359) (30,846,524)
---------------- -----------------
Total stockholders' equity 9,858,015 8,398,967
---------------- -----------------
Total liabilities and stockholders' equity $ 13,886,811 $ 14,406,540
================ =================
See accompanying notes to consolidated financial statements (unaudited).
5
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
Three months Three months
ended ended
September 30, September 30,
2003 2002
------------------ -----------------
Revenue:
Technology licenses $ 243,288 $ 366,340
Services 757,225 405,160
------------------ -----------------
Total revenue 1,000,513 771,500
------------------ -----------------
Cost of revenue:
Technology licenses 34,154 10,834
Services 284,749 314,089
------------------ -----------------
Total cost of revenue 318,903 324,923
------------------ -----------------
Gross profit 681,610 446,577
Operating expenses:
General and administrative 499,674 467,173
Salary and related benefits 750,223 845,967
Research and development -- 97,400
Depreciation and amortization 440,348 349,714
Marketing and publicity 96,762 39,413
------------------ -----------------
Total operating expenses 1,787,007 2,124,590
------------------ -----------------
Operating loss (1,105,397) (1,353,090)
------------------ -----------------
Other income (expenses):
Proceeds from life insurance policy 500,000 --
Amortization of debt issuance costs (57,525) (54,576)
Interest expense and financing costs (946,918) (287,965)
------------------ -----------------
Total other expenses (504,443) (342,541)
------------------ -----------------
Net loss $ (1,609,840) $ (1,695,631)
================== =================
Loss per common share:
Basic and diluted $ (.14) $ (.18)
================== =================
Weighted average number of shares outstanding: 11,121,724 9,391,370
================== =================
See accompanying notes to consolidated financial statements (unaudited).
6
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
Nine months Nine months
ended ended
September 30, September 30,
2003 2002
------------------ -----------------
Revenue:
Technology licenses $ 1,553,344 $ 545,840
Services 2,114,496 1,230,677
------------------ -----------------
Total revenue 3,667,840 1,776,517
------------------ -----------------
Cost of revenue:
Technology licenses 74,858 32,501
Services 902,277 919,740
------------------ -----------------
Total cost of revenue 977,135 952,241
------------------ -----------------
Gross profit 2,690,705 824,276
Operating expenses:
General and administrative 1,020,317 1,290,284
Salary and related benefits 2,074,680 2,964,164
Research and development -- 320,220
Depreciation and amortization 1,317,512 1,197,236
Marketing and publicity 1,677,429 366,505
------------------ -----------------
Total operating expenses 6,089,938 7,090,650
------------------ -----------------
Operating loss (3,399,233) (5,314,133)
------------------ -----------------
Other income (expenses):
Proceeds from life insurance policy 500,000
Amortization of debt issuance costs (294,803) (145,536)
Costs in connection with uncompleted acquisition (200,000) --
Interest expense and financing costs (1,921,799) (778,935)
------------------ -----------------
Total other expenses (1,916,602) (924,471)
------------------ -----------------
Net loss $ (5,315,835) $ (6,238,604)
================== =================
Loss per common share:
Basic and diluted $ (.53) $ (.76)
================== =================
Weighted average number of shares outstanding: 10,111,766 8,207,741
================== =================
See accompanying notes to consolidated financial statements (unaudited).
7
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 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 1,253,986 1,254 2,404,135 -- 2,405,389
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
Issuance of common stock upon conversion of
debenture 322,629 323 564,278 564,601
Net loss for the nine months ended September
30, 2003 -- -- -- (5,315,835) (5,315,835)
-------------- ------------- ---------------- -------------- ---------------
Balances at September 30, 2003 11,893,038 $ 11,892 $ 46,008,482 $ (36,162,359) $ 9,858,015
============== ============= ================ ============== ===============
See accompanying notes to consolidated financial statements (unaudited).
8
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
Nine months Nine months
ended ended
September 30, September 30,
2003 2002
----------------- ----------------
Operating activities:
Net loss $ (5,315,835) $ (6,238,604)
Adjustments to reconcile net loss to net cash used in operating
activities:
Accretion of discount on notes payable charged to interest expense 556,322 364,791
Accretion of beneficial conversion value of debenture 1,053,064 316,217
Amortization of option liability (13,423) (107,385)
Amortization of debt issuance costs 294,803 145,536
Amortization of deferred marketing costs 340,002 --
Depreciation and amortization 977,509 1,239,958
Expenses for compensatory stock options and warrants 23,845 163,200
Issuance of securities for services 1,413,946 (152,200)
Write off of deposit on cancelled acquisition 200,000 --
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in:
Accounts receivable 33,468 174,858
Prepaid expenses (165,777) (18,649)
Other current assets (4,384) (26,081)
Due from life insurance company (500,000) --
(Decrease) increase in:
Accounts payable (207,391) 253,618
Accrued expenses 134,368 112,954
Deferred revenue (1,379,922) 2,668,063
--------------------- --------------------
Net cash used in operating activities (2,559,405) (1,103,724)
--------------------- --------------------
Investing activities:
Proceeds from repayment of note receivable -- 67,500
Cash used for property, equipment and software development costs (648,574) (25,732)
Proceeds from partial release of security deposit -- 45,120
Net cash to acquire WellComm Group, Inc. -- (2,045,065)
--------------------- --------------------
Net cash used in investing activities (648,574) (1,958,127)
--------------------- --------------------
Financing activities:
Principal payments on capital leases (62,319) (64,677)
Proceeds from credit line payable -- 125,000
Repayment to related parties (165,000) (65,000)
Notes payable repayments (175,000) --
Proceeds from officers, directors and other related parties 740,000 700,000
Proceeds from sale of common stock 2,405,389 1,943,476
Proceeds from notes payable 350,000 --
Costs of issuance of debenture -- (150,000)
Proceeds from issuance of debenture -- 2,000,000
--------------------- --------------------
Net cash provided by financing activities 3,093,070 4,488,799
--------------------- --------------------
Net increase (decrease) in cash (114,909) 1,426,948
Cash at beginning of period 360,166 1,029,208
--------------------- --------------------
Cash at end of period $ 245,257 $ 2,456,156
===================== ====================
Supplemental disclosure of non-cash flow information:
Cash paid during the period for:
Interest $ 27,839 $ 10,978
===================== ====================
(Continues on following page.)
9
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Continues from previous page.)
Nine months Nine months
ended ended
September 30, September 30,
2003 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 $ -- $ 391,408
===================== ====================
Issuance of common stock upon conversion of related party debt and
assigned debt $ 1,169,270 $ --
===================== ====================
Issuance of common stock for conversion of deferred salaries $ 121,997 $ --
--------------------- --------------------
--------------------- --------------------
Issuance of common stock upon conversion of debenture $ 564,601 $ --
===================== ====================
See accompanying notes to consolidated financial statements (unaudited).
10
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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 September 30, 2003, the Company had two wholly owned subsidiaries: I-trax
Health Management Solutions, Inc. ("Health Management"), a corporation, and
WellComm Group, LLC, 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
September 30, 2003 and the results of the operations and cash flows for the
three and nine months ended September 30, 2003. The results for the three and
nine months ended September 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 nine months ended September 30, 2003, the Company capitalized software
development costs amounting to $617,045 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 September 30, 2003 and 2002, 5,809,093 and
1,836,556, respectively, of shares issuable upon exercise 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3--DUE FROM LIFE INSURANCE COMPANY
A senior executive officer and director of the Company died in September 2003.
In October 2003, the Company received proceeds of $500,000 from a key-person
life insurance policy maintained by the Company on the life of the deceased
senior executive officer. Accordingly, this amount was accrued as of September
30, 2003. Because the Company pledged the proceeds from this insurance policy as
security for loans made to the Company in 2002 and 2003 by the deceased senior
executive officer, a former director and a key employee, the Company dispersed
the proceeds from the insurance policy in October 2003 in partial satisfaction
of such loans.
NOTE 4--ACQUISITION OF WELLCOMM GROUP, INC.
On February 6, 2002, the Company acquired all of the issued and outstanding
common stock of WellComm Group, Inc. by issuing 1,488,000 shares of common stock
valued at $9,746,400, granting options valued at $733,600 to acquire 112,000
shares 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 nine months ended September 30,
2002 as if the acquisition was consummated at the beginning of that period.
Nine months
ended
September 30,
2002
-----------------
Total revenue $ 2,030,296
==================
Total expenses $ 8,253,170
==================
Net loss $ (6,222,874)
==================
Pro forma net loss per share:
Basic and Diluted $ (.66)
==================
Weighted average number of shares outstanding:
Basic and Diluted 9,391,296
==================
NOTE 5--RELATED PARTY TRANSACTIONS
At December 31, 2002, the Company owed to certain officers and directors
$1,024,598 and owed a relative of the Company's Chief Operating Officer an
additional $225,000. During February 2003, the Company repaid $140,000 of the
$225,000 loan outstanding to a relative of the Company's Chief Operating
Officer.
During February 2003, pursuant to two promissory notes, two former directors of
the Company advanced $200,000 to the Company for working capital. The notes
accrue interest at 8% per year and mature in February 2004. In addition, through
June 30, 2003, the Company's Chief Executive and Operating Officers, along with
a director of the Company, advanced the Company a total of $540,000 for working
capital at an interest rate of 8% per year. During the three months ended
September 30, 2003, the Company repaid $25,000 to its Chief Executive Officer.
The Company's Chief Executive and Operating Officers have committed to continue
to support the Company through July 1, 2004.
12
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5--RELATED PARTY TRANSACTIONS (cont'd)
In June 2003, certain of the Company's officers, directors and a venture capital
fund managed by the Company's Chief Executive Officer converted $909,421,
comprised of loans and advances of $790,697 and accrued interest of $118,724,
into 519,667 shares of common stock at $1.75 per share. 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 10 below.
At September 30, 2003, based on repayment terms agreed upon with certain
officers, the Company classified $315,000 of outstanding loans and advances as a
non-current liability because they are not due within the next twelve months.
Interest expense associated with related party loans amounted to $13,951 and
$13,792 for the three months ended September 30, 2003 and 2002, respectively.
For the nine months ended September 30, 2003 and 2002, interest expense
associated with related party loans amounted to $70,686 and $41,876,
respectively.
NOTE 6--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 September 30, 2003, the discount accreted to interest
expense associated with the convertible promissory note amounted to $18,546. At
September 30, 2003 the carrying value of the note amounted to $69,092 and is
included in "Notes payable - other" on the accompanying condensed consolidated
balance sheets.
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 September 30, 2003, the outstanding principal balance
on this loan is $50,000. For the three months ended September 30, 2003, interest
expense amounted to approximately $3,750.
On May 29, 2003, the Company borrowed $100,000 from a shareholder. The loan was
due on September 29, 2003 and it accrued interest at 12% during the four-month
period it was outstanding. For the three months ended September 30, 2003,
interest expense associated with this loan amounted to approximately $9,000. The
loan and related interest amounting to $112,000 was repaid in full on September
29, 2003.
13
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7--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. The
amount accreted to interest expense amounted to $22,677 and $22,677 for the
three months ended September 30, 2003 and 2002, respectively. For the nine
months ended September 30, 2003 and 2002 the amount accreted to interest expense
amounted to $68,031 and $68,031, respectively. At September 30, 2003, the
carrying value of the notes amounted to $397,500 and is included in the
"Promissory notes, net of discount" on the accompanying consolidated balance
sheets.
In June 2003, as part of certain related parties converting and assigning debt
as discussed in Note 5 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
thereon amounting to $6,669 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 in the amount of $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 10 below.
NOTE 8--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. For
the three months ended September 30, 2003, Palladin converted an aggregate of
$564,601 of the amount due on the debenture for which the Company issued 322,629
shares of common stock.
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 resetting 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 resetting. The amount accreted to
interest expense associated with the value assigned to the warrant amounted to
$260,650 and $111,285 for the three months ended September 30, 2003 and 2002,
respectively. For the nine months ended September 30, 2003 and 2002 the amount
accreted to interest expense amounted to $575,012 and $333,855, respectively.
Upon the initial sale of the debenture, the Company recorded a beneficial
conversion value of $948,651. 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.
14
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8--CONVERTIBLE DEBENTURE (cont'd)
The beneficial conversion value was increased by $682,528 as a result of the
reset in June 2003. As of September 30, 2003, the carrying value of the
debenture amounted to $1,101,192 and is classified as a current liability in the
accompanying condensed consolidated balance sheet. The carrying value of the
debenture is net of Palladin's partial conversion of the debenture as describe
above.
As a result of Palladin's partial conversion of the debenture, the Company
recorded $254,310 of additional interest expense for the quarter ended September
30, 2003. This amount represents the portion of the beneficial conversion value
associated with the principal being converted and was therefore charged to
interest expense immediately instead of being amortized over time.
Accordingly, the Company recorded $527,508 and $118,581 of interest expense for
the three months ended September 30, 2003 and 2002, respectively for the
amortization of the beneficial conversion value of the debenture. For the nine
months ended September 30, 2003 and 2002, the Company recorded $849,986 and
$355,743, respectively.
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 of common stock issuable under the warrant by 74,285 shares, resulting in
a further charge to operations of $95,828. For the three months ended September
30, 2003 and 2002 the amortization of these debt issuance costs amounted to
$57,525 and $54,576, respectively, whereas for the nine months ended September
30, 2003 and 2002, such amortization amounted to $294,803 and $145,536,
respectively.
NOTE 9--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 September 30, 2003, two
customers represented 24% and 11% of the total accounts receivable. For the
three months ended September 30, 2003, the Company had two customers, each of
which accounted for 13% of total revenue. For the nine months ended September
30, 2003, the Company also had two customers that accounted for 38% and 11% of
total revenue.
15
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9--COMMITMENTS AND CONTINGENCIES (cont'd)
Risk Sharing Contracts
The Company enters into risk sharing contracts with some customers 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 customer if the Company does not save such customer a
pre-determined percentage of the expenses incurred by individuals whose health
is managed by the Company. As of September 30, 2003, the Company is not a party
to any risk sharing contracts.
NOTE 10--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 aggregates $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 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.
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.
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.
During the three months ended September 30, 2003, Palladin converted $564,601 of
principal outstanding under the convertible debenture into 322,629 shares of the
Company's common stock.
During August 2003 the Company commenced a private placement whereby it offered
as a unit, two shares of common stock and a warrant to purchase an additional
share of common stock exercisable at $3.00 (the market price on the Company's
common stock on the date the Company commenced the private placement) for a unit
purchase price of $5. The maximum amount offered was $3,500,000. Through
September 30, 2003, the Company has issued 640,000 shares of common stock and
granted warrants to purchase 320,000 additional shares under this private
placement. The Company has realized net proceeds of $1,401,203 after expenses as
of September 30, 2003.
16
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10--STOCKHOLDERS' EQUITY (cont'd)
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 of
$1.50 and $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 warrants to purchase an aggregate of 450,000 shares for an exercise
price of $1.80 per share (representing a premium over market price on the date
of grant) 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 because they were 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 any time by
the shareholder into common stock 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 is $68,000 and is recorded as a discount to the
convertible promissory note using the relative 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, in
accordance with a contractual commitment, reset the exercise price of the
warrant originally granted to a third party that brokered the Palladin
investment 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 in the amount of $95,828.
The following table summarizes the Company's activity as it relates to its
warrants for the nine months ended September 30, 2003:
Shares
-----------------
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
------------------
Quarter ended September 30, 2003:
Granted 320,000
Exercised
------------------
Balance outstanding at September 30, 2003 3,452,238
==================
17
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10--STOCKHOLDERS' EQUITY (cont'd)
Stock Options
The table below summaries the activity in the Company's stock option plans for
the nine months ended September 30, 2003:
Non-Plan
Non-Qualified Non-Qualified
Incentive Options Options Options Total
-------------------------------------------------------------------------------------------------------------
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 30, 2003 743,882 825,973 739,000 2,308,855
Granted 48,000 - - 48,000
Exercised - - - -
Forfeited/Expired - - - -
-----------------------------------------------------------------------------------
Outstanding as of
September 30, 2003 791,882 825,973 739,000 2,356,855
===================================================================================
Vesting Dates:
December 31, 2003 125,144 141,004 189,164 453,312
December 31, 2004 190,706 200,998 101,665 473,786
December 31, 2005 104,795 82,665 75,006 246,967
December 31, 2006 57,587 50,504 -- 96,340
December 31, 2007 -- 333 -- 333
Thereafter -- -- 20,000 20,000
As of September 30, 2003, there were outstanding an aggregate of 1,017,617 of
exercisable plan and non-plan options with exercise prices ranging from $.01 to
$10.00.
18
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10--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 nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
----------------- ------------------ ----------------- -------------------
Net loss as reported $ (1,609,840) $ (1,695,631) $ (5,315,835) $ (6,238,604)
Add back intrinsic value of the
options issued to employee and
charged to operations -- -- 23,845 163,200
Deduct total stock based
employee compensation expense
determined under fair value
based methods for all awards (817,118) (639,310) (2,952,906) (2,155,403)
------------------ ------------------- ------------------ --------------------
Pro forma net loss (2,426,958) (2,334,941) (8,244,896) (8,230,807)
================== =================== ================== ====================
Basic and diluted net loss per
share as reported $ (.14) $ (.18) $ (.53) $ (.76)
------------------ ------------------- ------------------ --------------------
Pro forma basic and diluted net
loss per share $ (.22) $ (.25) $ (.82) $ (1.00)
================== =================== ================== ====================
NOTE 11--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. 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 and
accordingly such agreement was terminated which, in turn, resulted in the
Company's charging the $200,000 to earnings in the first quarter of 2003.
19
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 12--SUBESEQUENT EVENTS
During October 2003, the Company issued 760,000 shares of common stock and
granted warrants to purchase an additional 380,000 shares of common stock
pursuant to the private placement commenced during August 2003. The Company has
realized $1,676,242 after expenses for these October sales. See Note 10 above
for further discussion.
During October 2003, the Company received $175,000 from Palladin in connection
with the partial exercise of its warrants to purchase 100,000 shares of common
stock at $1.75 each.
During October 2003, Palladin converted $175,000 of principal outstanding under
the convertible debenture into 100,000 shares of the Company's common stock.
During October 2003, the Company repaid $300,000 owed on its line of credit,
representing payment in full.
During October 2003, the Company repaid to the estate of a deceased senior
executive officer, a former director and a key employee $500,000 of loans using
proceeds of a life insurance policy. See Note 3 above for further discussion.
During October 2003, the Company repaid a shareholder $50,000 (along with
accrued interest), which represented the total balance outstanding as of
September 30, 2003. The original loan in the amount of $150,000 was made to the
Company pursuant to a promissory note dated April 10, 2003.
20
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-Life(SM) Program
We deliver our solutions through our proprietary Health-e-Life((SM))
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-Life(SM) 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 for our clients.
Technology Solutions
All technology components of our Health-e-Life(SM) 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 adherence to our
health and disease intervention programs. The key technology we use for
effective care coordination include:
21
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 trained
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 affect 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 two wholly owned subsidiaries: I-trax Health Management
Solutions, Inc. (formerly known as I-Trax.com, Inc.) ("Health Management"), a
corporation, and WellComm Group, LLC, 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 70 customers. Our
customers include physician groups, hospitals, health plans, including plans
providing Medicaid and Medicare covered services, universities, colleges and
agencies and branches of the United States government.
Marketing Strategy
We continue to focus the majority of our marketing efforts on the
following markets:
o Self-Insured Employers. Self-insured employers have a
significant stake in making sure that employees and
their dependents are empowered with tools to make the
best and most educated healthcare decisions. We
believe that correct and informed decisions will not
only reduce direct healthcare costs, but also reduce
employee absenteeism and improve employees' focus at
22
work. Where employees are older or retired and at
risk for chronic diseases, early risk identification
and targeted interventions will help reduce costs and
improve quality of life. Third party administrators,
the organizations that process claims for most
self-insured employers, are an important channel in
pursuing this market segment.
o Health Plans and Health Insurers. We believe that the
era of health maintenance organizations denying
access to care as a measure to reduce costs is over.
We believe that health plans and health insurers are
under increasing pressure to revise their methods to
reduce medical errors, coordinate care and implement
technology enabled population health management
solutions and disease management programs. We believe
that denial of access was a short-term solution that
is now causing escalated costs. Population health
management is a long-term solution with proven return
on investment.
o Health Systems and Hospitals. Hospitals and health
systems are under increasing financial pressure to
balance the expense of high quality medical care with
public and private insurers' reimbursements. Our
solutions assist hospitals and health systems to
reduce costs while enhancing the service and care
provided to patients.
Results of Operations
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002
Revenue for the three months ended September 30, 2003 was $1,000,513,
an increase of $229,013 or 30% from $771,500 for the three months ended
September 30, 2002. Total revenue was comprised of two components: (1)
prevention and care services revenue of $757,225; and (2) technology license and
services revenue of $243,288. Of the total technology license and services
revenue, $125,000 represents revenue from the exclusive license of CarePrime(R)
and MyFamilyMD(TM) to UICI, Inc. We contracted this license and software
development in the third quarter of 2002 and we are recognizing it based on
deliverables. We expect that a significant portion of revenue in future periods
will be generated from the delivery of care services through our
Health-e-Life(SM) Program.
Cost of revenue for the three months ended September 30, 2003 was
$318,903, a decrease of 2% from $324,923 for the three months ended September
30, 2002. The small decrease is attributable to streamlining of personnel costs
required to service our prevention and care services contracts. We expect future
revenue to be made up largely of prevention and care services. Because the costs
associated with these services are variable in nature, we expect our expenses
will increase in line with our revenues.
Commencing in the first quarter of 2003, we have begun to capitalize
certain development costs, which are comprised primarily of developer's salaries
and outsourced expenses. As of September 30, 2003, we have capitalized an
aggregate of $617,045 in costs.
For the three months ended September 30, 2003 we capitalized $241,500.
Such costs were expensed during the quarter ended September 30, 2002 because the
products under development had not reached technological feasibility and
therefore the related expense could not be capitalized. We expect to continue to
spend funds to improve our services and to add functionality to our technology
products. Such products include the MyFamilyMD(TM) application and its
MedWizard(R) tools, the CarePrime(TM) application, which interacts with
MyFamilyMD(TM) and its MedWizard(R) tools, and the Health-e-Coordinator(TM)
application, which is a disease management platform.
General and administrative expenses (excluding salary and related
benefits which are discussed separately below) increased slightly from $467,173
for the three months ended September 30, 2002 to $499,674 for the three months
ended September 30, 2003. We believe that we currently have the resources to
handle increased revenue without major increases in general and administrative
expenses.
Salary and related benefits were $750,223 for the three months ended
September 30, 2003 as compared to $845,967 for the three months ended September
30, 2002. The decrease in salary and related benefits from the three months
23
ended September 30, 2002 to the three months ended September 30, 2003 was
$95,744 or 11% resulting from consolidating positions and improving
efficiencies.
Depreciation and amortization expenses were $440,348 for the three
months ended September 30, 2003, as compared to $349,714 for the three months
ended September 30, 2002. The increase is primarily attributable to certain
intangible assets acquired in October 2002.
Marketing and publicity expenses were $96,762 for the three months
ended September 30, 2003 as compared to $39,413 for the three months ended
September 30, 2002. The increase of 146% or $57,349 is a direct result of
augmented marketing and investor relation campaigns to promote I-trax and
penetrate the disease management market.
Interest expense and financing costs for the three months ended
September 30, 2003 were $946,918, an increase of $658,953 or 229% from $287,965
for the three months ended September 30, 2002. Interest expense for the three
months ended September 30, 2003 includes charges of approximately $838,825
related to the Palladin debenture and related warrants. Of this amount, $29,571
represents 6% interest on the debenture for the three months ended September 30,
2003; $554,844 represents amortization of the value assigned to the original
beneficial conversion value of the Palladin debenture and the associated
warrants and additional charges and amortization for the further beneficial
conversion value caused by the June 2003 resetting of the conversion price of
such debenture and the exercise price of the associated warrants; and $254,310
represents an accelerated charge to interest expense for the portion of the
debenture converted during the three months ended September 30, 2003. During
this period, Palladin converted approximately $561,000 of principal outstanding
under the debenture into common stock. 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 $108,093 is associated with interest on other
debt and the amortization of warrants granted to certain shareholders for loans
made to I-trax.
Amortization of debt issuance and conversion costs was $57,525 and
$54,576 for the three months ended September 30, 2003 and 2002, respectively.
These amounts represent costs incurred in selling the $2,000,000 debenture to
Palladin and will be amortized over the two-year life of the debenture.
Carol Rehtmeyer, a senior executive officer and director of I-trax,
died in September 2003. In October 2003, we received proceeds of $500,000 from a
key-person life insurance policy we maintained on the life of the deceased
senior executive officer. Accordingly, this amount was accrued as of September
30, 2003. Because we were obligated to use the proceeds of this policy to pay
certain loans, we dispersed the proceeds from insurance policy in October 2003
in partial satisfaction of such loans.
For the three months ended September 30, 2003 our net loss was
$1,609,840 as compared to a net loss $1,695,631 for the three months ended
September 30, 2002, a decrease of 5%.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002
Revenue for the nine months ended September 30, 2003 was $3,667,840, an
increase of $1,891,323 or 106% from $1,776,517 for the nine months ended
September 30, 2002. The increase in revenue is primarily attributable to I-trax
recognizing approximately $1,400,000 of deferred revenue pursuant to a contract
executed during the third quarter of 2002. The balance of the increase is
associated with new care services contracts executed during the nine months
ended September 30, 2003. Total revenue was comprised of two components: (1)
prevention and care services revenue of $2,114,496; and (2) technology license
and services revenue of $1,553,344. Of the total technology license and services
revenue, $1,400,000 represents revenue from the exclusive license of
CarePrime(R) and MyFamilyMD(TM) to UICI, Inc. We contracted this license and
software development in the third quarter of 2002 and we are recognizing it
based on deliverables. We expect that a significant portion of revenue in future
periods will be generated from the delivery of care services through our
Health-e-Life(SM) Program.
Cost of revenue for the nine months ended September 30, 2003 was
$977,135, an increase of 3% from $952,241 for the nine months ended September
30, 2002. The increase is attributable to the personnel costs required to
24
service our prevention and care services contracts. We expect future revenue to
be made up largely of prevention care services. Because the costs associated
with these services are variable in nature, we expect our expenses will increase
in line with our revenues.
Outsourced and certain internal research and development costs
amounting to $617,045 were capitalized for the nine months ended September 30,
2003 as compared to $320,220 which was expensed for the nine months ended
September 30, 2002. We expensed such costs during the nine months ended
September 30, 2002 because the products under development had not reached
technological feasibility and therefore the related expense could not be
capitalized. We expect to continue to spend funds to improve our services and to
add functionality to our technology products. Such products include the
MyFamilyMD(TM) application and its MedWizard(R) tools, the CarePrime(TM)
application, which interacts with MyFamilyMD(TM) and its MedWizard(R) tools, and
the Health-e-Coordinator(TM) application, which is a disease management
platform. Commencing in the first quarter of 2003, we began to capitalize
certain costs, which are comprised primarily of developer salaries and
out-sourced costs.
General and administrative expenses (excluding salary and related
benefits which are discussed separately below) decreased from $1,290,284 for the
nine months ended September 30, 2002 to $1,020,317 for the nine months ended
September 30, 2003, a decrease of 21%. Our ability to reduce general and
administrative expenses is attributable to increased efficiencies and
implementation of stringent budgetary controls. Additionally, during the nine
months ended September 30, 2003, we successfully settled certain payables on
favorable terms that resulted in a $180,757 expense reversal. We believe that we
currently have the resources to handle increased revenue without major increases
in general and administrative expenses.
Salary and related benefits were $2,074,680 for the nine months ended
September 30, 2003 as compared to $2,964,164 for the nine months ended September
30, 2002. The decrease in salary and related benefits from the nine months ended
September 30, 2002 to the nine months ended September 30, 2003 was $889,484 or
30%, resulting from consolidating positions and improving efficiencies.
Depreciation and amortization expenses were $1,317,512 for the nine
months ended September 30, 2003, as compared to $1,197,236 for the nine months
ended September 30, 2002. The increase is primarily attributable to certain
intangible assets acquired during October 2002.
Marketing and publicity expenses were $1,677,429 for the nine months
ended September 30, 2003 as compared to $366,505 for the nine months ended
September 30, 2002. The increase of 358% or $1,310,924 is a direct result of
augmented marketing and investor relation campaigns to promote I-trax in the
capital markets and its products in the disease management market. A non-cash
charge of approximately $1,467,000 for the nine months ended September 30, 2003,
resulted from the issuance of common stock, granting of warrants and
contribution of common stock by certain stockholders of I-trax to an investor
relations firm.
Interest expense and financing costs for the nine months ended
September 30, 2003 were $1,921,799, increasing by $1,142,864 or 147% from
$778,935 for the nine months ended September 30, 2002. For the nine months ended
September 30, 2003, interest expense includes charges of approximately
$1,646,354 related to the Palladin debenture and related warrants. Of this
amount $89,671 represents interest of 6% on the debenture for the nine months
ended September 30, 2003; $1,302,373 represents amortization of the value
assigned to the original beneficial conversion value of the Palladin debenture
and the associated warrants and additional charges and amortization for the
further beneficial conversion value caused by the June 2003 resetting of the
conversion price of such debenture and the exercise price of the associated
warrants; and $254,310 represents an accelerated charge to interest expense for
the portion of the debenture converted during the nine months ended September
30, 2003. During the period, Palladin converted approximately $561,000 of
principal outstanding under the debenture into common stock. 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 $275,445 is
associated with interest on other debt and the amortization of the value of
warrants granted to certain shareholders for loans made to I-trax.
Amortization of debt issuance and conversion costs was $294,803 and
$145,536 for the nine months ended September 30, 2003 and 2002, respectively.
These amounts represented costs incurred in selling the $2,000,000 debenture to
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Palladin and will be amortized over the two-year life of the debenture. During
the nine months ended September 30, 2003, we booked a one-time charge of
$122,228 in connection with the re-pricing of the exercise price of the warrants
granted to a third party that brokered the Palladin transaction and 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, including third party financing for the cash portion of the purchase
price, were not satisfied.
For the nine months ended September 30, 2003, our net loss was
$5,315,835 as compared to a net loss of $6,238,604 for the nine months ended
September 30, 2002, a decrease of 15%.
Liquidity and Capital Resources
Working Capital Deficiency
As of September 30, 2003, we had a working capital deficiency of
$1,704,369. As of the date of this report, we have secured funds sufficient to
finance these deficits from the sales of equity instruments.
During the nine months ended September 30, 2003, our Chief Executive
and Operating Officers, along with certain stockholders advanced to us $740,000
in the form of loans for working capital. Our Chief Executive and Operating
Officers have committed to continue to support us through July 1, 2004. Cash
flow deficits from operations during the three months ended September 30, 2003
have averaged approximately $ 348,000 per month.
Sources and Uses of Cash
Despite negative cash flows from operations, which amounted to
$2,559,405 for the nine months ended September 30, 2003 and $1,103,724 for the
nine months ended September 30, 2002, we have been able to secure funds to
support our operations. During the nine months ended September 30, 2002, we
secured funding by selling equity securities, issuing a debenture and receiving
advances from officers, directors and other related parties, which aggregated
approximately $4,490,000. Of the $4,490,000, approximately $2,200,000 was used
to acquire WellComm Group, Inc., and the remainder was used to fund operations.
During the nine months ended September 30, 2003, we borrowed (net of repayments)
$750,000 from officers, related parties and certain shareholders. Additionally,
during the nine months ended September 30, 2003, we raised approximately
$2,400,000 pursuant to private placements of our securities. The funds were used
primarily to fund operations, continue the investment in our technology and
satisfy certain liabilities.
As of September 30, 2003, our current liabilities were $3,282,483, of
which $547,560 is due to related parties. The remainder of current liabilities
of $2,734,923 is comprised primarily of trade payables of approximately
$711,000, accrued expenses of approximately $442,000, $300,000 credit line
payable, which was assumed with the acquisition of WellComm, carrying value of
$1,101,000 for convertible debenture we sold to Palladin (with a face value of
$1,586,000 maturing in February 2004) and $119,000 of loans from shareholders.
If we do not have sufficient funds to repay the convertible debenture we sold to
Palladin when due, we will be in default on a material obligation and as a
result our operations may be materially and adversely effected. We have good
relationships with all of our vendors.
As of September 30, 2003, the face value of our long-term debt amounted
to $617,809 (with a carrying value of $397,500) 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, we owe $315,000 to our Chief Executive and
Operating Officers for advances made to us. This amount is classified as
non-current since we do not 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
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interest, and converted $121,997 of deferred salaries by selling or issuing, as
applicable, common stock. In this offering, we issued a total of 1,311,682
shares.
During August 2003 we commenced a private placement whereby we offered
as a unit two shares of common stock and a warrant to purchase an additional
share of common stock exercisable at $3.00 (the market price of our common stock
on the date we commenced the private placement) for a unit purchase price of $5.
The maximum amount offered is $3,500,000. Through September 30, 2003, we issued
640,000 shares of common stock and granted warrants to purchase 320,000
additional shares under this private placement. We realized net proceeds of
$1,401,203 after expenses as of September 30, 2003.
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. This 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 1, 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 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 contract types, including
perpetual software licenses, subscription licenses and custom development
services, all of which may 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.
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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 our fee and, accordingly, 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.
Upon execution of a contract for services, 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 such contract. If a
significant portion of a fee is due after our normal payment terms, which are
generally 30 to 90 days from invoice date, we account for such fee as services
are provided.
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. Accordingly, we defer revenue for the amount 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, upon
execution of a contract, we determine 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 fee using the percentage of completion
method. We determine the percentage of completion based on our estimate of costs
incurred to date compared with the total costs budgeted to complete the project.
We recognize service revenue as services are rendered. We contract with
our customers to provide services based on an agreed upon monthly fee, a
per-call charge or a combination of both.
As of the date of this filing, we have not entered into any
risk-sharing contracts, however we expect that we may do so in future periods.
This type of contract is generally for a term of three to five years, provides
for automatic renewal, and may provide that a percentage of our fee is
refundable ("performance based") based on achieving a targeted percentage
reduction in a customer's healthcare costs.
Material Equity Transactions
As of September 30, 2003 we have executed equity transactions with
related and unrelated parties in connection with raising funds for working
capital and with issuing securities in lieu of compensation for services
received. We believe that we have valued all such transactions pursuant to
various applicable accounting rules and that they ultimately represent the
economic substance of each transaction.
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Item 3. Controls and Procedures
As of September 30, 2003, 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
On August 14, 2003 we commenced a private placement whereby we offered
as a unit two shares of common stock and a warrant to purchase an additional
share of common stock exercisable at $3.00 (the market price of our common stock
on the date we commenced the private placement) for a unit purchase price of $5.
Westminster Securities Corporation, Member New York Stock Exchange, acted as
placement agent for this private placement. The maximum amount offered is
$3,500,000. As of September 30, 2003, we issued 640,000 shares of common stock
and granted warrants to purchase 320,000 additional shares under this private
placement. As of September 30, 2003, we realized proceeds of $1,401,203, net of
$198,797 in placement agent commissions and expenses. Each of the participants
in this private placement 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.
Item 3. Defaults upon Senior Securities
We did not default upon any senior securities during the quarter ended
September 30, 2003.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matters to a vote of our security holders during
the quarter ended September 30, 2003.
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 two Current Reports on Form 8-K with the Securities and
Exchange Commission on August 15, 2003 to report the issuance of our earnings
press release and Regulation FD disclosure.
We filed a Current Report on Form 8-K with the Securities and Exchange
Commission on October 17, 2003 to report a private placement of our securities.
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SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
I-TRAX, INC.
Date: November 13, 2003 By: /s/ Frank A. Martin
--------------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
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