UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
Commission File Number: 0-30275
I-TRAX, INC.
------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
23-3057155
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(I.R.S. Employer Identification No.)
One Logan Square, 130 N. 18th Street, Suite 2615
Philadelphia, Pennsylvania 19103
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(Address of principal executive offices)
(215) 557-7488
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of August 12, 2004, the number of
outstanding shares of common stock, par value $.001 per share, was 28,655,871.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
INDEX
Page No.
PART I. FINANCIAL INFORMATION..............................................................................3
Item 1. Financial Statements ......................................................................3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....22
Item 3. Controls and Procedures...................................................................34
PART II. OTHER INFORMATION................................................................................34
Item 1. Legal Proceedings.........................................................................34
Item 2. Changes in Securities and Small Business Issuer Purchases of Securities...................35
Item 3. Default Upon Senior Securities............................................................35
Item 4. Submission of Matters to a Vote of Security Holders.......................................35
Item 6. Exhibits and Reports on Form 8-K..........................................................35
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
I-TRAX, INC.
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Page No.
Report of Independent Registered Public Accounting Firm 4
Condensed Consolidated Balance Sheets at June 30, 2004 (unaudited)
and December 31, 2003 5
Condensed Consolidated Statements of Operations
for the three months ended June 30, 2004 and 2003 (unaudited) 6
Condensed Consolidated Statements of Operations
for the six months ended June 30, 2004 and 2003 (unaudited) 7
Condensed Consolidated Statement of Stockholders' Equity
for the six months ended June 30, 2004 (unaudited) 8
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2004 and 2003 (unaudited) 9
Notes to Condensed Consolidated Financial Statements 11
3
Report of Independent Registered Public Accounting Firm
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, 2004, and
the related condensed consolidated statements of operations for the three month
and six month periods ended June 30, 2004 and 2003, the condensed consolidated
statements of stockholders' equity for the six month period ended June 30, 2004
and the condensed consolidated statements of cash flows for the six month
periods ended June 30, 2004 and 2003. These interim financial statements are the
responsibility of the company's management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the condensed consolidated
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 consolidated financial statements referred to above for
them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the balance sheet as of
December 31, 2003, 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 February 16, 2004, 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,
2003, 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 27, 2004
4
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
June 30, 2004 December 31,
(unaudited) 2003
--------- ---------
Current assets
Cash and cash equivalents $ 3,214 $ 574
Accounts receivable, net 14,090 549
Income tax receivable 279 --
Other current assets 1,560 188
--------- ---------
Total current assets 19,143 1,311
Property and equipment, net 5,096 1,675
Goodwill 45,853 8,424
Customer list, net 29,075 769
Other intangible assets, net 2,204 1,400
Other long term assets 61 24
--------- ---------
Total assets $ 101,432 $ 13,603
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 6,730 $ 606
Accrued expenses 4,575 361
Due to officers and related parties -- 280
Notes payable 2,000 --
Net liabilities of discontinued operations 1,299 --
Other current liabilities 7,040 355
--------- ---------
Total current liabilities 21,644 1,602
Common stock warrants -- 2,760
Note payable 4,459 --
Other long term liabilities 2,451 856
--------- ---------
Total liabilities 28,554 5,218
--------- ---------
Commitments and contingencies -- --
Stockholders' equity
Preferred stock - $.001 par value, 2,000,000 shares authorized,
1,200,000 and -0- issued and outstanding, respectively 1 --
Common stock - $.001 par value, 100,000,000 shares authorized,
24,595,074 and 13,966,817 shares issued and outstanding, respectively 24 14
Additional paid in capital 131,198 47,276
Accumulated deficit (58,345) (38,905)
--------- ---------
Total stockholders' equity 72,878 8,385
--------- ---------
Total liabilities and stockholders' equity $ 101,432 $ 13,603
========= =========
See accompanying notes to consolidated financial statements (unaudited).
5
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
(in thousands, except share data)
Three months Three months
ended ended
June 30, 2004 June 30, 2003
------------ ------------
Net revenue $ 30,229 $ 1,051
------------ ------------
Costs and expenses:
Operating expenses 24,962 503
General and administrative expenses 4,651 2,015
Depreciation and amortization 1,357 441
------------ ------------
Total costs and expenses 30,970 2,959
------------ ------------
Operating loss (741) (1,908)
------------ ------------
Other expenses:
Interest expense 163 654
Amortization of financing costs 12 180
------------ ------------
Total other expenses 175 834
------------ ------------
Net loss (916) (2,742)
------------ ------------
Less preferred stock dividend (598) --
------------ ------------
Net loss applicable to common stockholders $ (1,514) $ (2,742)
============ ============
Loss per common share, basic and diluted $ (0.06) $ (0.28)
============ ============
Weighted average number of shares outstanding, basic and diluted 24,586,681 9,873,184
============ ============
See accompanying notes to consolidated financial statements (unaudited).
6
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
(in thousands, except share data)
Six months ended Six months ended
June 30, 2004 June 30, 2003
------------ ------------
Net revenue $ 31,676 $ 2,667
------------ ------------
Costs and expenses:
Operating expenses 25,659 1,064
General and administrative expenses 6,672 3,019
Depreciation and amortization 1,792 878
------------ ------------
Total costs and expenses 34,123 4,961
------------ ------------
Operating loss (2,447) (2,294)
------------ ------------
Other expenses:
Interest expense 776 975
Amortization of financing costs 47 237
Other expenses 350 200
------------ ------------
Total other expenses 1,173 1,412
------------ ------------
Net loss (3,620) (3,706)
Less preferred stock dividend (677) --
Less deemed dividends applicable to preferred stockholders (15,820) --
------------ ------------
Net loss applicable to common stockholders $ (20,117) $ (3,706)
============ ============
Loss per common share, basic and diluted: $ (1.01) $ (0.39)
============ ============
Weighted average number of shares outstanding, basic and diluted: 19,995,997 9,620,206
============ ============
See accompanying notes to consolidated financial statements (unaudited).
7
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
(in thousands, except share data)
Preferred Stock Common Stock Additional Total
----------------------- ---------------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
--------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at January 1, 2004 -- $ -- 13,966,817 $ 14 $ 47,276 $ (38,905) $ 8,385
Reclassification of common stock warrants
to paid in capital -- -- -- -- 3,110 -- 3,110
Issuance of common stock in connection with
conversion of promissory note and other
settlement, net of costs -- -- 69,165 -- 71 -- 71
Issuance of common stock for conversion
of debenture and accrued interest -- -- 427,106 -- 747 -- 747
Issuance of common stock for exercise
of warrants -- -- 131,986 -- 52 -- 52
Sale of preferred stock, net of costs 1,000,000 1 -- -- 23,509 -- 23,510
Issuance of preferred stock for
acquisition of CHD Meridian 400,000 -- -- -- 10,000 -- 10,000
Redemption of preferred stock (200,000) -- -- -- (5,000) -- (5,000)
Issuance of common stock for
acquisition of CHD Meridian -- -- 10,000,000 10 36,290 -- 36,300
Beneficial conversion feature in connection
with issuance of preferred stock -- -- -- -- 15,820 (15,820) --
Preferred stock dividend -- -- -- -- (677) -- (677)
Net loss for the six months ended
June 30, 2004 -- -- -- -- -- (3,620) (3,620)
--------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at June 30, 2004 1,200,000 $ 1 24,595,074 $ 24 $ 131,198 $ (58,345) $ 72,878
========= ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements (unaudited).
8
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
(in thousands, except share data)
Six months Six months
ended ended
June 30, 2004 June 30, 2003
------------- --------------
Operating activities:
Net loss $ (3,620) $ (3,706)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,792 878
Accretion of discount on notes payable charged to interest expense
and beneficial conversion value of debenture 573 780
Increase in fair value of common stock warrants 350 --
Amortization of debt issuance costs 34 237
Write-off of deposit on cancelled acquisition -- 200
Issuance of securities for services -- 1,414
Other non-cash items -- 10
Changes in operating assets and liabilities, net of acquisition:
Decrease (increase) in accounts receivable (731) 135
Decrease (increase) in other current assets (375) (56)
Decrease in accounts payable (242) (230)
Increase in accrued expenses 378 80
(Decrease) increase in other current liabilities 70 (1,255)
-------- --------
Net cash used in operating activities (1,771) (1,513)
-------- --------
Investing activities:
Purchases of property, plant and equipment (770) (380)
Acquisition of intangible assets (637) --
Acquisition of CHD Meridian, net of acquired cash (18,134) --
-------- --------
Net cash used in investing activities (19,541) (380)
-------- --------
Financing activities:
Principal payments on capital leases (21) (35)
Proceeds from/ repayment to related parties (280) 600
Proceeds from note payable -- 325
Proceeds from exercise of warrants 52 --
Proceeds from bank credit facility, net of issuance costs 5,691 --
Proceeds from sale of preferred stock, net of issuance costs 23,510 --
Proceeds from sale of common stock -- 1,004
Redemption of preferred stock (5,000) --
-------- --------
Net cash provided by financing activities 23,952 1,894
-------- --------
Net increase (decrease) in cash and cash equivalents 2,640 1
Cash and cash equivalents at beginning of period 574 360
-------- --------
Cash and cash equivalents at end of period $ 3,214 $ 361
======== ========
Supplemental disclosure of non-cash flow information: Cash paid during the year
for:
Interest $ 266 $ --
======== ========
(Continues on following page.)
See accompanying notes to consolidated financial statements (unaudited).
9
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Continues from previous page.)
Six months Six months
ended ended
June 30, 2004 June 30, 2003
------------- --------------
Income taxes $ 151 $ --
======== ========
Schedule of non-cash financing activities:
Reclassification of common stock warrants to paid in capital $ 3,110 $ --
======== ========
Issuance of common stock in connection with conversion of promissory $ 71 $ 1,169
======== ========
Issuance of common stock in connection with conversion of debenture
payable $ 747 $ --
======== ========
Beneficial conversion feature in connection with issuance of preferred
stock $ 15,820 $ --
======== ========
Issuance of common and preferred stock in connection with the
acquisition of CHD Meridian $ 46,300 $ --
======== ========
Preferred stock dividend $ 677 $ --
======== ========
Issuance of common stock in connection with the conversion of deferred
salaries $ -- $ 122
======== ========
Purchase of all capital stock of CHD Meridian and assumption of liabilities
in the acquisition as follows:
Fair value of non-cash tangible assets acquired $ 17,257 $ --
Goodwill 37,429 --
Customer list 29,184 --
Other intangibles 1,167 --
Cash paid, net of cash acquired (includes $85 of transaction costs
incurred in a prior period) (18,834) --
Common stock issued (36,300) --
Preferred stock issued (10,000) --
-------- --------
Liabilities assumed $(19,903) $ --
======== ========
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") was incorporated in the State of Delaware on
September 15, 2000. On March 19, 2004, the Company consummated a merger with
Meridian Occupational Healthcare Associates, Inc., a private company, which does
business as CHD Meridian Healthcare ("CHD Meridian"). (See Note 3--Business
Combination.)
Following the merger, the Company offers two categories of services: (1) on-site
health related services such as occupational health, primary care, corporate
health, and pharmacy and (2) personalized health management programs.
The Company conducts its on-site services through CHD Meridian Healthcare, LLC,
a Delaware limited liability company ("CHD Meridian LLC"), and its subsidiary
companies, and its personalized health management programs through I-trax Health
Management Solutions, LLC, a Delaware limited liability company, and I-trax
Health Management Solutions, Inc., a Delaware corporation.
Physician services at the Company's on-site locations are provided under
management agreements with affiliated physician associations, which are
organized professional corporations that hire licensed physicians who provide
medical services (the "Physician Groups"). The Physician Groups provide all
medical aspects of the Company's on-site services, including the development of
professional standards, policies and procedures. The Company provides a wide
array of business services to the Physician Groups, including administrative
services, support personnel, facilities, marketing, and non-medical services.
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 and the instructions to Form 10-QSB and Item
310(b) of Regulation S-B promulgated under the Securities Exchange Act of 1934.
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 necessary to present fairly the financial position as of June 30,
2004 and the results of the operations and cash flows for the three and six
months ended June 30, 2004. Because the combination of the Company and CHD
Meridian for accounting purposes was effective as of April 1, 2004, the results
for the six months ended June 30, 2004 only include the operations of CHD
Meridian for the three months ended June 30, 2004. The balance sheet at December
31, 2003 has been derived from the audited financial statements of the Company
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.
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 stockholders 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 preferred stock. As of June 30, 2004 and 2003,
17,719,554 and 5,444,093 shares issuable upon exercise of options, warrants and
convertible preferred stock, respectively, were excluded from the diluted loss
per share computation because their effect would be anti-dilutive.
11
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2--INTERIM RESULTS AND BASIS OF PRESENTATION (continued)
These unaudited financial statements should be read in conjunction with the
Company's audited financial statements and the financial statements of CHD
Meridian and notes thereto for the year ended December 31, 2003 included in the
Company's annual report on Form 10-KSB/A for the year ended December 31, 2003,
and the Company's current report on Form 8-K/A, respectively, each filed on
August 11, 2004.
During the second quarter of 2004 and for all historical periods, the Company
reclassified performance incentives received from its wholesale distributor for
total pharmaceutical volume purchased. The reclassification reduced revenue and
operating expenses and had no effect on operating income or net income. In
addition, for comparability, certain other amounts for historic periods have
been reclassified and combined, where appropriate, to conform to the financial
statement presentation used in 2004.
The consolidated financial statements include the balance sheet of CHD Meridian
LLC, its wholly owned subsidiaries, and the Physician Groups. The financial
statements of the Physician Groups are consolidated with CHD Meridian LLC in
accordance with the nominee shareholder model of EITF 97-2, "Application of FASB
Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements."
CHD Meridian LLC has unilateral control over the assets and operations of the
Physician Groups. Control of the Physician Groups is perpetual and other than
temporary because of the nominee shareholder model and the management agreements
between the entities. The net tangible assets of the Physician Groups were not
material at June 30, 2004.
NOTE 3--BUSINESS COMBINATION
On March 19, 2004, the Company merged with CHD Meridian, a privately held
company and a major provider of outsourced, employer-sponsored healthcare
services. CHD Meridian provides such services to large self-insured employers,
including Fortune 1,000 companies.
Pursuant to the merger agreement, the Company, (1) issued 10,000,000 shares of
common stock, (2) issued 400,000 shares of convertible preferred stock (with
each share convertible into 10 shares of common stock) at $25.00 per share or
$10,000,000 in the aggregate, and (3) paid approximately $25,508,000 to the CHD
Meridian stockholders. Immediately following the closing of the merger, the
Company also redeemed from former CHD Meridian stockholders that participated in
the merger, pro rata, an aggregate of 200,000 shares of convertible preferred
stock at its original issue price of $25.00 per share or $5,000,000. The total
value of the merger consideration is $73,592,000, made up of common stock valued
at $36,300,000, preferred stock valued at $10,000,000, cash of $25,908,000 and
transaction expenses of $1,384,000. The Company has filed a registration
statement with the Securities and Exchange Commission to register for resale the
(a) common stock issued in the merger, and (b) common stock issuable upon
conversion of convertible preferred stock issued in the merger.
The former CHD Meridian stockholders will also receive additional shares of the
Company's common stock if CHD Meridian, continuing its operations following the
closing of the merger as CHD Meridian LLC, achieves calendar 2004 milestones for
earnings before interest, taxes, depreciation and amortization (or EBITDA) as
follows: If EBITDA equals or exceeds $8,100,000, the number of such additional
common shares payable will be 3,473,280; the number of such shares will increase
proportionately with EBITDA above $8,100,000, up to a maximum of 3,859,200
additional shares of the Company's common stock if EBITDA equals or exceeds
$9,000,000. In connection with this earn-out, the Company placed 3,859,200
shares in escrow. The shares are not recorded as outstanding for accounting
purposes until the earn-out target is satisfied.
12
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3--BUSINESS COMBINATION (continued)
The Company funded the cash portion of the merger consideration by (1) selling
1,000,000 shares of convertible preferred stock at $25.00 per share (with each
share convertible into 10 shares of common stock), for gross proceeds of
$25,000,000, and (2) drawing $12,000,000 under a new $20,000,000 senior secured
credit facility with a national lender. (See Note 6 - Long Term Debt.)
In connection with the sale and issuance of the convertible preferred stock, the
Company reported $15,820,000 as a deemed dividend to preferred stockholders
representing the beneficial conversion value for the underlying common stock as
of the date the merger was agreed. The beneficial conversion value is treated as
a dividend on the convertible preferred stock solely for the purpose of
computing earnings per share. The dividend is computed by multiplying (1) the
difference between the value of the underlying common stock calculated using
average closing price for the three days prior and three days after the
announcement of the merger ($3.63 per share) and the conversion price ($2.50 per
share) by (2) the number of shares of common stock into which the convertible
preferred stock outstanding at the merger's effective time was convertible
(14,000,000 shares).
The aggregate purchase price of $73,592,000 for this transaction is summarized
as follows:
Fair value of tangible assets acquired (includes
cash of $8,444,000) $ 25,715,000
Liabilities assumed (19,903,000)
Goodwill 37,429,000
Customer list 29,184,000
Other intangibles 1,167,000
-------------------
$ 73,592,000
===================
The acquisition was accounted for using the purchase method of accounting. The
Company incurred acquisition costs of $1,384,000 that are included in the
purchase price. In addition, $832,000 of transaction related bonuses and
termination pay are included in the general and administrative expense item on
the condensed consolidated statement of operations.
The following are the Company's unaudited pro forma results of operations giving
effect to the acquisition of CHD Meridian as though the transaction had occurred
on January 1, 2003. The results exclude transaction costs of $1,938,000 and
transaction related bonuses and termination pay of $832,000 included in the CHD
Meridian and the Company's statements of operations, respectively. The pro forma
results also include adjustments to amortization expense associated with the
intangibles acquired and interest expense related to the new credit facility.
Six months ended Six months ended
June 30, 2004 June 30, 2003
------------------ ------------------
Net revenue $ 59,939,000 $ 56,976,000
------------------ ------------------
Operating income (1,005,000) (700,000)
------------------ ------------------
Net loss $ (2,329,000) $ (2,756,000)
================== ==================
Loss per common share $ (0.10) $ (0.14)
================== ==================
13
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4--GOODWILL AND INTANGIBLE ASSETS
During the quarter ended June 30, 2004, goodwill increased by $615,000. This
increase is related to additional transaction costs incurred by the Company and
an adjustment in the liabilities acquired. The changes in the carrying amount of
goodwill for the quarter ended June 30, 2004 is as follows:
Total
---------------
Balance as of January 1, 2004 $ 8,424,000
Goodwill acquired in the six months
ended June 30, 2004 37,429,000
---------------
Balance as of June 30, 2004 $ 45,853,000
===============
The components of identifiable intangible assets, which are included in the
consolidated balance sheet as of June 30, 2004, are as follows:
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
----------------- --------------- ---------------
Amortized intangible assets:
Customer lists $ 36,492,000 $ 7,417,000 $ 29,075,000
Other intangibles 5,284,000 3,080,000 2,204,000
----------------- --------------- ----------------
Total $ 41,776,000 $ 10,497,000 $ 31,279,000
================= =============== ================
Customer lists are amortized on a straight-line basis over the expected periods
to be benefited, generally 12 - 15 years. Other intangible assets represent
technology and deferred marketing costs, which are amortized on a straight-line
basis over the expected periods to be benefited, generally 3 - 5 years. In
accordance with SFAS No. 142, the Company completes a test for impairment of
goodwill and certain other intangible assets annually.
NOTE 5--CONVERTIBLE DEBENTURE
During the first quarter of 2004, Palladin Opportunity Fund LLC converted the
remaining balance of the debenture payable and accrued interest into common
stock. Accordingly, the Company issued 427,106 shares of common stock for the
conversion of principal and accrued interest amounting to $747,000.
Interest expense associated with the convertible debenture amounted to $368,000
for the six months ended June 30, 2004. This amount includes $362,000 that
represents accelerated accretion to interest expense for the discount of the
value assigned to the warrants issued to the debenture holder and the beneficial
conversion value at date of issuance.
14
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6--LONG TERM DEBT
On March 19, 2004, in connection with the CHD Meridian acquisition, the Company
obtained a $20,000,000 senior secured credit facility from a national lender
that expires on April 1, 2007. The credit facility has a $6,000,000 term loan
commitment with a $14,000,000 revolving credit commitment. Outstanding letter of
credit liabilities reduce the amount available to be borrowed under the
revolving credit commitment.
The credit facility is secured by substantially all of the Company's assets.
From June 1, 2004 until November 1, 2005, the borrowings under the revolving
credit commitment may not exceed 80% of eligible receivables plus 50% of
eligible fixed assets. Borrowings, at the Company's election, may be either Base
rate or Eurodollar rate loans. Base rate loans bear interest at the prime rate
as published from time to time, plus up to 0.75% per annum depending on the
Company's debt service coverage ratios. Eurodollar rate loans bear interest at
the Eurodollar rate plus up to 3.0% per annum likewise depending on the
Company's debt service coverage ratios.
As of June 30, 2004, the Company had outstanding $6,000,000 under the term loan,
$2,000,000 of which is classified as short term and $4,000,000 of which is
classified as long term, and $459,000 under the revolving credit commitment,
which is classified as long term, and an aggregate of $3,000,000 under letters
of credit. On the first day of each calendar quarter beginning July 1, 2004 and
ending on April 1, 2007, the Company is required to make a principal installment
payment of $500,000. The balance outstanding on the term loan as of the filing
of this report is $5,500,000.
The credit facility includes certain financial covenants, including a covenant
measuring: (1) the ratio of the Company's funded indebtedness to earnings before
income, taxes, depreciation and amortization, or EBITDA, (2) the ratio of the
Company's funded indebtedness to capitalization, and (3) the Company's fixed
charges coverage ratio. The first measuring date under the credit facility
occurred on June 30, 2004. As of that date, the Company was not in compliance
with the funded indebtedness to EBITDA ratio and the fixed charges coverage
ratio.
On August 12, 2004, the Company agreed with the senior lender to amend the
credit facility, and, accordingly, as of the date of this filing, the Company is
in compliance with all covenants. Among other things, the amendment includes two
additional covenants: (1) the Company must achieve minimum stockholders' equity
of $82,878,000 as of October 31, 2004, an increase of $10,000,000 from the
stockholder's equity reflected on the balance sheet as of June 30, 2004, and (2)
the Company must achieve pro forma 2004 EBITDA (giving effect to the acquisition
of CHD Meridian Healthcare as though the transaction had occurred on January 1,
2004) of $3,560,000. The Company will need to raise approximately $10,000,000 in
the form of equity to satisfy the stockholders' equity covenant in the credit
facility amendment.
The credit facility amendment also limits the amount the Company can borrow
under the facility, although the amount of the revolving credit commitments
under the facility remains at $14,000,000. Through October 31, 2004, the Company
may use up to $5,500,000 (including outstanding letters of credit). After
October 31, 2004 and assuming the Company is in compliance with all covenants as
of such date, the Company may borrow additional amounts up to the borrowing base
(approximately $11,000,000 as of June 30, 2004), less the amount of outstanding
letters of credit.
In addition to funding the merger and related costs, a portion of the proceeds
from the credit facility was used by the Company to repay $280,000 in related
party loans and $944,000 in principal and interest for all other outstanding
promissory notes.
15
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7--COMMITMENTS AND CONTINGENCIES
Litigation
CHD Meridian is a defendant in two lawsuits seeking a return of approximately
$920,000 in payments received in the ordinary course of business from two
clients that filed for protection under bankruptcy laws during 2002 and 2003.
Management believes that such amounts were not preference payments, and as such
are not subject to repayment. The outcome of these lawsuits, however, cannot be
determined.
CHD Meridian is also involved in certain legal actions and claims on a variety
of matters related to the normal course of business. Management believes that
such legal actions will not have a material effect on the results of operations
or the financial position of the Company. (See also Note 9 - Risk Retention
Group.)
Compliance with Healthcare Regulations
Because the Company operates in the healthcare industry, it is subject to
numerous laws and regulations of Federal, state, and local governments. These
laws and regulations include, but are not limited to, matters regarding
licensure, accreditation, government healthcare program participation
requirements, reimbursement for patient services, and Medicare and Medicaid
fraud and abuse. Recently, government activity has increased with respect to
investigations and allegations concerning possible violations of fraud and abuse
statutes and regulations by healthcare providers. Violations of these laws and
regulations could result in, among other things, expulsion from government
healthcare programs together with the imposition of significant fines and
penalties, as well as significant repayments for patient services previously
billed.
Management believes that the Company is in compliance with fraud and abuse
statutes as well as other applicable government laws and regulations. Compliance
with such laws and regulations can be subject to future government review and
interpretation as well as regulatory actions unknown or unasserted at this time.
Significant Customers
As of June 30, 2004, two customers represented 20% of the Company's accounts
receivable as reflected on the Company's condensed consolidated balance sheets.
For the three and six months ended June 30, 2004, one customer of the Company
accounted for 10% of the Company's revenue as reflected on the Company's
condensed consolidated statement of operations.
Risk-Sharing Contracts
From time to time the Company enters into risk-sharing contracts. A risk-sharing
contract generally requires the Company to manage the health and wellness of a
predetermined set of individuals for a term of three to five years. A
risk-sharing contract provides that the Company is required to refund to its
client a percentage of the Company's fees if its program does not save the
client an agreed upon percentage of the client's healthcare costs. The Company
did not generate material risk revenue, which may be subject to a refund, during
the quarter and six months ended June 30, 2004.
16
NOTE 8--STOCKHOLDERS' EQUITY
Preferred Stock
The Company has 2,000,000 authorized shares of preferred stock. As of June 30,
2004, the Company had issued and outstanding 1,200,000 shares of Series A
Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock
is convertible into shares of common stock. Holders of Series A Convertible
Preferred Stock may convert such shares into common stock at any time. The
Series A Convertible Preferred Stock has a liquidation preference of $25.00 per
share (the original purchase price). The Series A Convertible Preferred Stock
accrues, from issuance, dividends at a rate of 8% per year on the $25.00 per
share original issue price. Dividends will only be payable upon the Company's
liquidation or conversion of the Series A Convertible Preferred Stock into
common stock and will be payable, at the Company's option, in cash or common
stock. For the six months ended June 30, 2004, the Company recorded
approximately $677,000 in accrued dividends.
The placement agents of the Series A Convertible Preferred Stock sold to fund
the acquisition of CHD Meridian received a commission of $1,490,000 and warrants
to acquire 492,000 shares of common stock exercisable at $2.50 per share. Such
warrants were valued at $1,506,000 utilizing the Black-Scholes valuation model.
The amount of the cash paid and the value of the warrants have been classified
as a cost of equity in the condensed consolidated statement of stockholders'
equity.
Common Stock
The Company has 100,000,000 authorized shares of common stock. As of June 30,
2004, the Company had issued and outstanding 24,595,074 shares, which excludes
3,859,200 shares held in escrow for the CHD Meridian earn out.
Warrants
Under the terms of a private placement completed during October 2003, the
Company filed a registration statement under the Securities Act of 1933, as
amended, covering the resale of the common stock and the common stock underlying
warrants issued in the private placement. The Securities and Exchange Commission
declared the registration statement effective on February 17, 2004.
17
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8--STOCKHOLDERS' EQUITY (continued)
Warrants (continued)
In accordance with EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed To, and Potentially Settled In a Company's Own Stock," upon issuance of
the warrants, the Company recorded a liability in the amount of the fair value
of $2,459,000 for certain warrants to acquire 890,000 shares of common stock.
The fair value of the warrants was estimated using the Black-Scholes valuation
model with the following assumptions: no dividends; risk-free interest rate of
4%; the contractual life of 5 years; and volatility of 112%. The fair value of
the warrants was estimated to be $2,760,000 and $3,110,000 at December 31, 2003
and February 17, 2004, respectively. The Company recorded an additional
liability, with a corresponding charge to operations, of $301,000 and $350,000
on December 31, 2003 and February 17, 2004, respectively, associated with the
increase in fair value of the warrants.
The adjustments required by EITF 00-19 were triggered by the terms of the
private placement subscription agreement, which imposed penalties if the Company
did not timely register the common stock underlying the warrants issued in the
private placement. The Securities and Exchange Commission declared the related
registration statement effective within the contractual deadline and the Company
incurred no penalties. The adjustments for EITF 00-19 had no impact on the
Company's working capital, liquidity or business operations.
The warrants were accounted for as a liability, with an offsetting reduction to
additional paid-in capital received in the private placement. The warrant
liability has been reclassified to equity as of February 17, 2004, the effective
date of the registration statement, evidencing the non-impact of these
adjustments on the Company's financial position and business operations.
The following table summarizes the Company's activity as it relates to its
warrants for the six months ended June 30, 2004:
Shares Underlying
Warrants
-------------------
Balance outstanding at January 1, 2004 3,351,372
Quarter ended March 31, 2004:
Granted 492,000
Exercised (179,278)
-------------------
Balance outstanding at March 31, 2004 3,664,094
-------------------
Quarter ended June 30, 2004:
Granted
Exercised (7,500)
===================
Balance outstanding at June 30, 2004 3,656,594
Warrants issued during the six months ended June 30, 2004 are exercisable at
$2.50 per share. Such warrants were valued at $1,506,000 and recorded as a cost
of equity because they were granted to placement agents in connection with sales
of convertible preferred stock.
18
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8--STOCKHOLDERS' EQUITY (continued)
Stock Options
The table below summarizes the activity in the Company's stock option plans for
the six moths ended June 30, 2004:
Non-Plan
Non-Qualified Non-Qualified
Incentive Options Options Options Total
------------------------ -------------------- ------------------- ------------------- -------------------
Outstanding as of 652,941 795,973 669,000 2,117,914
January 1, 2004
Granted 70,921 -- -- 70,921
Exercised -- -- -- --
Forfeited/Expired -- (30,000) -- (30,000)
-------------------- ------------------- ------------------- -------------------
Outstanding as of
March 31, 2004 723,862 765,973 669,000 2,158,835
-------------------- ------------------- ------------------- -------------------
Granted -- -- -- --
Exercised -- -- -- --
Forfeited/Expired (95,875) -- -- (95,875)
-------------------- ------------------- ------------------- -------------------
Outstanding as of June
30, 2004 627,987 765,973 669,000 2,062,960
==================== =================== =================== ===================
Vesting Dates:
December 31, 2004 122,541 170,998 177,496 471,035
December 31, 2005 122,062 82,665 101,665 306,392
December 31, 2006 72,062 50,004 75,006 197,072
December 31, 2007 5,549 -- -- 5,549
December 31, 2008 -- -- 20,000 20,000
Thereafter -- -- -- --
As of June 30, 2004, exercisable plan and non-plan options to purchase an
aggregate of 1,329,648 shares, with exercise prices ranging from $.005 to
$10.00, were outstanding.
The Company accounts for its employee incentive stock option plans 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. The adoption of the
disclosure requirements of SFAS No. 148 did not have a material effect on the
Company's financial position or results of operations.
19
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8--STOCKHOLDERS' EQUITY (continued)
Had the Company determined compensation expense based 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, 2004 June 30, 2003 June 30, 2004 June 30, 2003
---------------- ------------- -------------- ---------------
Net loss as reported $ (916,000) $(2,742,000) $(3,620,000) $(3,706,000)
Deduct total stock based employee
compensation expense determined
under fair value based methods
for all awards (201,000) (1,400,000) (418,000) (2,113,000)
----------- ----------- ----------- -----------
Pro forma net loss $(1,117,000) $(4,142,000) $(4,038,000) $(5,819,000)
=========== =========== =========== ===========
Basic and diluted net loss per
share as reported $ (0.06) $ (0.28) $ (1.01) $ (0.39)
=========== =========== =========== ===========
Pro forma basic and diluted net
loss per share $ (0.07) $ (0.42) $ (1.03) $ (0.60)
=========== =========== =========== ===========
The above pro forma disclosure may not be representative of the effects on
reported net operations for future years as options vest over several years and
the Company may continue to grant options to employees.
The fair market value of each option grant is estimated at the date of grant
using the Black-Scholes valuation model with the following weighted-average
assumptions:
Dividend yield 0.00%
Expected volatility 112%
Risk-free interest rate 4%
Expected life 5 years
Securities and Exchange Commission Registration
Pursuant to the terms of the merger agreement between the Company and CHD
Meridian, on April 19, 2004 the Company filed a registration statement under the
Securities Act of 1933, as amended, covering the resale of (1) the common stock
issued in the merger, (2) the common stock underlying the convertible preferred
stock issued in the merger and the related financing, and (3) the common stock
issuable upon exercise of warrants issued to the placement agents in connection
with the merger.
20
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9--Risk Retention Group
During the first quarter of 2004, CHD Meridian formed Green Hills Insurance, a
Risk Retention Group (the "RRG"), licensed in the State of Vermont for the
purposes of self-insuring a portion of the merged companies' professional and
general liability insurance.
The RRG was capitalized with $2,000,000 in cash and a $1,000,000 letter of
credit under the Company's credit facility. The RRG began issuing policies on a
claims-made basis to CHD Meridian LLC, its direct subsidiaries and Physician
Groups in May 2004. As of June 30, 2004, cash held by the RRG is invested in
cash equivalents in accordance with the regulations promulgated by the State of
Vermont and is reflected on the balance sheet as cash and cash equivalents.
Loss and loss adjustment expense reserves are recorded monthly and represent
management's best estimate of the ultimate net cost of all reported and
unreported losses incurred from May 1, 2004 through June 30, 2004. Management's
estimates are based on an independent actuarial report. The Company does not
discount loss and loss adjustment expense reserves. The reserves for unpaid
losses and loss adjustment expenses are estimated using individual case-basis
valuations and statistical analyses. Those estimates are subject to the effects
of trends in severity and frequency. Although considerable variability is
inherent in such estimates, management believes the reserves for losses and loss
adjustment expenses are adequate. The estimates are reviewed and adjusted
continuously as experience develops or new information becomes known; such
adjustments are included in current operations. No claims have been filed
against these policies as of June 30, 2004. To the extent claims are made
against the policies in the future, we expect such claims to be resolved within
five years of original date of claim.
The RRG does not plan to pay dividends to the policyholders in the foreseeable
future.
21
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following Management's Discussion and Analysis of Financial
Condition and 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 and
related notes included in our Annual Report on Form 10-KSB for the year ended
December 31, 2003, as amended, and the audited financial statements of CHD
Meridian Healthcare and related notes for the year ended December 31, 2003
included in our current report on Form 8-K/A filed on August 11, 2004.
The following discussion also contains forward-looking statements. All
statements, other than statements of historical facts, included in this
quarterly report regarding our strategy, future operations, financial position,
future revenues, projected costs, prospects, plans and objectives of management
are forward-looking statements. The words "anticipates," "believes,"
"estimates," "expects," "intends," "may," "plans," "projects," "will," "would"
and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words. We
cannot guarantee that we actually will achieve the plans, intentions or
expectations disclosed in our forward-looking statements, and readers of this
report should not place undue reliance on our forward-looking statements. Actual
results or events could differ, possibly materially, from the plans, intentions
and expectations disclosed in our forward-looking statements. We have identified
important factors in the cautionary statements below and in our Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2003, as amended, that we
believe could cause actual results or events to differ, possibly materially,
from our forward-looking statements. Our forward-looking statements do not
reflect the potential impact of any future acquisitions, mergers, dispositions,
joint ventures or investments we may make.
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
Item 310(b) of Regulation S-B. In our opinion, the unaudited financial
statements have been prepared on the same basis as the annual financial
statements and reflect all adjustments necessary to present fairly the financial
position as of June 30, 2004 and the results of the operations and cash flows
for the six months ended June 30, 2004. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets and liabilities and the reported amounts of revenues and
expenses during the covered periods. We base our estimates and judgments on our
historical experience and on various other factors that we believe are
reasonable under the circumstances. We evaluate our estimates and judgments,
including those related to revenue recognition, bad debts, and goodwill and
other intangible assets on an ongoing basis. Notwithstanding these efforts,
there can be no assurance that actual results will not differ from the
respective amount of those estimates.
Our Business
I-trax is an integrated health and productivity management company
formed by the merger on March 19, 2004 of I-trax, Inc. and Meridian Occupational
Healthcare Associates, Inc., which does business as CHD Meridian Healthcare.
Accordingly, this quarterly report on Form 10-QSB describes the business of the
merged companies. For accounting purposes, the consolidation of results of
operations of the two constituent companies was effective April 1, 2004. As a
result, our consolidated results of operations for the six months ended June 30,
2004 include the operations of CHD Meridian Healthcare only from April 1, 2004
until June 30, 2004.
We offer two categories of services that can be integrated or blended
as necessary or appropriate based on each client's needs. The first category
includes on-site health related services such as occupational health, primary
care, corporate health, and pharmacy, which were historically offered by CHD
Meridian Healthcare. We believe we are the nation's largest provider of on-site
corporate health management services. The second category includes personalized
health management programs, which were historically offered by I-trax.
Our services are designed to allow employers to contract directly for a
wide range of employee healthcare needs. We can deliver these services at or
near the client's work site by opening, staffing and managing a clinic or
pharmacy dedicated to the client and its employees, or remotely by using the
Internet and our state-of-the-art Care Communication Center staffed with trained
nurses and other healthcare professionals who are available 24 hours per
22
day, 7 days per week. Our array of services provides each client with
flexibility to meet its specific pharmacy, primary care, occupational health,
corporate health, wellness, lifestyle management or disease management needs.
We provide services to approximately 150 clients, including automotive
and automotive parts manufacturers, consumer products manufacturers, large
financial institutions, health plans, integrated delivery networks, and third
party administrators. These services include operating for certain of such
clients approximately 160 on-site facilities in 32 states. Our client retention
rate is high because we establish strong client relationships that are supported
by the critical nature of our services, the benefits achieved by employer and
employee constituents, and the utilization of multi-year service contracts.
Our Acquisition of CHD Meridian Healthcare
We acquired CHD Meridian Healthcare on March 19, 2004. Under the merger
agreement, we delivered to CHD Meridian Healthcare stockholders 10,000,000
shares of I-trax common stock, 400,000 shares of I-trax Series A Convertible
Preferred Stock, each of which is convertible into 10 shares of I-trax common
stock, and paid $25,508,000 in cash. I-trax obtained the cash portion of the
merger consideration by selling 1,000,000 shares of Series A Convertible
Preferred Stock at a purchase price of $25.00 per share for gross proceeds of
$25,000,000, and by borrowing $12,000,000 on a new $20,000,000 senior secured
debt facility from a national lender.
In the merger, I-trax assumed all of CHD Meridian Healthcare's
liabilities, which equaled approximately $20,000,000.
Immediately following the closing of the merger, I-trax redeemed from
former CHD Meridian Healthcare stockholders that participated in the merger, pro
rata, an aggregate of 200,000 shares of Series A Convertible Preferred Stock at
their original issue price of $25.00 per share.
Further, under the terms of the merger, if CHD Meridian Healthcare,
continuing its operations following the closing of the merger as a subsidiary of
I-trax, achieves calendar 2004 milestones for earnings before interest, taxes,
depreciation and amortization, or EBITDA, additional shares of common stock will
be payable as follows: If EBITDA equals or exceeds $8,100,000, the number of
such additional shares of common stock payable will be 3,473,280; the number of
such shares increases proportionately up to a maximum of 3,859,200 shares if
EBITDA equals or exceeds $9,000,000. Any escrowed shares that are not released
will be returned to I-trax for cancellation. The escrowed shares are not deemed
outstanding for accounting purposes until released. Based upon CHD Meridian
Healthcare's results of operations as of June 30, 2004, management believes that
CHD Meridian Healthcare will achieve at least the minimum EBITDA target set
forth in the merger agreement.
Our Services
Occupational Health Services
We provide professional staffing and management of on-site health
facilities that address the occupational health, workers' compensation injuries,
and minor illness needs of the employer's workforce. These programs are designed
to operate across the entire array of occupational health regulatory
environments and emphasize work-related injury cost-reduction, treatment,
medical surveillance or testing, disability management, case management,
return-to-work coordination, medical community relations or oversight, on-site
physical therapy and injury prevention, and ergonomic assessment and
intervention. Our health programs improve compliance with treatment protocols
and drug formularies, enhance employee productivity, and allow for greater
employer control of occupational health costs. We currently operate 79
occupational health facilities.
Primary Care Services
We operate employer-sponsored health centers designed to integrate with
the employer's existing healthcare plans. In such arrangements, employers
contract with us directly for primary care health services and in the process
regain control of costs, quality and access. Generally, each of our health
centers services a single employer and offers health management programs
addressing the primary care needs of the employee base, including optometry
services and prevention and disease management programs. Clients may combine our
health
23
centers with a dedicated pharmacy. We also offer customized solutions in network
management and absence management, including non-work related case management
and disability management. Our physicians, nurses, and other staff are dedicated
to the customer's employee population, allowing employees, retirees, and their
dependents to receive cost-effective, high quality, accessible and convenient
care. We currently operate 18 primary care centers.
Pharmacy Services
We operate employer-sponsored pharmacies that offer prescription
services exclusively to the client's covered population. A client may also
combine our pharmacy with a dedicated primary care center. By leveraging
prescription volume across our client base and procuring pharmaceuticals as a
captive class of trade, we purchase products at considerable savings for our
clients, thus significantly and positively affecting what we understand is one
of our clients' fastest-growing healthcare cost categories. Our pharmacy
services also use sophisticated information technologies. These technologies may
be integrated with each client's existing pharmacy management programs and
plans, and improve employees' prescription fulfillment convenience. We currently
operate 24 pharmacies.
Corporate Health Services
We offer custom designed workplace programs that combine preventative
care, occupational health, medical surveillance and testing, travel medicine and
health education to non-industrial clients that do not experience significant
physical injury rates, but nonetheless maintain large workforces with general
and specialized medical needs. Clients for which we provide corporate health
services include financial service, advertising and consulting firms. We
currently operate 47 corporate healthcare facilities.
Personalized Health Management Programs
Our personalized health management programs are designed to deliver
lifestyle and wellness management, and disease and risk reduction interventions
to a client's entire population, across multiple locations and irrespective of
population size. Using predictive science, sophisticated, proprietary computer
software, clinical expertise, and personal care coordination, we enable our
clients to evolve from fragmented care management practices into a cohesive and
efficient system of healthcare. We use a single-data platform to allow all
caregivers to share records, thus enabling our clients to provide true
coordination of care. We believe that facilitating real-time secure
communication between our client, the patient, the doctor, the care coordinator
and the insurer reduces costs and enables improved delivery of care.
Predictive Science. Our programs incorporate predictive science to
analyze our client's medical claims and pharmacy and clinical data to predict
future healthcare costs, which of those costs are avoidable, the health
conditions that will drive those costs, and the people within our client's
populations who are at risk for those conditions. Armed with this information,
we tailor our programs to help the client achieve better care, savings and other
desired results.
Technology Solutions. Our technology utilizes a single data
platform--Medicive(R) Medical Enterprise Data System--a proprietary software
architecture developed to collect, store, sort, retrieve and analyze a broad
range of information used in the healthcare industry. Our web accessible
software includes portals for key stakeholders in the care delivery
process--consumers, physicians and care managers--and permit real-time sharing
of information and support the adherence to our health and disease intervention
programs.
Interventions and Clinical Expertise. Our programs include personalized
health and disease interventions 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. All interventions include lifestyle and risk reduction programs that
follow evidence-based clinical guidelines to optimize health, fitness,
productivity, and quality of life.
Care Communication Center. Our Care Communication Center is staffed
with trained nurses and other healthcare professionals 24 hours per day, 7 days
per week. Through the Center, we effect targeted interventions to
24
achieve the goals of our programs. The Center helps each member or employee of
our client make informed decisions about his or her 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 increase compliance by caregivers and consumers with best practices.
Our Client Contracts
On-Site Facilities
Our client contracts for on-site clinics and pharmacies are typically
for an initial term of three to five years and renew automatically in the
absence of notice to the contrary. Under these contracts, we typically provide
services to our clients' employees, dependents and retirees, although
arrangements vary depending on the contract. We charge these clients for our
services on a "cost plus" basis to provide care to these individuals. Under such
contracts, we currently operate approximately 160 on-site facilities in 32
states. We also currently estimate that approximately 650,000 individuals have
access to our on-site clinics, which represents approximately 25% of our
clients' employees, dependents and retirees.
Personalized Health Management Programs
Similar to contracts for on-site clinics and pharmacies, contracts
covering our personalized health management programs are typically for an
initial term of three to five years and renew automatically in the absence of
notice to the contrary. Under these contracts, we typically charge our clients a
per member or per employee per month fee, which increases with a corresponding
increase in the level of service we provide. Basic personalized health
management programs provide inbound telephone access to a nurse or healthcare
professional for triage or health information, 24 hours per day, 7 days per
week, for employees, health plan members and, in many instances, dependents.
Enhanced programs, which we introduced in October 2003, provide inbound and
outbound contacts by telephone, mail and e-mail and electronic health
information and tools. Some clients also engage us to provide to their members,
employees and dependents custom disease management programs to target
individuals with a specific disease or who are at high risk for a specific
disease. We charge additional fees for individuals that elect to enroll in our
disease management programs. Our personalized health management contracts also
allow risk-sharing. These contracts provide for an incentive payment and/or fee
refund if we fail to achieve or exceed, as appropriate, a targeted percentage
reduction in our client's healthcare costs.
We measure the number of persons, or "covered lives," under contracts
for our programs because it is a useful indicator of the growth of our
personalized health management programs. We calculate covered lives as follows.
First, the number of employees or members covered by each contract is based on
estimates provided by our client, and is adjusted regularly for the actual
number of eligible or enrolled employees or members. Further, in many instances,
in addition to serving our client's employees or members, we also provide
services to some or all dependents, as provided in the specific contract.
Covered lives, therefore, include all such employees, members and their
dependents. We estimate that as of the date of this report, we are providing
enhanced programs to approximately 41,000 covered lives. In recognition of
contract negotiations that we believe are in final stages, we estimate that we
will be providing enhanced programs to approximately 97,000 covered lives by
December 31, 2004. Finally, we expect to enroll a certain percentage of such
covered lives into our disease management programs, although we cannot estimate
that percentage at this time.
Our Strategy
Our business strategy is to improve the health status of employee
populations and manage the upward claim trend experienced by employers and
employees, self-insured employers and government agencies. These groups often
seek programs that promote health, manage disease and disability, and complement
existing health initiatives and benefits. Self-insured employers and government
agencies invest in such health programs because they reduce later need for
critical care and related costs, increase productivity, reduce absenteeism,
improve health status of both active employees and retirees, and reduce overall
costs.
We believe that our programs offer a complete solution to meet this
need. We service each segment of a self-insured employer's population to achieve
the desired clinical and financial outcomes. Our on-site programs
25
reduce healthcare costs of the populations that use our facilities.
Complementing those services, our personalized health management programs
improve the health of each client's entire population, achieving the same
result. We believe that the combination of our on-site services and personalized
health management solutions responds to a specific and frequent request of large
employers for a comprehensive range of health management services.
We also believe that with a nominal increase in variable costs, we can
offer our on-site clients the value added benefit of our personalized health
management programs. We estimate that we service only 25% of our clients'
covered lives through our on-site facilities. We believe, however, that through
our personalized health management programs, we can provide services to the
balance of these populations. Further, with respect to certain of these clients,
we believe that we can successfully negotiate participation in future medical
cost savings that may result from our services.
Finally, our programs offer our clients multiple services and price
entry points to meet their budget restrictions and specific needs. We believe
that this available menu of services could shorten our current sales cycle and
provide us with an opportunity to build a more comprehensive program as the
relationship grows with each client over time.
Risks Inherent in Our Business
As we pursue the opportunities described in this report, we face
numerous and significant challenges specific to our company and the healthcare
industry in general. Challenges specific to our company include:
o We must integrate I-trax and CHD Meridian Healthcare, which
prior to the merger operated independently and focused on
different delivery methods within the corporate health
management solutions market. If we are not able to integrate
successfully, we will not realize the benefits we anticipate
from selling our combined services.
o The sales cycle for our services is complex, unpredictable and
has generally ranged from 3 to 24 months from initial contact
to contract signing. The time it takes to implement our
services is also difficult to predict and has lasted as long
as 18 months from contract execution to the commencement of
live operation. During the sales cycle and the implementation
period, we may expend substantial time, effort and money
preparing contract proposals, negotiating the contract and
implementing the solution without receiving any related
revenue.
o We are competing with numerous companies offering services
that are similar to ours. Such competition could reduce the
number of new clients we obtain and could cause us to reduce
our pricing and, consequently, our gross margins.
o Implementation and delivery of our personalized health
management programs is highly dependent on data about
individuals to whom we provide care supplied to us by our
clients, and on our information technology systems that
process such data when we receive it. If we do not receive
timely and accurate data from our clients, or if our
information technology systems do not process such data
accurately, we may not be able to fulfill our client
contracts, which could have a material adverse effect on our
business, results of operations and financial condition.
Further, our ability to deliver on our growth expectations is
dependent on fully implementing our personalized health
management programs for existing clients by the end of 2004
such that we can begin to collect recurring monthly fees under
these programs in the beginning of 2005.
o Our senior secured credit facility contains certain covenants
and financial tests that limit the way we conduct business.
The credit facility and such covenants are described in
"Liquidity and Capital Resources - Working Capital" section
below. These covenants will require us to raise additional
capital or to replace the credit facility, and may prevent us
from accessing working capital, competing effectively or
taking advantage of new business opportunities. Under our
credit facility, we are also required to maintain specified
financial ratios and satisfy certain financial tests. If we
cannot comply with these covenants or meet these ratios and
other tests, it could result in a default under our credit
facility, and unless we are able to negotiate an amendment,
26
forbearance or waiver, we could be required to repay all
amounts then outstanding, which could have a material adverse
effect on our business, results of operations and financial
condition.
o Our personalized health management programs are dependent on
efficient deployment, implementation, and scalability of our
software technology. To date, we have implemented our software
technology for only a relatively few covered lives. We must
continue to develop our software technology to provide the
scalability and new functionality necessary to accommodate the
greater number of covered lives we expect as we add new
clients. If we fail to respond to these requirements, our
ability to process new business could be slowed, which
ultimately could have a material adverse effect on our
business, results of operations and financial condition.
o Our revenue depends on the contractual relationships we
establish and maintain with our clients. Some of our contracts
provide for early termination. Other contracts may be
terminated by our clients because of their deteriorating
financial condition. No assurances can be given that the
results of contract restructurings and possible terminations
at or prior to renewal would not have a material negative
impact on our results of operations and financial condition.
o We have in the past expressed certain performance guidance in
the form of forward-looking statements. Even though these
statements were based on assumptions that we believed were
reasonable at the time they were made, they are inherently
subject to uncertainty and there is a risk that our actual
results of operations may be less than estimated if these
assumptions are not realized.
Challenges specific to our industry include:
o In recent years, healthcare costs have grown significantly and
as a result the healthcare industry is under significant price
pressure. Although this has increased interest in our services
because they are designed to contain costs, we are nonetheless
subject to this general trend. It is conceivable that new and
potential clients will continue to pressure us to reduce our
prices and if we do, our revenues growth will slow and our
gross margins will decrease.
o We are subject to extensive state and Federal regulation,
which grows more complex each year. As such, compliance
efforts have also increased in complexity. We may need
additional resources to assure compliance, which will increase
our expenses and decrease our gross margins.
Key Financial Trends and Analytical Points
The following is a summary of key trends and analytical points
affecting our business:
CHD Meridian Healthcare Acquisition. On March 19, 2004, we finalized
the acquisition of CHD Meridian Healthcare. We commenced reporting financial
results that include CHD Meridian Healthcare operations as of April 1, 2004.
Revenue and Expenses. Revenue and operating, general and administrative
expenses increased significantly from the three and six months ended June 30,
2003 to the three and six months ended June 30, 2004. The increase is a direct
result of the CHD Meridian Healthcare acquisition. On a pro forma basis,
assuming that the merger of I-trax and CHD Meridian Healthcare was consummated
on January 1, 2003, we have experienced a modest increase in revenue with
incremental costs increasing proportionately in connection with new and expanded
business. We expect revenue to increase modestly in the third and fourth quarter
of 2004, in tandem with the expected seasonal increase in the use of our on-site
facilities.
Working Capital. At June 30, 2004, we had a working capital deficiency
of $2,501,000, reflecting a change in our cash management approach and use of
the revolver portion of our credit facility. The working capital deficiency is
attributable to a pay down of $5,500,000 outstanding under the revolver. Please
refer to "Liquidity and Capital Resources - Working Capital" section below for a
further discussion.
27
Accounting Change. We receive performance incentives from our
pharmaceutical wholesale distributor for total pharmaceutical volume purchased.
Prior to the merger, CHD Meridian Healthcare received such performance payments.
During the quarter ended June 30, 2004, in accordance with EITF 02-16, we
reclassified such performance payments. The reclassification reduced revenue and
operating expenses each by the amount of such incentives, and had no impact on
operating income or net income.
Risk Retention Group. During the first quarter of 2004, CHD Meridian
Healthcare formed Green Hills Insurance, a Risk Retention Group to self-insure a
portion of the merged companies' professional and general liability insurance.
The RRG was capitalized with $2,000,000 in cash and a $1,000,000 letter of
credit under our credit facility. The RRG has not had a material impact on our
operations during the six months ended June 30, 2004.
Results of Operations
We commenced reporting financial results that include CHD Meridian
Healthcare operations beginning as of April 1, 2004, and consequently, our
historic results from the periods prior to the second quarter ended June 30,
2004 only reflect the separate operations of I-trax. Accordingly, in addition to
providing comparative analysis on a historical basis, we are also providing
supplemental unaudited pro forma information that we believe is useful to
understand how our results of operations have performed on a comparative basis
as if the acquisition of CHD Meridian Healthcare occurred on January 1, 2003.
Three Months ended June 30, 2004 (Actual) Compared to Three Months
ended June 30, 2003 (Actual)
Revenue for the three months ended June 30, 2004 was $30,229,000, an
increase of $29,178,000 from $1,051,000 for the three months ended June 30,
2003. Of the total revenue for the three months ended June 30, 2004, $582,000
was from our personalized health management programs and $29,647,000 from our
on-site facilities.
Operating expenses, which represent our direct costs associated with
the operation of our on-site facilities and our call center, amounted to
$24,962,000 for the three months ended June 30, 2004, an increase of $24,459,000
from $503,000 for the three months ended June 30, 2003.
General and administrative expenses which represent our corporate
costs, increased to $4,651,000 for the three months ended June 30, 2004 from
$2,015,000 for the three months ended June 30, 2003. The increase of $2,636,000
is primarily attributable to an increase of $3,358,000 related to the CHD
Meridian Healthcare acquisition, offset by a non-cash charge incurred during
2003 associated with issuing common stock, granting warrants and having certain
shareholders contribute shares to an investor relations firm as consideration
for services rendered.
Depreciation and amortization expenses were $1,357,000 for the three
months ended June 30, 2004, an increase of $916,000 as compared to $441,000 for
the three months ended June 30, 2003. Approximately $435,000 of the increase
relates to amortization for the intangibles recorded as part of the CHD Meridian
transaction. The remaining increase relates to intangible assets acquired from
CHD Meridian Healthcare.
Interest expense for the three months ended June 30, 2004 was $163,000,
representing a decrease of $491,000 or 75% from $654,000 for the three months
ended June 30, 2003. For the three months ended June 30, 2004, interest expense
includes interest payable under the credit facility. For the three months ended
June 30, 2003, interest expense includes a charge of $517,000 attributable to
the unamortized portion of the discount and beneficial conversion value
associated with a convertible debenture.
Amortization of financing costs for the three months ended June 30,
2004 was $12,000 representing a decrease of $168,000 or 93% from $180,000 for
the three months ended June 30, 2003. As of June 30, 2004, these financing costs
are fully amortized.
For the three months ended June 30, 2004, our net loss was $916,000, as
compared to a net loss of $2,742,000 for the three months ended June 30, 2003.
28
Six Months ended June 30, 2004 (Actual) Compared to Six Months ended
June 30, 2003 (Actual)
Revenue for the six months ended June 30, 2004 was $31,676,000, an
increase of $29,009,000 from $2,667,000 for the six months ended June 30, 2003.
Of the total revenue for the six months ended June 30, 2004, $2,029,000 was from
our personalized health management programs and $29,647,000 from our on-site
facilities. Revenue of $582,000 from our personalized health management programs
for the three months ended June 30, 2004 decreased substantially from revenue of
$1,447,000 for the three months ended March 31, 2004 because revenue for the
three months ended March 31, 2004 includes approximately $750,000 of one time
set-up fees and perpetual license fee associated with the implementation of two
of our personalized health management contracts.
Operating expenses, which represent our direct costs associated with
the operation of our on-site clinics and our call center, amounted to
$25,659,000 for the six months ended June 30, 2004, an increase of $24,595,000
from $1,064,000 for the six months ended June 30, 2003.
General and administrative expenses, which represent our corporate
costs, increased to $6,672,000 for the six months ended June 30, 2004 from
$3,019,000 for the six months ended June 30, 2003. The increase of $3,653,000 is
primarily attributable the addition of $3,358,000 related to the CHD Meridian
Healthcare acquisition, and to an increase of $1,083,000 in salaries and wages
expenses, offset by a non-cash charge incurred during 2003 associated with
issuing common stock, granting warrants and having certain shareholders
contribute shares to an investor relations firm as consideration for services
rendered.
Depreciation and amortization expenses were $1,792,000 for the six
months ended June 30, 2004, an increase of $914,000 as compared to $878,000 for
the six months ended June 30, 2003. Approximately $435,000 of the increase
relates to amortization for the intangibles recorded as part of the CHD Meridian
Healthcare acquisition. The remaining increase relates to intangible assets
acquired from CHD Meridian Healthcare.
Interest expense for the six months ended June 30, 2004 was $776,000,
representing a decrease of $199,000 from $975,000 for the six months ended June
30, 2003. For the six months ended June 30, 2004, interest expense includes a
charge of $573,000 attributable to the unamortized portion of the discount and
beneficial conversion value associated with the convertible debenture and
certain other promissory notes. The discount amount is expensed because the
convertible debenture was converted into common stock and the promissory notes
were repaid during March 2004. During the six months ended June 30, 2003,
interest expense includes a charge of $748,000 attributable to the unamortized
portion of the discount and beneficial conversion value associated with a
convertible debenture.
Amortization of financing costs for the six months ended June 30, 2004
was $47,000 representing a decrease of $190,000 or 80% from $237,000 for the six
months ended June 30, 2003. As of June 30, 2004, these financing costs are fully
amortized.
Other expense for the six months ended June 30, 2004, represents a
one-time non-cash charge of $350,000 associated with the warrants to acquire
common stock issued in a private placement completed during October 2003. The
charge represents the increase in the value of the common stock underlying the
warrants until the effective time of a registration statement we filed with the
Securities and Exchange Commission to register the underlying shares. The
initial value of the warrants was recorded as a liability and any fluctuation in
the value was passed through the statement of operations. Once the registration
became effective, any balance in the liability account was reclassified to
equity. The registration became effective during February 2004, and accordingly,
we reclassified $3,110,000 of liability into equity. Other expense for the six
months ended June 30, 2003, reflects a charge of $200,000 in connection with the
termination in January 2003 of our agreement to acquire DxCG, Inc., a
Boston-based predictive modeling company. This sum was paid 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 six months ended June 30, 2004, our net loss was $3,620,000, as
compared to a net loss of $3,706,000 for the six months ended June 30, 2003. The
net loss for the six months ended June 30, 2004, includes non-cash and merger
related expenses of $1,755,000, comprised of: (1) $573,000 in non-cash interest
expense
29
attributable to the unamortized discount and beneficial conversion value of a
previously outstanding convertible debenture and certain other promissory notes
which were converted into common stock in March 2004; (2) $350,000 of non-cash
charges related to an increase in the fair market value of common stock
underlying warrants issued in a private placement completed during October 2003;
and (3) $832,000 of merger related costs, which were included in general and
administrative expense.
Pro Forma Results of Operations
The following are our unaudited pro forma results of operations giving
effect to the acquisition of CHD Meridian Healthcare as though the transaction
had occurred on January 1, 2003. The results exclude transaction costs of
$1,938,000 and transaction related bonuses and termination pay of $832,000
included in the CHD Meridian Healthcare's and our statements of operations,
respectively. The pro forma results also include adjustments to amortization
expense associated with the intangibles acquired and interest expense related to
the new credit facility.
Six months ended Six months ended
June 30, 2004 June 30, 2003
--------------- ---------------
Net revenue $ 59,939,000 $ 56,976,000
------------ ------------
Operating income (1,005,000) (700,000)
------------ ------------
Net loss $ (2,329,000) $ (2,756,000)
============ ============
Loss per common share $ (.10) $ (.14)
============ ============
Six Months ended June 30, 2004 (pro forma) Compared to Six Months ended
June 30, 2003 (pro forma)
Revenue for the six months ended June 30, 2004 increased to
$59,939,000, an increase of approximately 5.2% from $56,976,000 for the six
months ended June 30, 2003. In accordance with management's expectations, our
on-site revenue increased from a combination of expansion of existing business
and new sales growth, while we continued to increase our service revenue and
decrease our technology revenue on our personalized health management business.
We expect this trend to continue. We also expect to increase our total revenue
as a result of our continuing sales efforts.
Total costs and expenses include direct costs of our operations
(operating expenses), corporate overhead (general and administrative expenses),
and depreciation and amortization. Total costs and expenses for the six months
ended June 30, 2004 increased to $60,944,000, a $3,268,000 or 5.7% increase from
$57,676,000 reported for the six months ended June 30, 2003. The increase is
primarily related to the incremental costs associated with new and expanded
business discussed above offset by a slight reduction in general and
administrative expenses. Depreciation and amortization also increased by
$78,000. In coming periods, we expect total costs and expenses to increase as
our revenue increases.
Interest expense and financing costs for the six months ended June 30,
2004 decreased from the six months ended June 30, 2003. During the six months
ended June 30, 2004 and June 30, 2003, we recorded non-recurring charges to
interest expense and other expenses in the amount of $923,000 and $948,000,
respectively. We expect interest expense related to outstanding amounts due
under the senior secured credit facility to increase in future periods.
30
Liquidity and Capital Resources
Working Capital
As of June 30, 2004, we had a working capital deficiency of $2,501,000,
a decrease of $6,993,000 from the $4,492,000 of working capital as of March 31,
2004. The primary reason for this decrease is the pay down of approximately
$5,500,000 of the revolving credit facility in order to limit interest expense.
On March 19, 2004, in connection with the CHD Meridian Healthcare
acquisition, we obtained a $20,000,000 senior secured credit facility from a
national lender that expires on April 1, 2007. The credit facility has a
$6,000,000 term loan commitment with a $14,000,000 revolving credit commitment.
Outstanding letter of credit liabilities reduce the amount available to be
borrowed under the revolving credit commitment.
The credit facility is secured by substantially all of our assets.
Borrowings, at our election, may be either Base rate or Eurodollar rate loans.
Base rate loans bear interest at the prime rate as published from time to time,
plus up to 0.75% per annum depending on our debt service coverage ratios.
Eurodollar rate loans bear interest at the Eurodollar rate plus up to 3.0% per
annum likewise depending on our debt service coverage ratios.
As of June 30, 2004, we had outstanding $6,000,000 under the term loan,
$2,000,000 of which is classified as short term and $4,000,000 of which is
classified as long term, and $459,000 under the revolving credit commitment,
which is classified as long term, and an aggregate of $3,000,000 under letters
of credit. We are required to make twelve principal installment payments of
$500,000 each quarter beginning on July 1, 2004, and made the first such payment
on that date. The balance outstanding on the term loan as of the filing of this
report is $5,500,000.
We plan to raise additional equity or debt capital during 2004 to fund
investments in product development, sales and marketing, and acquisition of new
businesses and to meet certain covenants under the credit agreement. The terms
of the credit agreement will also require us to use proceeds from any such new
financing to pay off the balance outstanding on the term loan.
The credit facility includes certain financial covenants, including a
covenant measuring: (1) the ratio of our funded indebtedness to earnings before
income, taxes, depreciation and amortization, or EBITDA, (2) the ratio of funded
indebtedness to capitalization, and (3) fixed charges coverage ratio. The first
measuring date under the credit facility occurred on June 30, 2004. As of that
date, we were not in compliance with the funded indebtedness to EBITDA ratio and
the fixed charges coverage ratio.
On August 12, 2004, we agreed with the senior lender to amend the
credit facility, and, accordingly, as of the date of this filing, we are in
compliance with all covenants. The amendment to the credit facility is filed as
an exhibit to this report. Among other things, the amendment includes two
additional covenants: (1) we must achieve minimum stockholders' equity of
$82,878,000 as of October 31, 2004, an increase of $10,000,000 from our
stockholder's equity as of June 30, 2004, and (2) we must achieve pro forma 2004
EBITDA (giving effect to the acquisition of CHD Meridian Healthcare as though
the transaction had occurred on January 1, 2004) of $3,560,000. The 2004 EBITDA
covenant is consistent with our current expectations, and is lower than our
previously issued guidance. We will need to raise approximately $10,000,000 in
the form of equity to satisfy the stockholders' equity covenant in the credit
facility amendment.
As of the date of this report we do not have any committed sources of
additional capital, and we cannot provide assurance that additional capital will
be available on acceptable terms, if at all. We will explore, however, all
options to meet the stockholders' equity covenant in the credit facility
amendment, which includes replacing the credit facility.
The credit facility amendment also limits the amount we can borrow
under the facility, although the amount of the revolving credit commitments
under the facility remains at $14,000,000. Through October 31, 2004, we may use
up to $5,500,000 (including outstanding letters of credit). After October 31,
2004 and assuming we are in compliance with all covenants as of such date, we
may borrow additional amounts up to the borrowing base (approximately
$11,000,000 as of June 30, 2004), less the amount of outstanding letters of
credit.
31
We believe that amounts available under our credit facility, together
with cash flow from operations, are sufficient to meet our operating needs
through December 31, 2004.
Sources and Uses of Cash
Cash used for operations was $1,771,000 for the six months ended June
30, 2004. A portion of the cash used for operations is the result of an increase
in accounts receivable from the CHD Meridian Healthcare acquisition and billings
on the implementation costs of new clients. Other current assets also increased
due to additional carrying balances in prepaid insurance. Finally, accrued
expenses increased because the higher carrying amount of accrued payroll and
vacation.
During the six months ended June 30, 2004, we received funds from
selling 1,000,000 shares of Series A Convertible Preferred Stock for
$25,000,000, before commission expenses and other transaction costs, which
amounted to approximately $1,490,000 in the aggregate. We also received funds
from borrowings of $12,000,000 from our new senior secured credit facility with
a national lender. These funds were primarily used to fund $30,508,000 required
for the cash portion of the CHD Meridian Healthcare acquisition, including the
$5,000,000 redemption of Series A Convertible Preferred Stock issued directly to
the CHD Meridian Healthcare stockholders and for working capital.
In addition to funding the merger and related costs, we used a portion
of the proceeds from the credit facility to repay $280,000 in related party
loans and $944,000 in principal and interest for all other outstanding
promissory notes.
During the first quarter of 2004, Palladin Opportunity Fund LLC
converted the remaining balance of the debenture payable and accrued interest
into common stock. Accordingly, the Company issued 427,106 shares of common
stock for the conversion of principal and accrued interest amounting to
$747,000.
Material Commitments
The following schedule summarizes the contractual lease obligations of
I-trax and CHD Meridian Healthcare by the indicated period as of December 31,
2003:
For the year ending I-trax CHD Meridian Total
December 31: Healthcare
---------------------- ---------------- --------------- --------------
2004 $ 206,000 $ 1,217,000 $ 1,423,000
2005 119,000 909,000 1,028,000
2006 56,000 850,000 906,000
2007 24,000 735,000 759,000
2008 -- 651,000 651,000
Thereafter -- 574,000 574,000
---------------- --------------- --------------
Total future payments $ 405,000 $ 4,936,000 $ 5,341,000
================ =============== ==============
Critical Accounting Policies
Impairment of Goodwill and Intangible Assets
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. In accordance
with SFAS No. 142, we complete a test for impairment of goodwill and certain
other intangible assets annually.
32
Revenue Recognition
Service Revenue - On-site Facilities. We generate revenue from
contractual client obligations for occupational health, primary care, pharmacy
and corporate health services rendered on either a fixed fee or a cost-plus
arrangement. For fixed fee contracts, revenues are recorded on a straight-line
basis as services are rendered. For cost-plus contracts, revenues are recorded
as costs are incurred with the management fee component recorded as earned based
upon the method of calculation stipulated in the client contracts.
Revenue is recorded at estimated net amounts to be received from
customers for services rendered. The allowance for doubtful accounts represents
management's estimate of potential credit issues associated with amounts due
from customers.
We record pass-through pharmaceutical purchases on a gross basis when
we take title to the pharmaceutical inventory or a net basis when we do not take
title to the pharmaceutical inventory, dependent on specific contractual
language and obligations in accordance with EITF 99-19, "Reporting Revenue Gross
as a Principal versus Net as an Agent." We record volume based performance
incentives from the pharmaceutical wholesalers as a reduction of operating
expenses.
Cash we receive prior to the performance of services is reflected as
deferred revenue on the balance sheet.
Service Revenue - Personalized Health Management Programs. We recognize
service revenue as services are rendered. We contract with our customers to
provide services based on an agreed upon monthly fee based on the number of
employees, members or covered lives, a per-call charge to our Care Communication
Center or a combination of both.
Upon execution of a contract for services, we assess whether the fee
associated with our revenue transactions is fixed and determinable and whether
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.
From time to time we enter into risk-sharing contracts. A risk-sharing
contract generally requires us to manage the health and wellness of a
predetermined set of individuals for a term of three to five years. A
risk-sharing contract may also provides that we are required to refund to our
client a percentage of our fees if our program does not save the client an
agreed upon percentage of the client's healthcare costs. We did not generate
material risk revenue, which may be subject to a refund, during the quarter and
six months ended June 30, 2004.
Technology Revenue. 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 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 our fee and, accordingly, do not apply
separate accounting guidance to the hardware and software elements. For hardware
transactions where software is not involved, we apply the provisions of Staff
Accounting Bulletin 101 "Revenue Recognition." In addition, we apply the
provisions of EITF 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.
33
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 the product is delivered to a common
carrier.
We assess collection based on a number of factors, including past
transaction history with the customer and the creditworthiness 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 in 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.
Material Equity Transactions
During the six months ended June 30, 2004, we executed equity
transactions with unrelated parties in connection with the CHD Meridian
Healthcare merger and related financing. We believe that we have valued all such
transactions pursuant to the various accounting rules and that they ultimately
represent the economic substance of each transaction. Please refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Part II, "Item 2 - Changes in Securities and Small Business
Issuer's Purchases of Securities."
Item 3. Controls and Procedures
Our management, under the supervision and with the participation of the
principal executive officer and principal financial officer, has evaluated the
effectiveness of our controls and procedures related to our reporting and
disclosure obligations as of June 30, 2004, which is the end of the period
covered by this Quarterly Report on Form 10-QSB. Based on that evaluation, the
principal executive officer and principal financial officer have concluded that
our disclosure controls and procedures are effective.
There were no changes that occurred during the fiscal quarter ended
June 30, 2004 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Other than as described in I-trax's Quarterly Report on Form 10-QSB for
the quarter ended March 31, 2004, there have been no material developments in
any of the reported legal proceedings.
Subsidiaries of I-trax are involved in various other claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on I-trax's overall consolidated financial position, results of
operations or liquidity.
34
Item 2. Changes in Securities and Small Business Issuer's Purchases of
Securities
Issuance of Unregistered Securities
On April 30, 2004, two investors exercised warrants to acquire an
aggregate of 7,500 shares of our common stock by paying the exercise price of
$3.00 per share. The investors are accredited investors. In undertaking this
issuance, we relied on an exemption from registration under Section 4(2) of the
Securities Act.
Effective as of June 30, 2004 we issued 6,153 shares of our common
stock to an investment banker as consideration for prior services. The
investment banker is an accredited investor. In undertaking this issuance, we
relied on an exemption from registration under Section 4(2) of the Securities
Act.
Repurchases of Securities
None.
Item 3. Default Upon Senior Securities
On March 19, 2004, in connection with the CHD Meridian Healthcare
acquisition, we obtained a $20,000,000 senior secured credit facility from a
national lender that expires on April 1, 2007. The credit facility has a
$6,000,000 term loan commitment with a $14,000,000 revolving credit commitment,
including any outstanding letter of credit liabilities under the facility.
As of June 30, 2004, we were not in compliance with the funded
indebtedness to EBITDA ratio and the fixed charges coverage ratio under the
credit facility. On August 12, 2004, we agreed with the senior lender to amend
the credit facility in a number of respects, and, accordingly, as of the date of
this filing, we are in compliance with all covenants. Please refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Working Capital" for a detailed
discussion of the amendment.
Item 4. Submission of Matters to a Vote of Security Holders
We held an annual meeting of stockholders in Philadelphia, Pennsylvania
on May 19, 2004 to elect directors. Of the 40,374,852 shares eligible to vote at
the meeting, which includes shares of common stock and shares of common stock
issuable upon conversion of shares of Series A Convertible Preferred Stock,
28,388,122 shares were present or represented by proxy at the meeting. The
results of the election were as follows:
For Against Withheld
------------- --------------- ---------------
David R. Bock 28,386,122 2,000 0
Haywood Cochrane 28,384,267 2,000 1,855
Philip D. Green 28,336,222 2,000 49,900
Dr. Michael M.E. Johns 28,336,222 2,000 49,900
Dr. Arthur N. Leibowitz 28,386,122 2,000 0
Frank A. Martin 28,386,122 2,000 0
Dr. David Nash 28,336,222 2,000 49,900
R. Dixon Thayer 28,386,122 2,000 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 First Amendment to Credit Agreement dated as of June 1, 2004 by and
among I-trax, Inc., all subsidiaries of I-trax that are parties to the
Credit Agreement, and Bank of America, N.A.
10.2 Second Amendment to Credit Agreement dated as of July 1, 2004 by and
among I-trax, Inc., all subsidiaries of I-trax that are parties to the
Credit Agreement, and Bank of America, N.A.
35
10.3 Third Amendment to Credit Agreement dated as of August 12, 2004 by and
among I-trax, Inc., all subsidiaries of I-trax that are parties to the
Credit Agreement, and Bank of America, N.A.
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 furnished a current report on Form 8-K under Items 7 and 12 to the
Securities and Exchange Commission on May 17, 2004 to report results of
operations and financial condition.
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SIGNATURE
In accordance with the requirements 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: August 16, 2004 By: /s/ Frank A. Martin
----------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
37