Filed Pursuant to Rule 424(b)(3)
Registration File No. 333-87134
I-TRAX, INC.
PROSPECTUS SUPPLEMENT DATED AUGUST 20, 2002
TO PROSPECTUS DATED JULY 12, 2002
The prospectus of I-trax, Inc. dated July 12, 2002 is supplemented to
include certain information from the quarterly report on Form 10-QSB for the
quarter ended June 30, 2002 filed with the Securities and Exchange Commission by
I-trax, Inc. on August 14, 2002. Our consolidated financial statements and
related notes for the three and six months ended June 30, 2002, as well as
management's discussion and analysis of financial condition and results
operations, is included in this supplement.
S-1
I-TRAX, INC. AND SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
ASSETS
June 30, December 31,
2002 2001
--------------- ----------------
Current assets:
Cash $ 83,389 $ 1,029,208
Accounts receivables, net 497,022 --
Prepaid expenses 49,474 99,245
Other current assets 4,800 1,915
Note receivable 15,000 72,437
--------------- ----------------
Total current assets 649,685 1,202,805
--------------- ----------------
Office equipment, furniture and leasehold improvements, net 474,849 279,635
Goodwill 9,536,001 2,224,726
Intangible assets, net 4,302,647 --
Debt issuance costs, net 345,650 --
Security deposits 35,071 66,896
--------------- ----------------
Total assets $ 15,343,903 $ 3,774,062
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 742,773 $ 619,612
Accrued expenses 526,152 276,750
Credit line payable 300,000 --
Due to officers 674,598 739,598
Capital lease payable 75,533 42,878
Deferred revenue 365,393 148,830
--------------- ----------------
Total current liabilities 2,684,449 1,827,668
--------------- ----------------
Capital lease obligation, net of current portion 55,900 55,901
Promissory notes and debenture payable, net of discount 1,591,191 312,327
--------------- ----------------
Total liabilities 4,331,540 2,195,896
--------------- ----------------
Commitments and contingencies (Note 8)
Stockholders' equity
Preferred stock - $.001 par value, 2,000,000 shares authorized,
-0- issued and outstanding -- --
Common stock - $.001 par value, 100,000,000 shares authorized,
46,956,452 and 34,939,466 issued and outstanding, respectively 46,956 34,939
Additional paid in capital 37,684,245 22,964,778
Accumulated deficit (26,718,838) (21,421,551)
--------------- ----------------
Total stockholders' equity 11,012,363 1,578,166
--------------- ----------------
Total liabilities and stockholders' equity $ 15,343,903 $ 3,774,062
=============== ================
See accompanying notes to financial statements (unaudited).
S-2
I-TRAX, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
Three months Three months
ended ended
June 30, June 30,
2002 2001
---------------- ----------------
Revenue
Technology licenses $ 135,000 $ 270,470
Services 463,660 --
---------------- ----------------
Total revenue 598,660 270,470
---------------- ----------------
Operating expenses:
Cost of revenue 365,153 20,578
General and administrative 1,376,290 1,516,827
Research and development 103,320 123,059
Depreciation and amortization 627,535 179,517
Marketing and advertising 156,636 39,229
---------------- ----------------
Total operating expenses 2,628,934 1,879,210
---------------- ----------------
Operating loss (2,030,274) (1,608,740)
---------------- ----------------
Other income (expenses):
Miscellaneous income -- --
Amortization of debt and conversion costs (54,576) (869,168)
Interest income -- 15,322
Interest expense (237,639) (146,748)
---------------- ----------------
Total other income (expenses) (292,215) (1,000,594)
---------------- ----------------
(Loss) before provision for income taxes (2,322,489) (2,609,334)
---------------- ----------------
Provision for income taxes -- --
---------------- ----------------
Net (loss) $ (2,322,489) $ (2,609,334)
================ ================
Loss per common share:
Basic and diluted $ (.04) $ (.11)
================ ================
Weighted average number of shares outstanding: 46,535,820 23,821,568
================ ================
See accompanying notes to financial statements (unaudited).
S-3
I-TRAX, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
Six months ended Six months ended
June 30, June 30,
2002 2001
----------------- -----------------
Revenue
Technology licenses $ 179,500 $ 460,410
Services 825,517 --
---------------- ----------------
Total revenue 1,005,017 460,410
---------------- ----------------
Operating expenses:
Cost of revenue 627,318 36,124
General and administrative 2,778,108 3,095,749
Research and development 222,820 350,323
Acquired in process research and development -- 1,642,860
Depreciation and amortization 847,522 281,817
Marketing and advertising 327,092 105,366
---------------- ----------------
Total operating expenses 4,802,860 5,512,239
---------------- ----------------
Operating loss (3,797,843) (5,051,829)
---------------- ----------------
Other income (expenses):
Miscellaneous income -- 6,636
Amortization of debt and conversion costs (90,960) (869,168)
Interest income -- 17,483
Interest expense (1,408,484) (429,681)
---------------- ----------------
Total other income (expenses) (1,499,444) (1,274,730)
---------------- ----------------
(Loss) before provision for income taxes (5,297,287) (6,326,559)
---------------- ----------------
Provision for income taxes -- --
---------------- ----------------
Net (loss) $ (5,297,287) $ (6,326,559)
================ ================
Loss per common share:
Basic and diluted $ (.12) $ (.28)
================ ================
Weighted average number of shares outstanding: 43,911,518 22,609,279
================ ================
See accompanying notes to financial statements (unaudited).
S-4
I-TRAX, INC. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
Total
Common Stock Additional Stockholders'
----------------------------- Paid-in Accumulated Equity
Shares Amount Capital Deficit (Deficiency)
------------- ------------- ---------------- -------------- ---------------
Balances at December 31, 2001 34,939,466 $ 34,939 $ 22,964,778 $ (21,421,551) $ 1,578,166
Fair market value of detachable warrants
issued in connection with debenture and
beneficial conversion value -- -- 2,000,000 -- 2,000,000
Issuance of Common Stock and granting of
options in connection with the
acquisition of WellComm Group, Inc. 7,440,000 7,440 10,472,560 -- 10,480,000
Issuance of Common Stock and warrants as
consideration for finder fee 111,000 111 391,297 -- 391,408
Sale of Common Stock, net of $7,150 in costs 2,637,500 2,638 1,940,838 -- 1,943,476
Issuance of Common Stock and warrants as
consideration for services rendered 75,000 75 126,525 -- 126,600
Issuance of Common Stock in connection with
exercise of warrants (see Note 6) 1,753,486 1,753 (1,753) -- --
Mark-to-market of options granted to
officers in lieu of canceling note and
pledge agreement during 2001 -- -- (210,000) -- (210,000)
Net loss for the six months ended June 30,
2002 -- -- -- (5,297,287) (5,297,287)
------------ ------------ --------------- ------------- --------------
Balances at June 30, 2002 46,956,452 $ 46,956 $ 37,684,245 $ (26,718,838) $ 11,012,363
============ ============ =============== ============= ==============
See accompanying notes to financial statements (unaudited).
S-5
I-TRAX, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
Six months Six months
ended ended
June 30, 2002 June 30, 2001
---------------- ----------------
Operating activities:
Net loss $ (5,297,287) $ (6,326,559)
Adjustments to reconcile net loss to net cash used for operating
activities:
Accretion of discount on notes payable charged to interest
expense 247,065 384,696
Beneficial conversion value of debenture 1,031,800 --
Depreciation and amortization 847,522 358,257
Amortization of debt and conversion costs 90,960 --
Issuance of securities for services, net of marked to market
adjustments (83,400) 907,409
Write-off of in progress research and development acquired
in iSummit Partners, LLC acquisition -- 1,642,860
Decrease (increase) in:
Accounts receivable (19,275) 69,314
Prepaid expenses 82,923 21,038
Other current assets (20,525) 4,581
(Decrease) increase in:
Accounts payable 59,668 207,027
Accrued expenses 56,609 480,063
Deferred revenue 216,563 (188,922)
--------------- ---------------
Net cash used for operating activities (2,787,377) (2,440,236)
--------------- ---------------
Investing activities:
Proceeds from partial repayment of note receivable 52,500 --
Deposit on acquisition of intellectual property (100,000)
Cash used to acquire property and equipment (12,866) --
Proceeds from partial release of security deposit 31,825 53,388
Net cash to acquire WellComm Group, Inc. (2,045,065) --
--------------- ---------------
Net cash used for investing activities (1,973,606) (46,612)
--------------- ---------------
Financing activities:
Principal payments on capital leases (38,312) (17,120)
Proceed from credit line payable 125,000 --
Proceeds from issuance of promissory notes -- 692,809
Repayment to related party (65,000) (480,000)
Proceeds from related parties -- 855,000
Proceeds from issuance of convertible promissory notes 270,000
Proceeds from sale of Common Stock 1,943,476 1,100,000
Costs in connection with issuance of debenture (150,000) --
Proceeds from issuance of debenture and warrants 2,000,000 --
--------------- ---------------
Net cash provided by financing activities 3,815,164 2,420,689
--------------- ---------------
Net decrease in cash (945,819) (66,159)
Cash and cash equivalents at beginning of period 1,029,208 132,806
--------------- ---------------
Cash and cash equivalents at end of period $ 83,389 $ 66,647
=============== ===============
Supplemental disclosure of non-cash flow information:
Cash paid during the period for:
Interest $ 6,099 $ 3,908
=============== ===============
Income taxes $ -- $ --
=============== ===============
(Continued on following page.)
S-6
I-TRAX, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(Continued from previous page.)
Six months Six months
ended ended
June 30, 2002 June 30, 2001
---------------- ----------------
Schedule of non-cash investing activities:
Issuance of 3,368,000 shares of Common Stock in connection with
acquisition of MyFamilyMD $ -- $ 5,254,080
=============== ===============
Issuance of 7,440,000 shares of Common Stock and granting of 560,000
in connection with acquisition of WellComm Group, Inc. $ 10,480,000 $ --
=============== ===============
Issuance of Common Stock and stock options for finder fee $ 391,408 $ --
=============== ===============
Schedule of non-cash financing activities:
Issuance of Common Stock in connection with conversion of
convertible promissory notes $ -- $ 2,551,784
=============== ===============
Issuance of Common Stock in connection with conversion of advances
form officers $ -- $ 416,112
=============== ===============
See accompanying notes to financial statements (unaudited).
S-7
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--ORGANIZATION
I-trax, Inc. (the "Company") was incorporated in the State of Delaware on
September 15, 2000. On February 5, 2001, the Company and I-trax Health
Management Solutions, Inc. (formerly known as I-Trax.com, Inc.) ("Health
Management") completed a holding company reorganization. The holding company
reorganization was accomplished through a merger under Delaware law. At the
effective time of the reorganization, all of the stockholders of Health
Management became the stockholders of the Company and Health Management became a
wholly owned subsidiary of the Company. The Company's common stock is quoted on
the Over-the-Counter Bulletin Board under the symbol "IMTX."
As of June 30, 2002, the Company had one wholly owned subsidiary, Health
Management, and two single member limited liability companies, iSummit Partners,
LLC and WellComm Group, LLC. The Company acquired iSummit Partners, LLC in
February 2001. iSummit Partners, LLC does not conduct any operations but
maintains ownership of certain intellectual property. The Company formed
WellComm Group, LLC to conduct the activities of WellComm Group, Inc., which the
Company acquired on February 6, 2002 as further described in Note 3. The Company
conducts its operation through Health Management and WellComm Group, LLC.
NOTE 2--INTERIM RESULTS AND BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates continuity of
operations, realization of assets, and liquidation of liabilities in the normal
course of business. However, as of June 30, 2002, the Company's accumulated
deficit was $26,718,838 and its working capital deficiency was $2,034,764. In
addition, the Company has had negative cash flows from operations of $4,900,000
and $4,600,000 for the years ended December 31, 2001 and 2000, respectively, and
$2,800,000 for the six months ended June 30, 2002. As a result of these factors,
the auditor's report on the December 31, 2001 financial statements included a
paragraph indicating that there was substantial doubt about the Company's
ability to continue as a going concern.
We expect that in the near future additional cash will be required to fund these
deficits and enable us to continue the development of our core products to meet
customer demand, liquidate our short-term liabilities and continue to implement
our marketing strategy. The Company has, is and will continue to explore
opportunities to obtain funds to meet the projected shortfall. First, the
Company is intensifying its sales efforts to continue to grow its revenues.
Second, the Company has engaged investment professionals to assist the Company
in raising capital through debt or equity sales. Third, the Company is exploring
extending existing credit facilities and establishing new credit facilities with
present and new banks. And fourth, the Company's principal executive officers
are prepared to fund any shortfalls by lending funds to the Company, as is
disclosed in Note 11.
The Company's continuation as a going concern is dependent upon the Company's
ability to successfully close new sales contracts and negotiate financing
arrangements either through equity transactions or debt agreements. Although no
assurances can be given, the Company is reasonably confident that it will be
able to continue to operate as a going concern.
S-8
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2--INTERIM RESULTS AND BASIS OF PRESENTATION (Cont'd)
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
for interim financial information, the instructions to Form 10-QSB and Items 303
and 310(B) of Regulation S-B. In the opinion of management, the unaudited
financial statements have been prepared on the same basis as the annual
financial statements and reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the financial position as of
June 30, 2002 and the results of the operations and cash flows for the three and
six months ended June 30, 2002. The results for the three and six months ended
June 30, 2002 are not necessarily indicative of the results to be expected for
any subsequent quarter or the entire fiscal year ending December 31, 2002. The
balance sheet at December 31, 2001 has been derived from the audited financial
statements at that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
in the United States of America have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations.
Loss per common share is computed pursuant to Financial Accounting Standards
Board, "SFAS No. 128," "Earnings Per Share." Basic loss per share is computed as
net income (loss) available to common shareholders divided by the weighted
average number of common shares outstanding for the period. Diluted loss per
share reflects the potential dilution that could occur from common shares
issuable through stock options, warrants, and convertible debt. As of June 30,
2002 and 2001, 10,190,256 and 5,092,727, respectively, of options, warrants and
shares issuable upon conversion of certain debt were excluded from the diluted
loss per share computation, as their effect would be anti-dilutive.
These unaudited financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto for the year ended
December 31, 2001 as included in the Company's report on Form 10-KSB for the
fiscal year ended December 31, 2001 filed on April 4, 2002.
NOTE 3--ACQUISITION OF WELLCOMM GROUP, INC.
On February 6, 2002, the Company acquired all of the issued and outstanding
common stock of WellComm Group, Inc. ("WellComm"), as stipulated in the Merger
Agreement dated January 28, 2002, as amended, by issuing 7,440,000 shares of
Common Stock, granting 560,000 options to acquire Common Stock at a nominal
price and paying $2,175,056 in cash. In addition, the Company issued 80,000
shares of Common Stock to an employee for introducing the Company to WellComm.
The aggregate acquisition price amounted to approximately $12,660,000. The value
of the Common Stock issued and stock options granted was determined based on the
average market price of the Company's Common Stock immediately before and after
the acquisition was agreed to and announced. The acquisition was a two-step
reorganization pursuant to the Merger Agreement by and among the Company, WC
Acquisition, Inc., an Illinois corporation and a wholly owned subsidiary of the
Company ("Acquisition"), WellComm, and WellComm's two largest shareholders. The
initial step of the reorganization transaction involved a merger of Acquisition
with and into WellComm, in which merger WellComm continued as the surviving
corporation. The second step of the reorganization transaction involved a
statutory merger of WellComm with and into the Company, in which merger the
Company continued as the surviving corporation. For accounting purposes, the
effective date of the acquisition is January 31, 2002.
The Company agreed to deliver to the WellComm shareholders additional contingent
merger consideration either in cash or in Common Stock. The additional
contingent merger consideration will equal to 10% of revenues that may be
generated by sales of new services to an existing WellComm client during a
12-month period beginning on the date such new services begin to be delivered.
Such new services must commence by February 5, 2003, but have not been commenced
as of June 30, 2002. Any additional shares distributed will be recognized as
compensation expense in the period earned.
S-9
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3--ACQUISITION OF WELLCOMM GROUP, INC. (cont'd)
WellComm is a disease management company that offers a wide array of expertise
including a nurse contact center specializing in disease management, triage,
health information survey, and research services for the healthcare industry.
The Company acquired WellComm in order to enhance its portfolio of product
offerings by combining technology and services. The Company expects to reduce
costs through economies of scale.
The financial statements include the operations of WellComm from February 1,
2002 forward. The purchase price has been based on the estimated fair values of
the assets acquired and liabilities assumed. The Company is in the process of
obtaining third-party valuations of certain intangible assets and therefore the
following allocation of the purchase price is preliminary.
Of the total purchase price, the Company has initially allocated approximately
$1,370,000 to non-compete covenants, $3,680,000 to customer relationships,
$290,000 to net assets acquired with the remainder of approximately $7,320,000
assigned to goodwill. Non-compete covenants will be amortized on a straight-line
basis over a four-year life and customer relationships will be amortized over a
three-year life.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the acquisition date.
Current assets $ 614,000
Property and equipment 190,000
Intangible assets 5,050,000
Goodwill 7,320,000
---------------
Total assets acquired $ 13,174,000
===============
Current liabilities $ 485,000
Long term debt 29,000
---------------
Total liabilities assumed 514,000
---------------
Net assets acquired $ 12,660,000
===============
The following unaudited pro forma results of operations of the Company give
effect to the acquisition of WellComm as though the transaction had occurred on
January 1 of each period.
Three months Six months ended
ended June 30, June 30,
2001 2002 2001
----------------- ---------------- ----------------
Sales $ 2,491,291 $ 1,258,819 $ 3,359,436
================= ================ ================
Expenses $ 3,958,973 $ 6,540,376 $ 8,313,700
================= ================ ================
Net loss $ (1,467,682) $ (5,281,557) $ (4,954,264)
================= ================ ================
Earnings per share: $ (.04) $ (.11) $ (.16)
================= ================ ================
Weighted average shares outstanding:
Basic and Diluted 29,429,040 46,956,482 30,609,279
================= ================ ================
S-10
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4--ACQUISITION OF ISUMMIT PARTNERS, LLC
Effective February 7, 2001, the Company acquired iSummit Partners, LLC, doing
business as MyFamilyMD, by issuing a total of 4,222,500 shares of Common Stock
to the owners of iSummit in exchange for all of the issued and outstanding
limited liability company membership interests of iSummit. For purposes of
recording the acquisition, of the total 4,222,500 shares, the Company originally
recorded 3,368,000 shares (valued at $1.56 per share or $5,254,080)
(non-contingent) as consideration. Furthermore, of the total 4,222,500 shares,
854,500 shares would have been released to the former owners of iSummit, and
recorded as an expense for accounting purposes, upon the Company reaching
certain revenue targets generated by iSummit's products. Contemporaneously with
recording 3,368,000 shares, the Company recorded goodwill of $3,590,341 after
allocating $1,642,860 to in-progress research and development (representing
undeveloped software) and $20,879 to tangible assets. The allocation of purchase
price was prepared based on a formal valuation by an independent appraiser.
Effective December 31, 2001, 1,289,184 of the total 4,222,500 shares were
canceled because of unexpected costs the Company incurred in building out the
technology it had acquired from iSummit. iSummit is a passive wholly owned
entity of the Company, which holds certain intellectual property of the Company
and it does not engage in any operations. For accounting purposes, the Company
has reversed 464,592 of the total shares surrendered with a recorded value of
$724,764, since the remaining 854,500 shares were contingently issuable upon
meeting certain revenue targets, which were missed and therefore not recorded.
The Company has amortized goodwill through December 31, 2001. Accordingly, from
February 7, 2001 (date of acquisition) through December 31, 2001, the Company
recorded amortization expense of $640,851.
The following summary table sets forth the pro-forma statements of operations
for the three and six months ended June 30, 2001 as if the acquisition was
consummated at January 1, 2001.
Three months Six months
ended ended
June 30, 2001 June 30, 2001
---------------- ----------------
Total revenue $ 270,470 $ 460,410
=============== ===============
Total expenses $ 2,929,804 $ 6,836,969
=============== ===============
Net loss $ (2,659,334) $ (6,376,559)
=============== ===============
Pro forma basic and diluted net loss per share $ (.11) $ (.26)
=============== ===============
Weighted average number of shares outstanding 22,851,084 23,821,568
=============== ===============
NOTE 5--CREDIT LINE
The Company, by virtue of acquiring WellComm, assumed a revolving line of credit
that allows the Company to borrow up to $308,108. Sums outstanding under the
line of credit bear interest at 0.5% over the National Prime Rate, as reported
by the Wall Street Journal and are payable monthly. The line of credit expires
in August 2002 and it is collateralized by WellComm's assets. As of June 30,
2002, $300,000 was outstanding under the line of credit.
S-11
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6--PROMISSORY NOTES PAYABLE
On March 2, 2001 the Company entered into an Amended and Restated Promissory
Note and Warrant Purchase Agreement with Psilos Group Partners, L.P., its
affiliates and a venture capital fund managed by the Company's Chief Executive
Officer (collectively, the "Psilos Investor Group") pursuant to which the Psilos
Investor Group agreed to loan the Company up to $1,000,000. As consideration,
the Company granted the Psilos Investor Group detachable warrants to acquire
Common Stock at $0.10 per share. The loan bears interest at 8% per annum, with a
default rate of 12% per annum, and is due five years from original date of
issuance. As of December 31, 2001, the Psilos Investor Group funded an aggregate
of $692,809 of the $1,000,000 and received warrants to purchase 1,823,473 shares
of Common Stock. These warrants were exercised during the first quarter of 2002
the Company issued an aggregate 1,753,486 shares of Common Stock (net of
exercise price).
The Company valued the issued detachable warrants at $459,854 using the
Black-Scholes pricing model, thereby allocating a portion of the proceeds from
the debt to the warrants utilizing the relevant fair value of the debt and
warrants to the actual proceeds from the debt. This amount was recorded as a
discount to the related promissory notes and netted against the related debt.
Furthermore, the discount is being accreted to interest expenses over the
five-year term of the underlying promissory notes. For the three months ended
June 30, 2002 and 2001, the amount accreted to interest expense was $22,677 and
$22,677, respectively. For the six months ended June 30, 2002 and 2001, the
amount accreted to interest expense was $45,354 and $34,016, respectively.
NOTE 7--CONVERTIBLE DEBENTURE
The Company funded the cash portion of WellComm's acquisition price by selling a
6% convertible senior debenture in the aggregate principal amount of $2,000,000
(the "Debenture") to Palladin Opportunity Fund LLC ("Palladin") pursuant to a
Purchase Agreement dated February 4, 2002. Pursuant to the Purchase Agreement,
the Company also issued a warrant to Palladin to purchase an aggregate of up to
1,538,461 shares of Common Stock (the "Warrant"). The outstanding principal and
any accrued interest under the Debenture are payable in full on or before
February 3, 2004. Palladin can also convert the outstanding principal and any
accrued interest at any time into Common Stock at an initial conversion price of
$1.00 per share. The initial conversion price is subject to "reset" as of the
date that is 12 months and 18 months after the issue date (each such date, a
"Reset Date"). With respect to each Reset Date, the conversion price will only
be reduced if the average of closing bid prices for the Common Stock during a
period of 20 consecutive trading days ending on the date which immediately
precedes the applicable Reset Date is less than the then applicable conversion
price, in which case, the reset conversion price will be reset to equal such
average. The Warrant entitles Palladin to purchase shares of the Company's
common stock at the price of $1.10 per share.
Pursuant to the Purchase Agreement, Palladin also received an option to purchase
an additional 6% convertible senior debenture in the face amount of $1,000,000
and receive an additional warrant to purchase an aggregate of up to 769,230
shares of Common Stock. Finally, pursuant to a related registration rights
agreement, the Company registered all of the shares of Common Stock underlying
the Debenture and the Warrant in a registration statement on Form SB-2, which
was declared effective by the Securities and Exchange Commission in July 2002.
S-12
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7--CONVERTIBLE DEBENTURE (cont'd)
The Company valued the Warrant at $968,200 using the Black-Scholes pricing
model, thereby allocating a portion of the proceeds from the debt to the Warrant
using the relevant fair value of the debt and warrants to the actual proceeds
from the Debenture. The Company recorded $968,200 as a discount to the Debenture
and this amount will be accreted to interest expense over the life of the
Debenture. The Company also recorded $1,031,800 charge to interest expense for
the beneficial conversion value of the Debenture since the Debenture was
convertible immediately upon issuance. The beneficial conversion value
represents the difference between the fair market value of the Common Stock on
the date the Debenture was sold and the amount of proceeds characterized as debt
divided by the number of shares the face amount of the Debenture ($2,000,000)
would be convertible into (2,000,000 shares). Lastly, in connection with
facilitating the transaction with Palladin, the Company recorded $416,610 of
debt issuance costs comprised of $130,000, 31,000 shares of Common Stock and a
warrant to acquire 200,000 shares of Common Stock at $1.00 per share to an
unrelated party. These costs are amortized over the life of the Debenture. For
the three and six months ended June 30, 2002, amortization expense amounted to
$54,576 and $70,960, respectively.
NOTE 8--COMMITMENTS AND CONTINGENCIES
Nature of Business
The Company is subject to risks and uncertainties common to growing technology
companies, including rapid technological developments, reliance on continued
development and acceptance of the Internet and health care applications
utilizing the Internet, intense competition and a limited operating history.
Threatened Litigation
In 1998, a former Chief Executive Officer, stockholder and creditor of Health
Management (the "Plaintiff") commenced an action in New Jersey state court
against, among others, the present Chief Executive Officer of Health Management.
Health Management is identified in the caption as a defendant. The complaint
alleges breach of contract, breach of fiduciary duty, breach of the covenant of
good faith and fair dealing, securities fraud, common law fraud, negligent
misrepresentation and racketeering activity. See Nazir Memon v. Frank Martin, et
al, CAM-L-04026-98. The allegations in this action reference circumstances
relating to Health Management's prior line of business of physician practice
management. In 1999, the court entered two orders dismissing the action "without
prejudice" for procedural reasons. Furthermore, in 1999 the Plaintiff filed for
bankruptcy protection. As part of the bankruptcy proceedings, the Plaintiff, the
present Chief Executive Officer and Health Management entered into a stipulation
limiting the period within which the Plaintiff can bring a new action alleging
Plaintiff's claims. Plaintiff sought to reactivate his prior state court action
in January 2001 (within the stipulated period), rather than commence a new
action. The stipulated time period for commencing a new action has expired. By
Opinion-Letter/Order dated August 22, 2001, the New Jersey Superior Court, Civil
Division, ruled that Plaintiff was barred from reactivating the civil action by
the bankruptcy stipulation. The Plaintiff is appealing the Civil Division
Opinion-Letter/Order and the appeal is pending. As of June 30, 2002, the Company
made no accrual for accounting purposes because the Plaintiff's success in this
matter is not deemed probable nor could the Company reasonably estimate any
adverse effect based on the current facts.
S-13
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9--STOCKHOLDERS' EQUITY
Equity Compensation Plans and Non-Plan Stock Options
The Company has two equity compensation plans adopted in 2000 and 2001. The
purpose of the plans is to provide the opportunity for grants of incentive stock
options, nonqualified stock options and restricted stock to employees of the
Company and its subsidiaries, certain consultants and advisors who perform
services for The Company or its subsidiaries and non-employee members of The
Company's Board of Directors. The 2001 plan has several additional features,
including, a salary investment option grant program that permits eligible
employees to reduce their salary voluntarily as payment of two-thirds of the
fair market value of the underlying stock subject to the option, with the
remaining one-third of the fair market value payable as the exercise price for
the option and, if specifically implemented, automatic grant program for
non-employee members of the Board of Directors at periodic intervals.
There are 3,000,000 shares of Common Stock authorized under the 2000 plan and
6,000,000 shares of Common Stock authorized under the 2001 plan. The number of
available shares subject to the 2001 plan increases automatically on the first
day of each year beginning with the year 2002 by an amount equal to the lesser
of (a) three percent (3%) of the shares of Common Stock then outstanding and (b)
1,000,000 shares. The 2002 increase raised the number of shares available under
the 2001 plan from 5,000,000 to 6,000,000.
The maximum aggregate number of shares of Common Stock that can be granted to
any individual during any calendar year is 350,000 shares under the 2000 plan
and 400,000 shares and under the 2001 plan.
2000 Plan Grants
Through June 30, 2002, the Board has granted an aggregate of 2,617,223 options,
with exercise prices ranging from $1.00 to $2.00 per share (depending on the
fair market value of the stock on the date of grant). No grants were made
pursuant to this plan during the quarter.
2001 Plan Grants
Through June 30, 2002, the Board has granted an aggregate of 3,545,132 options
under 2001 plan. During the quarter ended June 30, 2002, the Company granted
80,000 options to employees at fair market value. Exercise prices of options
outstanding under 2001 Plan range from $0.55 to $1.25 (depending on fair market
value of the stock on the date of grant).
Non-Plan Stock Option Grants
Through June 30, 2002, the Company has granted an aggregate of 855,000 options
outside of any stock option plan with exercise prices ranging from $0.55 to
$2.00 per share (depending on fair market value of the stock on the date of
grant). No such grants were made during the quarter ended June 30, 2002.
S-14
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9--STOCKHOLDERS' EQUITY (cont'd)
Issuance of Common Stock and Warrants
In connection with signing of their employment agreements, the Company's Chief
Executive Officer and a current member of the Company's Office of the President
purchased from the Company a total of 500,000 shares of Common Stock at price of
$2 per share. The shares were purchased pursuant to a subscriptions agreement
and a note and pledge agreement. The note was for a principal amount of $999,500
(net of a $500 bonus), bearing interest at approximately 6% per annum, and
provided that the unpaid principal amount was due in five consecutive annual
installments beginning on December 29, 2001. Effective during the second quarter
2001 and with Board approval, the note and pledge agreements were canceled and
the shares were returned.
In April 2001, these executive officers received an aggregate of 700,000
incentive stock options pursuant to the 2001 Plan. Pursuant to FASB
Interpretation 44, variable accounting at the end of each interim period must be
applied to these options since they are deemed a re-pricing of the canceled note
and pledge agreements. Accordingly, since the Common Stock fair market value was
$1.25 at December 31, 2001 and these options are exercisable at $.55, the
Company recorded the intrinsic value of $.70 per option or $350,000 of
compensation expense. The Company will continue to mark-to-market these options
at the end of each respective interim period until they are exercised. For the
three and six months ended June 30, 2002, the Company marked-to-market these
options and recorded a reduction in compensation expense of $130,000 and
$210,000, respectively.
During the six months ended June 30, 2002, pursuant to various agreements and
board approval, the Company issued an aggregate of 75,000 shares of Common Stock
to various consultants for services received. The Common Stock was valued at the
fair market value of the stock on the date of issuance or $82,500 in the
aggregate. In addition, in July 2001, the Company granted an investment banker
180,000 five year warrants with an exercise price of $0.75 for services from
July 2001 to July 2002. Pursuant to EITF 96-18, the Company, at the end of each
reporting period, must value these warrants. For the six months ended June 30,
2002, the Company recorded a charge to earnings of $44,100 as an investor
relations expense for the valuing of these warrants.
During the six months ended June 30, 2002 the Company sold in a private
placement an aggregate of 110,000 shares of Common Stock for $47,850, net of
$7,150 of direct costs. This private placement was commenced in November 2001.
Pursuant to a private placement commenced in February 2002, the Company sold
2,527,500 shares for the six months ended June 30, 2002, yielding proceeds of
$1,895,625.
In connection with facilitating the transaction with Palladin as discussed in
Note 7, the Company issued 31,000 shares of Common Stock, a warrant to acquire
200,000 shares of Common Stock at an exercise price of $1.00 per share and paid
$130,000 to an unrelated party as a finder fee. The total consideration amounted
to $416,610 and has recorded as a debt issuance cost and will be amortized over
the life of the Debenture.
S-15
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses
financial accounting and reporting for business combinations and supercedes APB
Opinion No. 16, "Business Combinations." Changes made by SFAS No. 141 include
(1) requiring the purchase method of accounting be used for all business
combinations initiated after September 30, 2001, and (2) established specific
criteria for the recognition of intangible assets separately from goodwill.
These provisions are effective for business combinations for which the date of
acquisition is subsequent to September 30, 2001. SFAS No. 142 addresses the
accounting for goodwill and intangible assets subsequent to their acquisition.
The provisions for SFAS No. 142 will be effective for fiscal years beginning
after December 15, 2001. The Company has completed its initial transition
impairment assessment as required by SFAS No. 142 and concluded that no
impairment of recorded goodwill exists.
The changes in the carrying amount of goodwill for the six months June 30, 2002,
is as follows:
Total
---------------
Balance as of January 1, 2002 $ 2,224,726
Goodwill acquired during the six months 7,311,275
Impairment losses --
---------------
Balance as of June 30, 2002 $ 9,536,001
===============
The components of identifiable intangible assets, which are included as a
separate line item on the consolidated balance sheet, are as follow:
As of June 30, 2002
------------------------------------
Gross Carrying Accumulated
Amount Amortization
---------------- ----------------
Amortized intangible assets:
Non-compete covenants 1,370,000 (142,710)
Customer relationships 3,586,707 (511,350)
---------------- ----------------
Total $ 4,956,707 $ (654,060)
================ ================
Amortization expense for the three and six months ended June 30, 2002 amounted
to $159,354 and $494,706, respectively. Estimated amortization expense for the
remainder of fiscal 2002 and the remaining years is $769,026, $1,537,560,
$1,537,560, and $458,501.
S-16
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS (cont'd)
The reconciliation of reported net loss adjusted for the adoption of SFAS No.
142 is as follows:
Six months ended Three months ended
June 30, 2001 June 30, 2001
Amount Per share Amount Per share
---------------- ---------------- ---------------- ----------------
Reported net loss $ (6,326,559) $ (.28) $ (2,609,334) $ (.11)
Add back goodwill amortization 281,817 .01 102,300 --
-------------- --------------- --------------- ---------------
Adjusted net loss $ (6,044,742) $ (.27) $ (2,507,034) $ (.11)
============== =============== =============== ===============
In October 2001, the FASB issued SFAF No. 144 " Accounting for the Impairment or
Disposal of Long-Lived Assets" which addresses the financial accounting and
reporting for the impairment or disposal of long-lived assets and supercedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
assets to be Disposed Of." SFAS 144 is effective for fiscal years beginning
after December 15, 2001 and the interim periods within. The adoption of SFAS 144
did not have a material impact on the financial statements of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission on FASB Statements 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Under certain provisions of SFAS No. 145, gains and losses related to the
extinguishment of debt should no longer be segregated on the income statement as
extraordinary items net of the effects of income taxes. Instead, those gains and
losses should be included as a component of income before income taxes. The
provisions of SFAS No. 145 are effective for fiscal years beginning after May
15, 2002 with early adoption encouraged. To date, the Company has not recorded
any gains or losses on its statements of operations as extraordinary items.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred rather than when a company commits to such an
activity and also establishes fair value as the objective for initial
measurement of the liability.
NOTE 11--SUBSEQUENT EVENTS
During July 2002, certain principal executives advanced to the Company $350,000
pursuant to several promissory notes bearing interest at 8% and payable in 90
days.
S-17
Management's Discussion And Analysis Of Financial Condition And Results Of
Operations
The following discussions of the financial condition and related
results of operations of I-trax, Inc. and its subsidiaries should be reviewed in
conjunction with our financial statements and related notes appearing on the
preceding pages as well as our audited financial statements for the fiscal year
ended December 31, 2001, incorporated into our Form 10-KSB, filed on April 4,
2002.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements, which are based on
our current expectations and involve a number of risks and uncertainties. In
order for us to utilize the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, investors are hereby cautioned that these
statements may be affected by important factors, which are set forth below and
elsewhere in this report, and consequently, actual operations and results may
differ materially from those expressed in these forward-looking statements. The
important factors include our ability to execute new contracts for disease and
demand management services and software license agreements and, most
importantly, our ability to continue as a going concern.
Unaudited results of operations for the three and six month periods
ended June 30, 2002 are compared to the unaudited results of operations for the
comparable periods ended June 30, 2001. Results of operations are based on our
historical financial information as of the dates indicated and are not
necessarily indicative of results to be attained for any future period.
Our financial statements have been prepared assuming that it will
continue as a going concern. However, as of June 30, 2002, our working capital
deficiency was $2,034,764. Further, during the past two years, cash flow
deficits from operations have amounted to approximately $400,000 per month.
Through June 30, 2002 and the date of this report, we have been able to finance
these deficits. Most recently, such deficits were financed by sale of Common
Stock to unrelated parties and loans by certain key executives. Past deficits
were financed by sales of Common Stock and loans by our Chief Executive Officer,
a Member of our Office of the President and other employees. We expect that in
the near future additional cash will be required to fund these deficits and
enable us to continue the development of our core products to meet customer
demand, liquidate our short-term liabilities and continue to implement our
marketing strategy. We are optimistic that we will be able to raise additional
capital to fund these initiatives and to fund our cash flow deficits, however,
there can be no assurance that we will be able to do so.
Our Business
I-trax has historically developed enterprise and client server
applications for collecting disease specific data at the point-of-care for
several large hospitals and medical centers. In 2001, we expanded our product
lines by developing additional software applications, adding services and
completing several strategic acquisitions. We now offer total population health
management solutions: we combine health information and care coordination
services to provide a portfolio of integrated health management solutions to
payers, providers and employers to improve the quality of health and wellness
for populations.
Our solutions enable health care organizations to transition from
fragmented care management practices to a coordinated, informed approach to care
through focused care management and real time communication with all
stakeholders which yields reduced costs, and the best delivery of care.
Our Products
Our products are divided into the following portfolios: stand-alone
technology solutions, care services and total care coordination solutions. The
specific products in each portfolio are:
Stand Alone Technology Solutions
o AsthmaWatch(R) - a point-of-care respiratory disease management
system.
o C-Trax(TM) - a point-of-care cardiovascular care and information
management tool.
o CarePrime(R) - a point-of-care physician web portal.
S-18
o eImmune(R) - a point-of-care immunization and related adverse
events management system.
o MyFamilyMD(TM) - a patient education and communication web
portal.
o Health-e-Coordinator(TM) - care coordination and disease
management tool.
Our technology capabilities also include:
o Medicive(R) Medical Enterprise Data System, a proprietary
software architecture developed to collect, store, retrieve and
analyze a broad range of information used in the healthcare
industry.
o Extensive experience in data management and reporting.
o Extensive experience in providing customer interfaces.
o Extensive experience in design and modification of technology to
meet the needs of all healthcare stakeholders.
We license our software applications as client-managed integrated
applications or as an application service provider from our secure web hosting
facility.
Care Services
o NurseLine - 24 hours per day, 7 days per week demand management
and nurse triage service staffed by skilled nurses.
o Health Service Center - 24 hours per day, 7 days per week
healthcare contact center staffed by various levels of healthcare
professionals and para-professionals designed to address a broad
range of clinical issues or questions. These services may include
Health Risk Assessment design, delivery and analysis, special
projects and program support.
o Customer Contact Management - 24 hours per day, 7 days per week
customer contact center designed to manage and support healthcare
organization's marketing and communication center needs. Services
range from physician and service referrals, class registration
and web-based information centers to member satisfactions
surveys.
Our care services also include:
o Guaranteed 24 hours per day, 7 days per week access to a
healthcare professional.
o Experience in encouraging client behavior changes and crisis
management.
o Satisfaction of the client's needs through communication with
appropriate stakeholders.
o Internal quality assurance and quality information processes to
ensure consistent and appropriate care delivery.
Care Coordination
o Population Health Management - management of the healthcare needs
of populations for public health agencies, hospitals, health
plans, self-insured employers, and colleges and universities.
o Disease Management - management of the healthcare needs of
populations with chronic diseases such as asthma, coronary artery
disease, congestive heart failure and diabetes.
Our care coordination capabilities also include:
o Automated risk stratification of defined populations.
o Access to automated evidence based best practices for all
stakeholders.
S-19
o Integration of disease co-morbidities into a seamless plan of
care for those with complex health needs.
o Identification and integration with existing health management
systems, including technology and service integration, to avoid
duplication and omission of timely services.
o Providing access to information and support for all stakeholders
by traditional means, such as telephone, letter and fax, as well
as by technology-based means, such as email and electronic
alerts.
o Assisting clients to determine the best combination of service
and technology for their population management needs.
Our Customers
We currently serve 43 customers. Our customers include physician
groups, hospitals, health plans, including plans providing Medicaid and Medicare
covered services, universities and colleges and agencies and branches of the
United States government.
During the fourth quarter of 2001 and first quarter of 2002, we entered
into strategic agreements with several large organizations, which we are
optimistic will have the ability to market our products and services to their
existing and new clients. We expect that upon full implementation of these
agreements, we will be able to offer our products to a larger client base.
Finally, we expect that our own sales efforts, together with sales
opportunities generated through strategic relationships, will continue to
increase our revenue through the third and fourth quarter of 2002, and we are
optimistic that at such time we will have sufficient cash flow to fund our
operations without additional financing activities.
Corporate History Overview
I-trax was incorporated in the State of Delaware on September 15, 2000
at the direction of the Board of Directors of I-trax Health Management
Solutions, Inc. ("Health Management"), I-trax's then parent company. On February
5, 2001, I-trax became the holding company of Health Management at the closing
of reorganization under Delaware corporate law. The holding company
reorganization was described in greater detail in I-trax's registration
statement on Form S-4 (Registration Number 333-48862). At the effective time of
the reorganization, all of the stockholders of Health Management became the
stockholders of I-trax and Health Management became a wholly owned subsidiary of
I-trax. Further, all outstanding shares of Health Management were converted into
shares of I-trax in a non-taxable transaction. Health Management no longer files
reports with the Securities and Exchange Commission, and the price for its
common stock is no longer quoted on the Over-the-Counter Bulletin Board.
However, I-trax does file reports with the Securities and Exchange Commission,
and the price of its Common Stock is quoted on the Over-the-Counter Bulletin
Board under the symbol "IMTX." I-trax's shares are represented by the same stock
certificates that represented Health Management's shares prior to the holding
company reorganization.
The holding company structure has allowed us greater flexibility in our
operations and expansion and diversification plans, including in the acquisition
of iSummit Partners, LLC, doing business as "MyFamilyMD," on February 7, 2001
and WellComm Group, Inc. on February 6, 2002.
We acquired iSummit effective February 7, 2001 in an exchange
transaction pursuant to a Contribution and Exchange Agreement dated as of
September 22, 2000, as amended. After post closing adjustments, I-trax issued a
total of 2,903,409 shares of Common Stock to the owners of iSummit and the
owners contributed to I-trax all of the issued and outstanding ownership
interests in iSummit. Since February 7, 2001, iSummit has been a passive, wholly
owned entity of I-trax with certain intellectual property as its only assets.
S-20
On February 6, 2002, we acquired WellComm Group, Inc. WellComm is a
healthcare services company that offers a broad array of expertise including a
nurse contact center specializing in disease management, triage, health
information survey, and research services for the healthcare industry. For the
fiscal year ended December 31, 2001, WellComm recognized revenue of $5,287,702
and earnings before provision for income taxes of $327,159. For the fiscal year
ended December 31, 2000, WellComm recognized revenue of $979,142 and a loss of
$119,954.
To acquire WellComm, we issued 7,440,000 shares of common stock,
granted 560,000 options with a nominal exercise price and paid $2,175,056 in
cash. We also issued 80,000 shares to an employee for introducing us to
WellComm. The aggregate acquisition price was approximately $12,660,000. The
value of issued common stock and stock options was determined based on the
average closing price of our common stock immediately before and after we agreed
to and announced the acquisition.
Of the total purchase price, we allocated approximately $1,370,000 to
covenants not to compete, $3,680,000 to customer relationships, $290,000 to
acquired net assets and $7,320,000 to goodwill. We expect to amortize covenants
not to compete on a straight-line basis over four years and customer
relationships over three years.
The WellComm acquisition was a two-step reorganization pursuant to a
Merger Agreement dated January 28, 2002 by and among us, WC Acquisition, Inc.,
our wholly owned subsidiary, WellComm, John Blazek and Carol Rehtmeyer, Ph.D.
The initial step of the reorganization transaction involved a merger of WC
Acquisition with and into WellComm, in which merger WellComm continued as the
surviving corporation. The second step of the reorganization transaction
involved a statutory merger of WellComm with and into us, in which merger we
continued as the surviving corporation. The parties to the Merger Agreement
intend to treat the initial step and the second step of the reorganization as
part of an integrated plan, such that the two steps constitute a single,
tax-free reorganization.
We also agreed to deliver to the WellComm stockholders additional
contingent merger consideration either in cash or, at the election of John
Blazek as a representative of the WellComm stockholders, in shares of common
stock. The additional contingent merger consideration will be equal to 10% of
revenues that may be generated by sales of new services to an existing WellComm
client during a 12-month period beginning on the date such new services begin to
be delivered.
We funded the acquisition of WellComm by selling a 6% convertible
senior debenture in the aggregate principal amount of $2,000,000 to Palladin
Opportunity Fund, LLC pursuant to a Purchase Agreement dated February 4, 2002.
Pursuant to the Purchase Agreement, we also issued Palladin a warrant to
purchase an aggregate of up to 1,538,461 shares of common stock at an exercise
price of $1.10 per share. The outstanding principal and any deferred interest
under the Debenture are payable in full on or before February 3, 2004. Further,
outstanding principal and any deferred interest may be converted at any time at
the election of Palladin into common stock at an initial conversion price of
$1.00 per share. The initial conversion price is subject to "reset" as of the
dates that are 12 months and 18 months after the issue date. With respect to
each Reset Date, the conversion price will only be reduced if the closing bid
price for common stock, averaged during a period of 20 consecutive trading days
ending on the date that immediately precedes the applicable Reset Date, is less
than the then applicable conversion price, in which case, the reset conversion
price will equal to this average.
Under the Purchase Agreement, Palladin also received an option to
purchase an additional 6% convertible senior debenture in the face amount of $1
million and received an additional warrant to purchase an aggregate of up to
769,230 shares of common stock. The terms of the optional debenture and warrant
will be substantially similar to those of the Debenture and the Warrant.
We registered all of the shares of common stock underlying the
Debenture and the Warrant on a registration statement on Form SB-2.
S-21
Results of Operations
For the two years ended December 31, 2001, we did not generate
significant sales. During the period, we expended a predominant portion of our
resources to build and deliver eImmune(R) and C-Trax(TM) to Walter Reed Army
Medical Center in accordance with prior contractual obligations. Further, during
this period, we changed our focus from developing custom software applications
for few clients to:
(1) commercializing existing software applications including
eImmune(R), AsthmaWatch(R)and C-Trax(TM);
(2) web-enabling new applications including MyFamilyMD(TM),
CarePrime(R) and Health-e-Coordinator(TM); and
(3) marketing these products as a total population health management
solution.
This process began in May 2000 when we brought together our current
management team. The process continued in 2001 and in the first quarter of 2002,
when, in response to demand in the marketplace, we acquired WellComm to
supplement our technology solutions with disease management services. We now
focus our marketing efforts on three main markets: (1) college and university
student health services; (2) the Department of Defense/public health sector; and
(3) health plans and self-insured employers.
The results of operations presented in this report reflect the results
of operations of WellComm, which for accounting purposes, we acquired effective
as of February 1, 2002.
Three Months Ended June 30, 2002 Compared To Three Months Ended June
30, 2002
Total revenues for the three months ended June 30, 2002 were $598,660
representing an increase of $328,190 or 121% from $270,470 for the three months
ended June 30, 2001. The total revenues for three months ended June 30, 2002
were comprised of $463,660, representing service revenues derived from care
services and care coordination contracts, which we assumed effective February 1,
2002 as a result of the WellComm acquisition, and $135,000 representing
technology revenues derived from the sale of licenses of eImmune(R),
AsthmaWatch(R) and Health-e-Coordinator(TM). For the remainder of this year and
beyond, we expect to generate revenues from (1) licensing our software
applications on a subscription basis to customers that rely on their own
capabilities to deliver disease management service, (2) delivery of care
services, and (3) delivery of complete population health and disease management
solutions.
Cost of revenue amounted to $365,153 for the three months ended June
30, 2002, an increase of 1,327% from $25,578 for the three months ended June 30,
2001. The increase is directly attributable to the personnel costs required to
service our care services and care coordination contracts. We expect that in
future periods our cost of sales will increase or decrease in proportion to our
revenue. This is because we expect to derive a significant portion of our future
revenue from care services and care coordination contracts, which require human
involvement proportionate to the expected size of the contract.
Research and development costs amounted to $103,320 for the three
months ended June 30, 2002 as compared to $123,059 for the three months ended
June 30, 2001, a decrease of 16%. We expect to continue to spend funds on adding
functionality to our products especially to MyFamilyMD(TM) by adding
MedWizards(R), on CarePrime(TM), which interacts with MyFamilyMD(TM) and its
MedWizards(R), and on Health-e-Coordinator(TM) by adding additional disease
capabilities. All product development costs in this quarter and 2001 were
expensed.
General and administrative expenses decreased by 9% from $1,516,827 for
the three months ended June 30, 2001 to $1,376,290 for the three months ended
June 30, 2002, even though the expenses for the quarter ended June 30, 2002
include approximately $130,000 of expenses assumed by us as a result of our
acquisition of WellComm. The net decrease in expenses is primarily attributable
to continued personnel reductions and stringent budgetary controls implemented
in the fourth quarter of 2001 and a $130,000 expense reduction for marking to
market certain options granted to key executives. We do not anticipate
S-22
increasing spending during the balance of 2002. We believe that with the
addition of WellComm's personnel, we have the resources to handle increased
revenue with minimal incremental costs.
Depreciation and amortization expense amounted to $627,535 for the
three months ended June 30, 2002 as compared to $179,517 for the three months
ended June 30, 2001. The increase is primarily attributable to the amortization
of intangible assets recorded as a result of the WellComm acquisition.
Marketing and advertising expenses were $156,636 for the three months
ended June 30, 2002 as compared to $39,229 for the three months ended June 30,
2001. The increase of 299% was caused by an increase in investor relations
spending and increased marketing efforts to promote our disease management
solutions following the WellComm acquisition.
Interest expense for the three months ended June 30, 2002 amounted to
$237,639 increasing by $90,891 or 61% from $146,748. The increase is primarily
attributable to accruing interest of approximately $30,000 per quarter on the
convertible debenture sold to Palladin and accretion of the value of the
warrants, which we are amortizing at the rate of approximately $55,000 per the
quarter as an interest expense over the life of the debenture.
Our net loss amounted to $2,322,489 for the quarter ended June 30, 2002
as compared to a loss of $2,609,334 for the three months ended June 30, 2001 a
decrease of 11%. The loss for the three months ended June 30, 2001 included a
non-recurring charge of $869,168 for the conversion of certain debt to equity.
Accordingly, excluding such non-recurring charge, our loss for the three months
ended June 30, 2001 would have been $1,740,166 versus $2,322,489 for the current
quarter. The increase in the loss from quarter to quarter is primarily a direct
result of additional amortization expense for the current quarter relating
intangible assets acquired from WellComm.
Six months ended June 30, 2002 compared to six months ended June 30,
2001
Total revenues for the six months ended June 30, 2002 were $1,005,017,
an increase of $544,607 or 118% from $460,410 for the six months ended June 30,
2001. The total revenues for the six months ended June 30, 2002 were comprised
of $825,517, representing service revenues derived from care services and care
coordination contracts, which we assumed effective February 1, 2002 as a result
of the WellComm acquisition, and $179,500 representing our technology revenues
derived from the sale of a software licenses to eImmune(R), AsthmaWatch(R), and
Health-e-Coordinator(TM). For the remainder of this year and beyond, we expect
to generate revenues from (1) licensing our software applications on a
subscription basis to customers that rely on their own capabilities to deliver
disease management service, (2) delivery of care services, and (3) delivery of
complete population health and disease management solutions.
Cost of revenue amounted to $627,318 for the six months ended June 30,
2002, an increase of 1,636% from $36,124 for the six months ended June 30, 2001.
The increase is directly attributable to the personnel costs required to staff
the care services and care coordination contracts, which we assumed on February
1, 2002. We expect that our cost of sales will fluctuate in future periods
because technology-only contracts yield a low cost of sales whereas care
services and care coordination contracts are labor intensive. We also expect,
based on our current projections, that we will derive a significant portion of
our future revenue from application service provider contracts with colleges and
universities, self-insured employers and health plans.
Research and development costs amounted to $222,820 for the six months
ended June 30, 2002 as compared to $350,323 for the six months ended June 30,
2001, a decrease of 36%. The decrease was attributable in significant part to a
development subcontract of a software component during the six months ended June
30, 2001 because we did not have the work force to complete the build-out. We
expect to continue to spend funds on adding functionality to our products
especially to MyFamilyMD(TM) by adding MedWizards(R), on CarePrime(TM), which
interacts with MyFamilyMD(TM) and its MedWizards(R), and on
Health-e-Coordinator(TM) by adding additional disease capabilities. All product
development costs for the six months ended June 30, 2002 and 2001 were expensed.
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General and administrative expenses decreased 10% from $3,095,749 for
the six months ended June 30, 2001 to $ 2,778,108 for the six months ended June
30, 2002, which includes approximately $200,000 of expenses assumed by us as a
result of our acquisition of WellComm. The net decrease is primarily
attributable to personnel reductions and stringent budgetary controls
implemented in the fourth quarter of 2001 and a $210,000 expense reduction for
marking to market certain options granted to key executives. We do not
anticipate increasing spending in 2002. We believe that with the addition of
WellComm's personnel, we have the resources to handle increased revenue with
minimal incremental costs.
Acquired in process research and development amounted to $1,642,860 for
the six months ended June 30, 2001. This amount was directly attributable to the
acquisition of iSummit on February 7, 2001. An independent, third party,
valuation company derived this amount after a detailed analysis of all the
underlying facts.
Depreciation and amortization expense amounted to $ 847,522 for the six
months ended June 30, 2002 as compared to $281,817 for the six months ended June
30, 2001. The increase is primarily attributable to the amortization in
connection with the intangible assets recorded as a result of the WellComm
acquisition.
Marketing and advertising expenses were $ 327,092 for the six months
ended June 30, 2002 as compared to $105,366 for the six months ended June 30,
2001. The increase of 210% was caused by an increase in investor relations
spending and increased marketing efforts to promote our disease management
solutions following the WellComm acquisition.
Interest expense for the six months ended June 30, 2002 amounted to
$1,408,454 increasing by $978,773, or 227% from $429,681 for the six months
ended June 30, 2001. The net increase is primarily attributable to taking a
charge to interest expense for the beneficial conversion value associated with
the $2,000,000 convertible debenture sold to Palladin to fund the cash portion
of the WellComm acquisition. Generally, the beneficial conversion value
represents the benefit to the investor that results from purchasing an
immediately convertible debenture with a conversion price that is less than fair
market value on the date of purchase after first allocating a portion of the
proceeds from the debenture to the associated warrants.
Our net loss amounted to $5,297,287 for the six months ended June 30,
2002 as compared to a loss of $6,326,559 for the six months ended June 30, 2001,
a decrease of 16%. For both periods, we had significant transaction related
charges. For the six months ended June 30, 2002, we incurred a charge of
approximately $1,200,000 on account of the beneficial conversion value
associated with the Debenture. For the six months ended June 30, 2001, we
incurred a one-time charge of $1,642,860 on account of acquired in process
research and development in the iSummit acquisition and $869,168 for certain
securities issuances and conversion costs.
Liquidity and Capital Resources
Working Capital Deficiency
We ended the quarter with approximately $84,000 in cash on our balance
sheet. As of June 30, 2002, we had a working capital deficiency of $2,034,764.
Since June 30, 2002, we have been advanced, by certain principal executive
officers $350,000 through July 31, 2002. In order to meet our immediate cash
shortfall, we have begun the process of establishing a credit line, which we
expect will be guaranteed by certain of our principal executive officers.
We believe, although no assurances exist, that we will obtain
additional funding before our operations produce positive cash flow.
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Sources and Uses of Cash
Despite our negative cash flows from operations, which amounted to
approximately $2,800,000 for the six months ended June 30, 2002 and $2,400,000
for the six months ended June 30, 2001, we have been able to secure funds to
support our operations. During the six months ended June 30, 2002, such funds
were received by selling equity securities and the Debenture, which aggregated
approximately $4,000,000. Of the total $4,000,000 received, approximately
$2,100,000 was used to acquire WellComm and the remainder to fund operations.
For the six months ended June 30, 2001, we received approximately $375,000 from
our Chief Executive Officer, Frank A. Martin, Gary Reiss, a Member of our Office
of the President, and certain other senior officers. Additionally, during the
six months ended June 30, 2001, we borrowed approximately $963,000 of which
$270,000 was subsequently converted into equity. Lastly, the Company sold common
stock yielding net proceeds of $1,100,000, which was also used to fund
operations.
In the near future, we expect to rely less on equity financings and
more on cash flows from operations. However, before we reach that point we are
seeking to establish a credit line, which will be substantially guaranteed by
certain key officers and executives. This credit line will be primarily drawn on
to fund any working capital shortfalls until we ramp up revenue.
As of June 30, 2002, our current liabilities were approximately
$2,685,000, of which approximately $700,000 is due to Messrs. Martin and Reiss
for which no repayment terms have been established. We do not expect to repay
management loans until we begin to generate cash flows from operations and
obtain the consent of Palladin pursuant to the terms of the Debenture and
related documents. The remainder of current liabilities of approximately
$1,985,000 is made up, primarily, of trade payables of approximately $743,000,
accrued expenses of approximately $526,000, $300,000 credit line payable, which
was assumed with the acquisition of WellComm, and approximately $365,000 of
deposits on future contracts. We have good relationships with all of our
vendors.
Our long-term debt is made up of 6% convertible senior debenture in the
aggregate principal amount of $2,000,000 held by Palladin, for which principal
and deferred interest is not due until February 3, 2004, and $692,809 held by a
group of investors led by Psilos Group Partners, L.P., which includes Nantucket
Healthcare Ventures I, L.P., a venture fund managed by Mr. Martin for which
principal and interest is not due until March 2006.
Related Party Transactions
During the six months ended June 30, 2001, Mr. Martin and Mr. Reiss
periodically advanced funds to fund our working capital deficiency. As of June
30, 2002, we owed these individuals $674,598.
In connection with signing of their employment agreements, Mr. Martin
and Mr. Reiss purchased from us a total of 500,000 shares of Common Stock at
price of $2 per share. The shares were purchased pursuant to a subscriptions
agreement and a note and pledge agreement. The note was for a principal amount
of $999,500 (net of a $500 bonus), bearing interest at approximately 6% per
annum, and provided that the unpaid principal amount was due in five consecutive
annual installments beginning on December 29, 2001. Effective during the second
quarter 2001 and with Board approval, the note and pledge agreements were
canceled and the share were returned.
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In April 2001, these executive officers received an aggregate of
700,000 incentive stock options pursuant to the 2001 Equity Compensation Plan.
Pursuant to FASB Interpretation 44, variable accounting at the end of each
interim period must be applied to these options since they are deemed a
re-pricing of the canceled note and pledge agreements. Accordingly, since the
Common Stock fair market value was $1.25 at December 31, 2001 and these options
are exercisable at $0.55, we recorded the intrinsic value of $0.70 per option or
$350,000 of compensation expense. We will continue to mark-to-market these
options at the end of each respective interim period until they are exercised.
For the six months ended June 30, 2002, we marked-to-market these options and
recorded a reduction in compensation expense of $210,000.
Critical Accounting Policies
Legal Contingencies
We are currently involved in a certain threatened litigation. As
discussed in Note 13 of our consolidated financial statements, as of December
31, 2001, we have not accrued a loss contingency because the plaintiff's success
in this matter is not deemed probable nor could I-trax reasonably estimate any
adverse effect based on the current facts. We do not believe this proceeding
will have a material adverse effect on our consolidated financial position. It
is possible, however, that future results of operations for any particular
quarterly or annual period could be negatively and materially affected by
changes in our assumptions, of the effectiveness of our strategies, related to
these proceedings.
Impairment of Goodwill
We have evaluated goodwill for impairment indicators and will continue
to do so in the future. Our judgments regarding the existence of impairment
indicators are based on legal factors, market conditions and operational
performance of our acquired businesses. Future events could cause us to conclude
that impairment indicators exist, requiring a write-down of goodwill, which may,
in turn, negatively affect our earnings for any particular period. We have
completed our initial transition impairment assessment as required by SFAS No.
142 and have concluded that no impairment of recorded goodwill exists.
Revenue Recognition
We derive our revenue pursuant to different type contracts, including
perpetual software licenses, subscription licenses and custom development
services, all of which may also include support services revenue such as
licensed software maintenance, training, consulting and web hosting
arrangements. As described below, significant management judgments and estimates
must be made and used in connection with the revenue recognized in any
accounting period. Material differences may result in the amount and timing of
our revenue for any period if our management made different judgments or
utilized different estimates.
We license our software products for a specific term or on a perpetual
basis. Most of our license contracts also require maintenance and support. We
apply the provisions of Statement of Position 97-2, "Software Revenue
Recognition," as amended by Statement of Position 98-9 "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions" to all
transactions involving the sale of software products and hardware transactions
where the software is not incidental. For hardware transactions where software
is not incidental, we do not unbundle the fee and we do not apply separate
accounting guidance to the hardware and software elements. For hardware
transactions where no software is involved we apply the provisions of Staff
Accounting Bulletin 101 "Revenue Recognition." In addition, we apply the
provisions of Emerging Issues Task Force Issue No. 00-03 "Application of AICPA
Statement of Position 97-2 to Arrangements that Include the Right to Use
Software Stored on Another Entity's Hardware" to our hosted software service
transactions.
We recognize revenue from the sale of software licenses when persuasive
evidence of an arrangement exists, the product has been delivered, the fee is
fixed and determinable and collection of the resulting receivable is reasonably
assured. Delivery generally occurs when product is delivered to a common
carrier.
At the time of the transaction, we assess whether the fee associated
with our revenue transactions is fixed and determinable and whether or not
collection is reasonably assured. We assess whether the fee is fixed and
determinable based on the payment terms associated with the transaction. If a
significant portion of a fee is due after our normal payment terms, which are 30
to 90 days from invoice date, we account for the fee as not being fixed and
determinable. In these cases, we recognize revenue as the fees become due.
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We assess collection based on a number of factors, including past
transaction history with the customer and the credit-worthiness of the customer.
We do not request collateral from our customers. If we determine that collection
of a fee is not reasonably assured, we defer the fee and recognize revenue at
the time collection becomes reasonably assured, which is generally upon receipt
of cash.
For arrangements with multiple obligations (for example, undelivered
maintenance and support), we allocate revenue to each component of the
arrangement using the residual value method based on the fair value of the
undelivered elements. This means that we defer revenue from the arrangement fee
equivalent to the fair value of the undelivered elements.
We recognize revenue for maintenance services ratably over the contract
term. Our training and consulting services are billed based on hourly rates, and
we generally recognize revenue as these services are performed. However, at the
time of entering into a transaction, we assess whether or not any services
included within the arrangement require us to perform significant work either to
alter the underlying software or to build additional complex interfaces so that
the software performs as the customer requests. If these services are included
as part of an arrangement, we recognize the entire fee using the percentage of
completion method. We estimate the percentage of completion based on our
estimate of the total costs estimated to complete the project as a percentage of
the costs incurred to date and the estimated costs to complete.
Material Equity Transactions
For the six months ended June 30, 2002, we executed equity transactions
with related and unrelated parties in connection with the raising funds for
working capital along with issuing securities in lieu of compensation for
services received. We believe that we have valued all such transaction pursuant
to the various accounting rules and that they ultimately represent the economic
substance of each transaction.
Proposed Stock Split
We held our annual meeting of stockholders in Philadelphia,
Pennsylvania on May 22, 2002. At this meeting, our stockholders approved three
alternative reverse stock split transactions:
o a reverse 1-for-3 stock split;
o a reverse 1-for-4 stock split; and
o a reverse 1-for-5 stock split.
Our Board of Directors has the discretion to determine which of the
alternative reverse stock split transactions will be implemented. The purpose of
the proposed reverse stock split is to comply with the listing requirements of
the American Stock Exchange if it is the last requirement to secure listing for
our common stock on that exchange.
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