UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT
Commission File Number: 0-30275
I-TRAX, INC.
------------------------------------------
(Exact name of small business issuer in its charter)
Delaware 23-3057155
-------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Logan Square, 130 N. 18th Street, Suite 2615
Philadelphia, Pennsylvania 19103
--------------------------
(Address of principal executive offices)
(215) 557-7488
--------------------------
(Issuer's telephone number)
-----------------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practicable date: As of November 6, 2001, the Registrant
had 30,661,755 shares of its $0.001 par value Common Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
INDEX
Page No.
PART I. FINANCIAL INFORMATION.................................................3
Item 1. Financial Statements .......................................3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................18
PART II. OTHER INFORMATION....................................................25
Item 1. Legal Proceedings..........................................25
Item 2. Changes in Securities......................................25
Item 3. Defaults upon Senior Securities............................25
Item 4. Submission of Matters to a Vote of Security Holders........25
Item 5. Other Information..........................................25
Item 6. Exhibits and Reports on Form 8-K...........................25
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
I-TRAX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Page Number
Balance sheets at September 30, 2001 and
December 31, 2000 4
Statements of operations for the three months ended
September 30, 2001 and 2000 5
Statements of operations for the nine months ended
September 30, 2001 and 2000 6
Statement of stockholders' equity (deficiency) for the
nine months ended September 30, 2001 7
Statements of cash flows for the nine months ended
September 30, 2001 and 2000 8-9
Notes to financial statements 10
3
I-TRAX, INC. AND SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
ASSETS
September 30, December 31,
2001 2000
--------------- ---------------
Current Assets:
Cash $ -- $ 132,806
Accounts receivables, net 81,074 217,145
Prepaid expenses 22,020 36,706
Other receivables, net of allowance for doubtful accounts
of $73,534 as of September 30 and December 31, respectively 530 4,581
Note receivable 107,225 --
--------------- ---------------
Total current assets 210,849 391,238
--------------- ---------------
Office equipment and furniture, net 308,466 409,172
Note receivable -- 350,000
Deposit on acquisition of intellectual property 100,000 --
Deferred consulting costs 68,400 --
Goodwill and intangibles, net 3,129,007 --
Security deposits 74,994 128,382
--------------- ---------------
Total Assets $3,891,716 $1,278,792
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable, including cash overdraft of $27,214 as of September 30 $ 733,464 $ 427,150
Accrued expenses 1,084,196 444,342
Convertible notes payable, net of discounts -- 1,284,540
Due to officers 881,039 --
Capital lease payable 28,943 39,240
Deferred revenue 112,860 375,234
--------------- ---------------
Total current liabilities 2,840,502 2,570,506
--------------- ---------------
Capital lease obligation, net of current portion 61,506 81,613
Promissory notes payable, net of discount 283,512 --
--------------- ---------------
Total liabilities 3,185,520 2,652,119
--------------- ---------------
Commitments and contingencies (Note 9) -- --
Stockholders' Equity (Deficiency)
Preferred stock - $.001 par value, 2,000,000 shares authorized,
-0- issued and outstanding -- --
Common Stock - $.001 par value, 100,000,000 shares authorized,
29,807,255 and 19,483,084 issued and outstanding, respectively 29,807 19,483
Additional paid in capital 15,718,554 6,668,809
Accumulated deficit (15,042,165) (7,062,119)
Notes receivable - officers -- (999,500)
--------------- ---------------
Total stockholders' equity (deficiency) 706,196 (1,373,327)
--------------- ---------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 3,891,716 $1,278,792
=============== ===============
See accompanying notes to financial statements (unaudited).
4
I-TRAX, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
Three months Three months
ended ended
September 30, September 30,
2001 2000
-------------- ---------------
Revenue $ 127,726 $ 212,936
-------------- ---------------
Operating expenses:
Cost of revenue 46,107 117,610
General and administrative 1,356,426 1,325,457
Research and development 115,831 269,000
Amortization of goodwill 179,517 --
Marketing and advertising 35,229 38,686
-------------- ---------------
Total operating expenses 1,733,110 1,750,753
-------------- ---------------
Operating loss (1,605,384) (1,537,817)
-------------- ---------------
Other income (expenses):
Miscellaneous income 2,168 11,718
Interest income 13,766 4,730
Interest expense (64,037) (944)
-------------- ---------------
Total other income (expenses) (48,103) 15,504
-------------- ---------------
(Loss) before provision for income taxes (1,653,487) (1,522,313)
-------------- ---------------
Provision for income taxes -- --
-------------- ---------------
Net (loss) $(1,653,487) $(1,522,313)
============== ===============
Loss per common share:
Basic and diluted (.05) (.08)
============== ===============
Weighted average number of shares outstanding: 29,749,306 18,325,647
============== ===============
See accompanying notes to financial statements (unaudited).
5
I-TRAX, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
Nine months Nine months
ended ended
September 30, September 30,
2001 2000
-------------- ---------------
Revenue $ 588,136 $ 277,163
-------------- ---------------
Operating expenses:
Cost of revenue 82,231 163,123
General and administrative 4,452,175 3,048,485
Acquired in progress research and development 1,642,860 --
Research and development 466,154 334,267
Amortization of goodwill 461,334 --
Marketing and advertising 140,595 120,838
-------------- ---------------
Total operating expenses 7,245,349 3,666,713
-------------- ---------------
Operating loss (6,657,213) (3,389,550)
-------------- ---------------
Other income (expenses):
Provision for contingent liabilities -- (176,500)
Debt conversion costs (869,168) --
Miscellaneous income 8,804 69,078
Interest income 31,249 4,730
Interest expense (493,718) (2,619)
-------------- ---------------
Total other income (expenses) (1,322,833) (105,311)
-------------- ---------------
(Loss) before provision for income taxes (7,980,046) (3,494,861)
-------------- ---------------
Provision for income taxes -- --
-------------- ---------------
Net (loss) $ (7,980,046) $ (3,494,861)
============== ===============
Loss per common share:
Basic and diluted (.31) (.20)
============== ===============
Weighted average number of shares outstanding: 25,049,685 17,767,904
============== ===============
See accompanying notes to financial statements (unaudited).
6
I-TRAX, INC. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
Total
Common Stock Additional Notes Stockholders'
--------------------------- Paid-in Accumulated Receivable Equity
Shares Amount Capital Deficit Officers (Deficiency)
------------- ------------ -------------- -------------- ------------ --------------
Balances at December 31, 2000 19,483,084 $ 19,483 $ 6,668,809 $ (7,062,119) $ (999,500) $(1,373,327)
Common Stock issued in
connection with acquisition 3,368,000 3,368 5,250,712 -- -- 5,254,080
Fair market value of detachable
warrants issued in connection
with amended and restated
promissory notes -- -- 459,854 -- -- 459,854
Fair market value of detachable
warrants issued in connection
with convertible promissory notes -- -- 45,600 -- -- 45,600
Grant of non-qualified and non-plan
options to consultants as
consideration for services
rendered -- -- 29,741 -- -- 29,741
Cancellation of Note and
Pledge Agreements (500,000) (500) (999,500) -- 999,500 (500)
Issuance of Common Stock in
connection with conversion
of convertible promissory notes 4,560,314 4,560 2,547,224 -- -- 2,551,784
Issuance of Common Stock in
connection with conversion
of advances from officer 568,324 569 415,543 -- -- 416,112
Sale of Common Stock 2,200,000 2,200 1,097,800 -- -- 1,100,000
Issuance of Common Stock
and warrants for services and
settlement of accounts payable 127,533 127 202,771 -- -- 202,898
Net loss for the nine months ended
September 30, 2001 -- -- -- (7,980,046) -- (7,980,046)
------------ ----------- ------------- ------------- ----------- -------------
Balances at September 30, 2001 29,807,255 $29,807 $15,718,554 $(15,042,165) $ -- $ 706,196
============ =========== ============= ============= =========== =============
See accompanying notes to financial statements (unaudited).
7
I-TRAX, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
Nine months Nine months
ended ended
September 30, September 30,
2001 2000
------------- -------------
Operating activities:
Net loss $(7,980,046) $(3,494,861)
Adjustments to reconcile net loss to net
cash used for operating activities:
Accretion of discount on notes payable charged to interest expense 371,563 --
Depreciation and amortization 576,207 22,809
Issuance of various securities on conversions and services 1,003,166 270,000
Write-off of in progress research and development acquired
in MyFamilyMD acquisition 1,642,860 --
Decrease (increase) in:
Accounts receivable 136,071 72,944
Prepaid expenses 14,686 (85,448)
Other current receivables 4,051 (75,414)
Security deposits -- (88,001)
(Decrease) increase in:
Accounts payable 306,314 379,621
Accrued expenses 639,854 (123,246)
Deferred revenue (262,374) 315,280
------------- -------------
Net cash used for operating activities (3,547,648) (2,806,316)
------------- -------------
Investing activities:
Proceeds from partial repayment of note receivable 275,000 --
Deposit on acquisition of intellectual property (100,000) --
Proceeds from partial release of security deposit 53,388 --
Increase in software development costs -- (204,750)
Purchase of office equipment and furniture (1,990) (279,661)
------------- -------------
Net cash used for investing activities 226,398 (484,411)
------------- -------------
Financing activities:
Repayment of notes payable -- (37,500)
Repayments to related parties -- (30,365)
Principal payments on capital leases (30,404) (1,335)
Proceeds from issuance of promissory notes payable 692,809 --
Proceeds from officers 1,636,039 --
Repayments to officers (480,000) --
Proceeds from sale of Common Stock 1,100,000 3,475,380
Proceeds from issuance of convertible promissory notes 270,000 --
------------- -------------
Net cash provided by financing activities 3,188,444 3,406,180
------------- -------------
Net (decrease) increase in cash (132,806) 115,453
Cash and cash equivalents at beginning of period 132,806 195,728
------------- -------------
Cash and cash equivalents at end of period -- 311,181
============= =============
Supplemental disclosure of non-cash flow information:
Cash paid during the period for:
Interest $ 7,783 $ 2,619
============= =============
Income taxes $ -- $ --
============= =============
Schedule of non-cash investing activities:
Issuance of 3,368,000 shares of Common Stock in connection
with acquisition of MyFamilyMD $5,254,080 $ --
============= =============
--continued--
8
I-TRAX, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
(CONTINUED FROM PREVIOUS PAGE)
Nine months Nine months
ended ended
September 30, September 30,
2001 2000
--------------- ---------------
Acquisition of office equipment in connection
with capital lease obligation $ -- $ 34,290
============= =============
Schedule of non-cash financing activities:
Issuance of Common Stock in connection
with conversion of convertible promissory notes $2,551,784 $ (35,000)
============= =============
Issuance of Common Stock in connection
with conversion of advances from officer $ 275,000 $ --
============= =============
Issuance of Common Stock in connection
with conversion of accounts payable $ 76,798 $ --
============= =============
See accompanying notes to financial statements (unaudited).
9
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 holding company reorganization was
described in greater detail in the Company's registration statement on Form S-4
(Registration Number 333-48862). Effective February 5, 2001, all outstanding
shares of Health Management were converted into shares of the Company 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, the Company does
file reports with the Securities and Exchange Commission, and the price for its
Common Stock is quoted on the Over-the-Counter Bulletin Board under the symbol
"IMTX". The shares of the Company are represented by the same stock certificates
that represented shares of Health Management prior to the holding company
reorganization.
NOTE 2--INTERIM RESULTS AND BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As of September 30, 2001, the
Company's accumulated deficit amounted to $15,042,165 of which approximately
$2,100,000 is from purchased R&D and goodwill amortization from the MyFamilyMD
acquisition. Additionally, as of September 30, 2001, the Company had a working
capital deficiency of $2,629,653. As a result, the auditor's report on the
December 31, 2000 financial statements included a paragraph indicating that
there was substantial doubt about our ability to continue as a going concern.
Beginning in the fourth quarter of 2000, in an effort to conserve its available
cash, the Company established a salary deferment program whereby certain
executive officers and certain other senior level employees agreed to defer all
or a portion of their salaries until the Company reaches positive cash flows or
secures significant financing either from equity or debt instruments. The
program remains in effect as of the date of this report. As consideration for
such deferrals, the Company agreed to pay interest at the rate of 8% per annum
on the deferred salary. The Company intends to repay such accrued salary when
its cash flow, either from operations or financing activities, permits the
Company to do so. Certain participating officers and employees have elected to
surrender all or a portion of the accrued salary in exchange for the Company's
Common Stock at such time as the Company deems it advisable to effect such an
exchange. Finally, the Company agreed to grant all officers and employees
participating in the deferment program warrants to purchase the Company's Common
Stock at a price to be determined by agreement among the Company and such
officers and employees as consideration for participating in this program.
The Company has been able to secure financing to support its operations to date.
Such support has been received from unrelated parties and its Chief Executive
and Operating Officers. Going forward, significant amounts of cash will be
needed to enable the Company to finish the development of its core products,
liquidate its short-term liabilities and continue to implement its marketing
strategy.
10
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2--INTERIM RESULTS AND BASIS OF PRESENTATION (Cont'd)
Although management is optimistic that it will be able to raise additional
capital, there can be no assurance that it will be able to do so. These facts
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include adjustments relating to the
recoverability and realization of assets and classification of liabilities that
might be necessary should the Company be unable to continue in operation.
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
September 30, 2001 and the results of the operations and cash flows for the
three and nine month periods ended September 30, 2001 and 2000. The results for
the three and nine month periods ended September 30, 2001 are not necessarily
indicative of the results to be expected for any subsequent quarter or the
entire fiscal year ending December 31, 2001. The balance sheet at December 31,
2000 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.
Net loss per share is computed in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share". Basic net loss per
share is computed by dividing net loss per share by the weighted average number
of shares outstanding. Diluted loss per share is computed based on the
assumption that all of the convertible debt and related warrants are converted
in to Common Stock. For the three and nine months ended September 30, 2001, the
Company's basic and diluted earnings per share were the same.
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, 2000 as included in the Health Management's report on Form 10-KSB
for the fiscal year ended December 31, 2000 filed on April 2, 2001.
NOTE 3--NOTE RECEIVABLE
Pursuant to a promissory note and a security agreement dated December 19, 2000,
the Company loaned Diabetex Corporation ("Diabetex"), a Maryland corporation in
the business of managing the healthcare of diabetes patients, $350,000 with a
maturity date of February 19, 2002 or within 60 days of termination of merger
discussions, bearing interest at 8% per annum. In March 2001, the parties
terminated the merger discussions. Further, on April 30, 2001, the Company
demanded that, pursuant to the terms of the promissory note, Diabetex repay the
principal amount of the promissory note and all accrued interest thereon on or
before June 29, 2001. As of September 30, 2001, Diabetex and certain of its
related parties have paid the Company a total of $275,000, which has been first
applied to accrued interest and reimbursable expenses and the balance to
principal. As of September 30, 2001, the principal outstanding under the
promissory note equaled $107,225, of which $36,372 was paid on October 23, 2001.
The parties anticipate that the outstanding balance along with all accrued
interest will be repaid in the fourth quarter.
11
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4--DEPOSIT ON ACQUISITION OF INTELLECTUAL PROPERTY
On March 9, 2001 the Company entered into an intellectual property letter of
intent with Disease Management Holdings, Inc., doing business as CardioContinuum
("CardioContinuum"), a company in the business of providing disease management
services to patients suffering from cardiac disease. Among other things, the
letter of intent contemplates a license by CardioContinuum to the Company of
certain protocols and workflows that facilitate efficient treatment of patients
suffering from cardiac disease. The letter of intent also contemplates that a
promissory note in the principal amount of $100,000, and all accrued but unpaid
interest thereunder, issued by CardioContinuum to the Company on January 8, 2001
would be surrendered by the Company to CardioContinuum for cancellation as an up
front license fee for the intellectual property license. The Company and
CardioContinuum are continuing to negotiate a binding license agreement. The
Company has recorded the principal amount of the promissory note as a deposit
for the intellectual property that will be the subject of a binding license
agreement.
NOTE 5--ACQUISITION OF ISUMMIT PARTNERS, LLC
Effective as of February 7, 2001, the Company completed the acquisition of
iSummit Partners, LLC, doing business as MyFamilyMD ("MyFamilyMD"), as
stipulated in the Contribution and Exchange Agreement dated as of September 22,
2000, as amended, by issuing a total of 4,222,500 shares of its Common Stock to
the owners of MyFamilyMD in exchange for the assignment by the owners to the
Company of all of the issued and outstanding limited liability company
membership interests of MyFamilyMD. For accounting purposes, of the total
4,222,500 shares, the Company recorded 3,368,000 shares (which have been valued
at $5,254,080) as immediate consideration. Furthermore, of the total 4,222,500
shares, 854,500 shares will be released to the former owners of iSummit
Partners, and recorded as an expense for accounting purposes, only if and when
the Company meets agreed upon revenue targets generated by MyFamilyMD's
products. Contemporaneously with recording 3,368,000 shares, the Company
recorded goodwill and intangibles 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 on a
preliminary basis pending the completion of a formal valuation.
The Company is amortizing the goodwill and intangibles over a five-year period
on a straight-line basis. Accordingly, from February 7, 2001 (date of
acquisition) through September 30, 2001, the Company recorded amortization
expense of $461,334.
The following summarized table sets forth the pro-forma statements of operations
as if the acquisition was consummated at the beginning of the year for each of
the respective periods.
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
------------- ------------- ------------- --------------
Total revenue $ 127,726 $ 212,936 $ 588,136 $ 277,163
============= ============= ============= ==============
Total expenses $1,781,213 $ 1,914,766 $ 8,642,260 $ 4,562,321
============= ============= ============= ==============
Net Loss $ (1,653,487) $(1,701,830) $(8,054,124) $(4,285,158)
============= ============= ============= ==============
12
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6--CONVERTIBLE PROMISSORY NOTES PAYABLE
From November 2000 through May 2001, the Company issued several Convertible
Promissory Notes ("Promissory Notes") with an aggregate face amount of
$2,200,000. Of such total, $500,000 represented bridge financing provided to the
Company by its Chief Executive Officer and Chief Operating Officer in October
2000. The principal amount of the Promissory Notes and accrued and unpaid
interest thereon were convertible into Common Stock at $2.00 per share. The
Promissory Notes were to mature one year from the date of issuance and bore
interest at 8% per annum or 12% per annum in an event of default. Furthermore,
the Company issued to the holders of the Promissory Notes detachable warrants to
purchase an additional 2,200,000 shares of the Company's Common Stock at an
exercise price of $2.00. The conversion price of the Promissory Notes and the
exercise price of the detachable purchase warrants were adjustable downward in
the event the Company raised more than $3,000,000 from the sale of its Common
Stock or securities convertible into Common Stock at a effective per share price
of less than $2.00.
The proceeds allocated to the detachable purchase warrants amounted to $845,650,
which was arrived at using the Black-Scholes pricing model. Such amount was
recorded as a discount to the Promissory Notes. The discount has been accreted
as interest expense over the life of the underlying Promissory Notes. As of May
15, 2001, the date the holders of the Promissory Notes and the Company entered
in to the Exchange Agreement discussed below, the Company accreted $384,179 of
the discount to interest expense.
At the request of the Company and pursuant to an Exchange Agreement dated May
14, 2001 between the Company and the holders of the Promissory Notes, the
holders agreed to exchange $2,200,000, the principal amount of the Promissory
Notes, and $80,157, the interest accrued thereon through May 15, 2001, into
Common Stock at the exchange price of $.50 per share. In addition, as
consideration for the exchange, the Company reset the exercise price of the
warrants to $.50 per share. Accordingly, on June 25, 2001 the Company issued a
total of 4,560,314 shares of the Company's Common Stock in the exchange. For
accounting purposes, the Company recorded the conversion at $2,133,784 (net of
discount) into paid par value and paid in capital. In connection with the
Company reducing the conversion price from $2 to $.50, during the second quarter
the Company recorded debt conversion costs amounting to $691,619, which
represents the difference between the adjusted conversion price and the fair
market value of the Company's securities on the date of conversion.
NOTE 7--PROMISSORY NOTES PAYABLE
In December 2000, the Company entered into non-binding letters of intent to
acquire two corporations known as XL Health--CardioContinuum and Diabetex.
CardioContinuum and Diabetex are engaged in the business of providing disease
management services to cardiac and diabetes patients, respectively. Further, the
Company announced that the preferred stockholders of CardioContinuum led by
Psilos Group Partners, L.P. and its affiliates (the "C2 Investor Group") had
agreed to loan the Company up to $1,000,000 to facilitate the transactions. Upon
further due diligence, the Company elected not to acquire CardioContinuum.
Instead, on March 2, 2001 the Company entered into an Amended and Restated
Promissory Note and Warrant Purchase Agreement with the C2 Investor Group
pursuant to which the C2 Investor Group agreed to loan the Company up to
$1,000,000 and granted the Company a one year option to acquire all
CardioContinuum preferred stock and debt held by the C2 Investor Group for a
nominal consideration. As consideration, the Company granted the C2 Investor
Group detachable warrants to acquire 2.632 shares of the Company's Common Stock
at $.10 per share for each $1 of the face amount of the loan. 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 September 30, 2001, the C2 Investor
Group (which includes a venture fund managed by the Company's Chief Executive
Officer) funded an aggregate of $692,809 of the $1,000,000 and has received
warrants to purchase 1,823,473 shares of the Company's Common Stock.
13
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7--PROMISSORY NOTES PAYABLE (Cont'd)
The Company valued the detachable warrants issued to the C2 Investor Group 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 years term of the underlying promissory notes. Through September
30, 2001, $50,557 of such discount was accreted to interest expense.
NOTE 8--ADVANCES FROM OFFICERS
During the nine months ended September 30, 2001, the Company's Chief Executive
Officer and Chief Operating Officer have periodically advanced funds to the
Company for working capital. As of September 30, 2001, the Company was advanced
a net of $881,000 after certain repayments and the conversion of a $275,000 loan
to the Company by the Company's Chief Executive Officer into Common Stock.
NOTE 9--COMMITMENTS AND CONTINGENCIES
Nature of Business
The Company is subject to risks and uncertainties common to growing technology
companies, including rapid technological developments, reliance on continued
development and acceptance of the Internet and health care applications
utilizing the Internet, intense competition and a limited operating history.
Significant customers and vendors
Financial instruments which potentially expose the Company to concentrations of
credit risk consist primarily of accounts receivable. For the three months ended
September 30, 2001, the Company had one unrelated customer, which accounted for
80% of total revenues. As of September 30, 2001, the Company had one unrelated
customer, which accounted for 76% of accounts receivables.
Threatened Litigation
In its Quarterly Report on Form 10-QSB for the calendar quarter ended June 30,
2001, the Company disclosed that a former Chief Executive Officer, stockholder
and creditor of Health Management (the "Plaintiff") sought to reactivate a New
Jersey civil action originally commenced against, among others, Health
Management and its present Chief Executive Officer. See Nazir Memon v. Frank
Martin, et al, CAM-L-04026-98. In the civil action, Plaintiff 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. By Opinion-Letter/Order dated August 22, 2001, the
New Jersey Superior Court, Civil Division, ruled that Plaintiff is barred from
reactivating the civil action by a prior stipulation. The Plaintiff is appealing
the Civil Division Opinion-Letter/Order. As of September 30, 2001, the Company
made no accrual since it was not deemed probable nor could an estimate of the
outcome be determined based on the current facts.
14
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10--STOCKHOLDERS' EQUITY (DEFICIENCY)
Amendment of the Company's Certificate of Incorporation
At the Company's 2001 Annual Meeting of Stockholders held on May 21, 2001, the
holders of the majority of the Company's then outstanding shares of Common Stock
approved an amendment to the Company's Certificate of Incorporation increasing
the number of authorized shares of Common Stock from 50,000,000 to 100,000,000
shares. The Board of Directors of the Company approved this amendment on March
20, 2001.
2001 Equity Compensation Plan
On March 20, 2001, the Company's Board of Directors adopted the 2001 Equity
Compensation Plan (the "2001 Plan"). The Board of Directors amended the 2001
Plan on April 10, 2001 and the Company's stockholders adopted the 2001 Plan on
May 21, 2001. Four separate types of equity compensation may be issued under the
2001 Plan. First, stock options may be granted to eligible individuals,
including employees, consultants, advisors and non-employee members of the Board
of Directors. Stock options give optionees the right to purchase shares of
Common Stock at an exercise price determined at the time the option is granted.
Second, a salary investment option grant program may be implemented under the
2001 Plan. The salary investment option grant program 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.
Third, direct issuances of stock may be made to eligible persons under the 2001
Plan. Persons receiving direct issuances of restricted stock may purchase shares
of Common Stock at a price less than, equal to or greater than the fair market
value of the Common Stock or may receive such shares of Common Stock for past
services rendered or as a bonus for the performance of services. In addition, if
specifically implemented, the Plan permits non-employee members of the Board of
Directors to automatically receive options to purchase shares of Common Stock at
periodic intervals.
The number of shares of Common Stock that may be currently issued under the 2001
Plan shall not exceed 5,000,000. The number of available shares subject to the
2001 Plan will increase automatically on the first day of each calendar year
beginning with the year 2002 by an amount equal to the lesser of (i) three
percent (3%) of the shares of Common Stock then outstanding and (ii) 1,000,000
shares. No one person participating in the 2001 Plan may receive options for
more than 400,000 shares of Common Stock per calendar year.
As of September 30, 2001, the Company has granted an aggregate of 2,334,132
options with an exercise price of $.55 pursuant to the 2001 Plan.
2000 Equity Compensation Plan
As of September 30, 2001, the Company has granted an aggregate of 2,614,223
options pursuant to the 2000 Equity Compensation Plan, of which 905,000 options
have an exercise price of $1.00 per share and 1,709,223 options have an exercise
price of $2.00 per share.
Non-Plan Stock Option Grants
As of September 30, 2001, the Company has granted an aggregate of 1,045,000
options outside of any stock option plan with exercise prices ranging from $0.55
to $2.00 per share.
15
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10--STOCKHOLDERS' EQUITY (DEFICIENCY) (Cont'd)
Issuance of Common Stock and Warrants
Effective as of June 25, 2001 and pursuant to an Exchange Agreement dated as of
May 14, 2001 between the Company and the holders of the Promissory Notes, the
holders agreed to exchange $2,200,000, the principal amount of the Promissory
Notes, and $80,157, the interest accrued thereon effective as of May 15, 2001,
into Common Stock at the exchange price of $.50 per share. During the second
quarter, the Company issued a total of 4,560,314 shares of the Company's Common
Stock in the exchange. In addition, as consideration for the exchange, the
Company reset the exercise price of 2,200,000 warrants previously issued to such
holders to $.50 per share from $2.00. For accounting purposes, the Company
recorded the conversion at $2,133,784 (net of discount) into paid par value and
paid in capital. In connection with the Company reducing the conversion price
from $2 to $.50, it recorded debt conversion costs amounting to $691,619, which
represents the difference between the adjusted conversion price and the fair
market value of the Company's securities on the date of conversion.
In several installments in February, March and April 2001, the Company's Chief
Executive Officer lent the Company an aggregate of $515,000 for working capital
purposes. Of such aggregate amount, the Company repaid the Chief Executive
Officer $240,000 on June 1, 2001 and, effective as of June 15, 2001, the Chief
Executive Officer exchanged the balance, $275,000, and interest thereon in the
amount of $9,163, into Common Stock at the exchange price of $.50 per share. The
Company issued an aggregate of 568,324 shares of its Common Stock in this
exchange. In addition, as consideration for the loans, the Company issued to the
Chief Executive Officer detachable stock purchase warrants to acquire 515,000
shares of Common Stock at an exercise price of $.50 per share. In connection
with the Company reducing the conversion price from $2 to $.50, it recorded debt
conversion costs amounting to $131,949, which represents the difference between
the adjusted conversion price and the fair market value of its securities on the
date of conversion.
In several installments in March and April 2001, the Company's Chief Operating
Officer lent the Company an aggregate of $240,000 for working capital purposes.
The Company repaid the Chief Operating Officer the $240,000 on June 1, 2001. As
consideration for the loan, on June 15, 2001 the Company issued to the Chief
Operating Officer detachable stock purchase warrants to acquire 240,000 shares
of Common Stock at an exercise price of $.50 per share. In connection with this
transaction, the Company recognized $45,600 of costs representing the fair value
of the warrants.
Effective as of June 25, 2001, the Company completed a private placement of
2,200,000 shares of its Common Stock at $.50, yielding to the Company a total of
$1,100,000. As consideration for completing the private placement, the Company
issued to the participating investors detachable stock purchase warrants to
acquire a total of 550,000 shares of Common Stock at an exercise price of $1.00
per share.
In May 2001 the Company issued 9,000 shares of its Common Stock to an investment
banker, representing a portion of such banker's fees.
During the quarter ended September 30, 2001 and pursuant to an agreement, the
Company issued 118,533 shares to an investment banker and a consultant in
satisfaction of accrued consulting fees of $98,744. In addition, the Company
granted the investment banker 180,000 five year warrants with an exercise price
of $0.75 for future services. The Company valued such warrants using the
Black-Sholes pricing model. The value of the warrant, amounting to $72,000, has
been recorded as deferred consulting costs since it relates to future services.
As of September 30, 2001, the Company has amortized $3,600 of such deferred
consulting costs.
16
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137, "Accounting for Derivatives Instruments
and Hedging Activities-Deferral of the Effective Date of FASB Statement No.
133," and SFAS No. 138, "Accounting for Certain Derivatives Instruments and
Certain Hedging Activities." The standards require an entity to recognize all
derivatives as either assets or liabilities measured at fair value. The
accounting for the changes in fair value of a derivative depends on the use of
the derivative. The Company does not have any derivatives subject to these
pronouncements at this time.
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. We are currently evaluating the impact, these
statements will have on our financial position or results of operations.
In October 2001, the FASB issued SFAF No. 144 " Accounting for the Impairment or
Disposal of Long-Lived Assets" which addresses the financial accounting and
reporting for the impairment or disposal of long-lived assets and supercedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
assets to be Disposed Of". SFAS 144 is effective for fiscal years beginning
after December 15, 2001 and the interim periods within. The adoption of SFAS 144
is not expected to have a material impact on the financial statements of the
Company.
.
NOTE 12--SUBSEQUENT EVENTS
During October 2001, the Company's Chief Executive Officer advanced the Company
$175,000 for working capital. Additionally, during October 2001, a senior
employee made a bridge loan to the Company in the amount of $100,000 for working
capital, which is to be repaid during the fourth quarter.
In October 2001, the Company commenced a private offering of its Common Stock
covering 2,000,000 shares or $1,000,000 at $.50 per share. As of November 7,
2001, the Company has raised a total $125,000 in this offering.
17
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
The following discussion of the financial condition and related results
of operations of I-trax, Inc. (the "Company") and its subsidiaries should be
reviewed in conjunction with the financial statements of the Company and related
notes appearing on the preceding pages as well as the audited financial
statement of I-trax Health Management Solutions, Inc. (formerly known as
I-Trax.com, Inc.) ("Health Management"), the Company's wholly-owned operating
subsidiary, for the fiscal year ended December 31, 2000, incorporated into
Health Management's Form 10-KSB, filed on April 2, 2001.
Unaudited results of operations for the three and nine month periods
ended September 30, 2001 are compared to the unaudited results of operations for
the comparable periods ended September 30, 2000. Such information is based upon
the historical financial information available as of the dates indicated.
Results of operations for the three and nine month periods ended September 30,
2001 are not necessarily indicative of results to be attained for any other
period.
Statements regarding the Company's expectations as to financial results
and other aspects of its business set forth herein or otherwise made in writing
or orally by the Company may constitute forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Although the
Company believes that its expectations are based on reasonable assumptions
within the bounds of its knowledge of its business and operations, there can be
no assurance that actual results will not differ materially from its
expectations. Factors that might cause or contribute to such differences
include, but are not limited to, uncertainty of future profitability, changing
economic conditions and demand for the Company's products.
Introduction
On September 13, 2000, the Board of Directors of Health Management
directed the formation of the Company to facilitate the formation of a holding
company structure pursuant to Section 251(g) of the Delaware General Corporation
Law. The reorganization was consummated on February 5, 2001 pursuant to an
Agreement and Plan of Merger dated as of September 22, 2000 among the Company,
Health Management and I-Trax.com Acquisition Co., a special purpose subsidiary
of the Company. The holding company reorganization was described in greater
detail in the Company'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 the Company and Health
Management became a wholly owned subsidiary of the Company. Further, all
outstanding shares of Health Management were converted into shares of the
Company 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, the Company
does file reports with the Securities and Exchange Commission, and the price for
its Common Stock is quoted on the Over-the-Counter Bulletin Board under the
symbol "IMTX". The shares of the Company are represented by the same stock
certificates that represented shares of Health Management prior to the holding
company reorganization.
We expect that the holding company structure will allow us greater
flexibility in our operations and expansion and diversification plans. As an
example, the holding company structure facilitated the acquisition of iSummit
Partners, LLC, doing business as "MyFamilyMD" ("MyFamilyMD"), on February 7,
2001.
The Company's current operating business is a combination of businesses
of two predecessors--Member-Link Systems, Inc. ("Member-Link") and MyFamilyMD.
Health Management acquired Member-Link effective as of December 30, 1999 in a
merger transaction pursuant to a Merger Agreement dated as of December 14, 1999.
In the merger, each of the 1,809,686 outstanding shares of Member-Link common
stock was converted into a right to receive 4.4207 shares of Health Management's
common stock. Accordingly, an aggregate of 8,000,082 shares of Health
Management's common stock were issued or reserved for issuance in the merger.
The Company acquired MyFamilyMD effective as of February 7, 2001 in an
exchange transaction pursuant to a Contribution and Exchange Agreement dated as
of September 22, 2000, as amended. In the contribution and exchange the Company
issued a total of 4,222,500 shares of its Common Stock to the owners of
MyFamilyMD and the owners contributed to the Company all of the issued and
18
outstanding ownership interest in MyFamilyMD. At closing, of the total 4,222,500
shares 2,086,250 shares were delivered to the owners of MyFamilyMD and 2,136,250
shares were deposited with an escrow agent. The shares held in escrow will be
released in part upon the Company receiving assurances that none of the
representations in the Contribution and Exchange Agreement were breached and in
part upon the Company achieving certain agreed upon revenue targets for
MyFamilyMD's products.
Of the total 4,222,500 issued shares, for accounting purposes the
Company recorded 3,368,000 shares as immediate consideration. Furthermore, an
additional 854,500 shares will be released to the former owners of MyFamilyMD,
and recorded as an expense for accounting purposes, only if and when the Company
meets certain agreed upon revenue targets generated by MyFamilyMD'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 and $20,879 to tangible and intangible assets. The Company is
amortizing the goodwill over a five-year period on a straight-line basis.
Accordingly, for the period beginning on February 7, 2001 and ending on
September 30, 2001, the Company recorded amortization expense of $461,334.
Since February 7, 2001, MyFamilyMD has been a passive wholly owned
entity of the Company with certain intellectual property as its only assets.
The merger of Member-Link into Health Management and the acquisition of
MyFamilyMD have and will have a substantial impact on the Company's current and
future operating results. The Company's operating results have been negatively
affected for the three and nine month periods ended September 30, 2001 as to
profitability and will continue to be affected negatively through the balance of
calendar year 2001 since the Company has devoted substantial sums to develop
current and new products, expand sales and marketing resources necessary for a
rapid rollout of such products into additional markets, and attract and retain
additional management personnel.
Business Overview
The Company has historically developed enterprise or client server
applications for collecting disease specific data at the point of care for
several large hospitals and medical centers. In response to demand in the
marketplace, the Company restructured its business model in the first and second
quarters of 2001. The Company now offers technology-enabled population health
management services. Our mission is to provide disease management services
supported by our interactive, real-time software system solutions. Our solutions
are available as client-managed integrated applications or as outsourced
services through the Company.
We believe that our disease management services enable providers,
health plans and employers to lower medical costs, reduce practice variances,
improve operating efficiencies and improve the quality of care provided to their
members. The Company's integrated system solutions provide real-time and
appropriate health information and knowledge to the consumer, physician and care
manager/caregiver, and management information to executives.
Our advanced software solutions are designed to bridge the worlds of
disease management, population health management and technology. They are
designed to assist physicians, patients and the entire healthcare community in
assessing, preventing and managing all stages of disease and wellness.
Currently, our solutions include two web portals: MyFamilyMD(TM) for consumers
and CarePrime(TM) for physicians; and four clinical applications:
AsthmaWatch(R), Health-e-Coordinator(TM) care coordination tool, C-trax(TM)
cardiovascular care tool and eImmune(TM) immunization management system.
All of our systems solutions are built on a common
platform--Medicive(TM) Medical Enterprise Data System--our proprietary,
intelligent software architecture. Medicive(TM) is a proprietary system
developed to collect, store, retrieve and analyze a broad range of information
used in the healthcare industry. In fact, Medicive(TM) is capable of handling
all data necessary to operate one or many medical treatment facilities.
Medicive(TM) is designed to receive information for both the most complex and
the simplest tasks encountered in a medical setting. It currently accommodates
over 1,000 standard data elements containing in excess of 4,000 data
sub-elements. We believe that it provides the platform for development of
unlimited healthcare applications. A key feature of Medicive(TM) is its open
architecture, which permits it to accept new data elements, which is important
for an industry experiencing rapid advances in clinical and laboratory research,
as well as changes in treatment protocols.
19
The Company released the initial version of MyFamilyMD(TM) and
CarePrime(TM) on June 25, 2001. MyFamilyMD(TM), accessible at
www.MyFamilyMD.com, allows users to chronicle their daily health progress,
medications, allergies, exercise and health goals and communicate with their
physician via secure messaging. Users can also interact with MyFamilyMD(TM)
assessment tools, called MedWizards(TM), to determine their level of risk for
certain conditions, and receive guidelines on early risk prevention. We believe
that MyFamilyMD empowers users to monitor and control their health by reviewing
trends in their healthcare regimen. This is accomplished by using dynamic and
easy-to-use graphs and reports.
Consumers are also able to communicate via secure messaging with their
physicians and caregivers about their daily health management by connecting with
CarePrime(TM), the physician interface to MyFamilyMD(TM). Users can request
prescription refills, schedule appointments and attach health assessments on
line. Using CarePrime(TM), physicians can access their patients' Personal Health
Records, thereby automating data transfer tasks that previously were performed
manually.
The development and enhancements of the Company's products for delivery
of disease management services is an ongoing process. Accordingly, we are still
dependant for revenues from our traditional customers and will continue to
increase our expenditures in the areas of development of disease management
products, as well as client services, business development, and sales and
marketing. As a result, we expect to continue to incur operating losses through
the fourth quarter of 2001.
Results of Operations
Three Months Ended September 30, 2001 Compared to Three Months Ended
September 30, 2000
Total revenues for the three months ended September 30, 2001 amounted
to $127,726 whereas total revenues for the three months ended September 30, 2000
amounted to $212,936. In the future, the Company expects to generate a
significant portion of its revenues from licensing and subscriptions to the
Company's products delivered over the Internet.
The product development costs amounted to $115,831 for the three months
ended September 30, 2001 as compared to $269,000 for the three months ended
September 30, 2000. This decrease in spending was the result of the Company's
increased utilization of its in-house developer rather than out-source its
software development. The Company is continuing to devote internal efforts and
resources to web-enable its software products and expand its disease management
services. All product development costs in 1999 and 2000 and through September
30, 2001 were expensed.
Selling, general and administrative expenses amounted to $1,356,426 for
the three months ended September 30, 2001 as compared to $1,325,457 for the
three months ended September 30, 2000.
Cost of revenue amounted to $46,107 for the three months ended
September 30, 2001 as compared to $117,610 for the three months ended September
30, 2000. This decrease amounting to $71,503 is purely associated with the
Company's decrease sales and the components of each sale as certain sales may
have a bigger hardware component than others.
Marketing and advertising expenses amounted to $35,229 for the three
months ended September 30, 2001 as compared to $38,686 for the three months
ended September 30, 2000.
For the three months ended September 30, 2001, the Company recorded
amortization of goodwill amounting to $179,517 in connection with the
acquisition of MyFamilyMD during February 2001.
For the quarters ended September 30, 2001 and 2000, the Company
generated losses amounting to $1,653,487 and $1,522,313, respectively.
20
Nine Months Ended September 30, 2001 Compared to Nine Months Ended
September 30, 2000
Total revenues for the nine months ended September 30, 2001 amounted to
$588,136 whereas total revenues for the nine months ended September 30, 2000
amounted to $277,163. This increase was directly attributable to the Company
fulfilling a portion of a contract with Walter Reed Army Medical Center for
implementation of C-Trax Cardiovascular tracking system and for implementation
of a $250,000 contract for eImmune(TM), the Company's web enabled immunization
management system. In the future, the Company expects to generate a significant
portion of its revenues from the licensing and subscriptions to the Company's
products delivered over the Internet.
The product development costs amounted to $466,154 for the nine months
ended September 30, 2001 as compared to $334,267 for the nine months ended
September 30, 2000. This increase in spending was required to support the
Company's continued efforts to web-enable its software products and expand its
disease management services. All product development costs in 1999, 2000 and
through September 30, 2001 were expensed.
Selling, general and administrative expenses increased materially to
$4,452,175 for the nine months ended September 30, 2001 as compared to
$3,048,485 for the nine months ended September 30, 2000. The significant
increase, which amounted to $1,403,690, is composed primarily of increased
salaries and related benefits. The increase is directly associated with the
Company's continued effort to build a strong management, sales, marketing and
software development teams. Other smaller components of expenses representing
increases in general and administrative expenses were: marketing, rent and
travel costs for the sales force.
Cost of revenue amounted to $82,231 for the nine months ended September
30, 2001 as compared to $163,123 for the nine months ended September 30, 2000.
This decrease amounting to $80,892 is a direct result of the Company selling
less hardware components in the current quarter, which carry a higher cost to
the Company.
Marketing and advertising expenses amounted to $141,595 for the nine
months ended September 30, 2001 as compared to $120,838 for the nine months
ended September 30, 2000.
For the nine months ended September 30, 2001, the Company recorded
amortization of goodwill amounting to $461,334 in connection with the
acquisition of MyFamilyMD during February 2001
For the nine months ended September 30, 2001 and 2000, the Company
generated losses amounting to $7,980,046 and $3,494,861, respectively. The
increase in losses (net of increase in revenue) is directly attributable to the
Company's increased general and administrative expenses, the expensed portion of
acquired in-progress research and development associated with the acquisition of
MyFamilyMD of $1,642,860, increased research and development expenses amounting
to $132,000, amortization of goodwill of $461,334 resulting from such
acquisition, interest expense of $493,718, which is directly attributable to the
Company's borrowings pursuant to the promissory notes which bear interest at 8%
in addition to accreting the discount to interest expense as a result of the
Company issuing warrants with such promissory notes, and debt conversion costs
of $869,168 resulting from the reduction in exercise price in order to induce
the debt holders to convert.
Liquidity and Capital Resources
Working Capital Deficiency
The Company's financial statements have been prepared assuming that the
Company will continue as a going concern. As of September 30, 2001, the
Company's accumulated deficit amounted to $15,042,165 of which $7,980,046 was
generated during the first nine months of 2001, inclusive of purchased
in-progress research and development of $1,642,860. Additionally, as of
September 30, 2001, the Company had a working capital deficiency amounting to
$2,629,653. Although management is optimistic that it will be able to raise
additional capital, there can be no assurance that it will be able to do so.
These facts raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include adjustments relating to
the recoverability and realization of assets and classification of liabilities
that might be necessary should the Company be unable to continue in operation.
21
During October 2001, the Company's Chief Executive Officer and a
separate senior employee advanced to the Company an aggregate of $275,000 to
provide working capital.
In October 2001, the Company commenced a private offering of its Common
Stock covering 2,000,000 shares or $1,000,000 at $.50 per share. As of November
7, 2001, the Company has raised a total $125,000 in this offering.
Capital Requirements
The Company was able to meet its cash requirements from the beginning
of the year through the current quarter from advances from its Chief Executive
Officer and Chief Operating Officer, from the sale of 2,200,000 shares of its
Common Stock to unrelated investors, which yielded to the Company $1,100,000,
and from issuances of promissory notes. Going forward, significant amounts of
cash will be needed to enable the Company to finish the development of its
products, liquidate its short-term liabilities and implement its revised
marketing strategy.
The Company does not believe that its cash on hand as of September 30,
2001, together with additional funds received from collection of accounts
receivables, will be sufficient to meet the Company's immediate cash
requirements. The Company is currently seeking additional capital, but there can
be no assurance that such financing will be available timely and on acceptable
terms, if at all.
The Company continues to actively seek additional funds either through
the sale of equity or debt securities until the Company's pipeline can generate
sufficient cash flow to support the Company's operations. The Company has
retained various institutions to assist with these fund raising efforts and will
continue to do so until it is self-sufficient.
For the nine months ended September 30, 2001 and 2000, the Company used
$3,547,648 and $2,806,316, respectively, in cash for operating activities funded
by advances from officers and sale of securities to unrelated parties amounting
to approximately $3,200,000 in the nine months ended September 30, 2001, and by
proceeds from sale of Common Stock of approximately $3,475,000 in the nine
months ended September 30, 2000.
Employee Salary Deferment Program
Beginning in the fourth quarter of 2000, in an effort to conserve its
available cash, the Company established a salary deferment program whereby
certain executive officers and certain other senior level employees agreed to
defer all or a portion of their salaries until the Company reaches positive cash
flows or secures significant financing either from equity or debt instruments.
The program remained in effect as of the date of this report. As consideration
for such deferrals, the Company agreed to pay interest at the rate of 8% per
annum on the deferred salary. The Company intends to repay such accrued salary
when its cash flow, either from operations or financing activities, permits the
Company to do so. Certain participating officers and employees have elected to
surrender all or a portion of the accrued salary in exchange for the Company's
Common Stock at such time as the Company deems it advisable to effect such an
exchange. Finally, the Company agreed to grant all officers and employees
participating in the program warrants to purchase the Company's Common Stock at
a price to be determined by agreement among the Company and such officers and
employees as consideration for participating in this program. The Company has
continued the salary deferment program through the third quarter of 2001, and
beyond. As of September 30, 2001, the Company had accrued approximately $976,000
on account of such deferred salaries.
Convertible Promissory Notes
From November 2000 through May 2001, the Company issued several
Convertible Promissory Notes ("Promissory Notes") with an aggregate face amount
of $2,200,000. Of such total, $500,000 represented bridge financing provided to
the Company by its Chief Executive Officer and Chief Operating Officer in
October 2000. The principal amount of the Promissory Notes and accrued and
unpaid interest thereon were convertible into Common Stock at $2.00 per share.
The Promissory Notes were to mature one year from the date of issuance and bore
interest at 8% per annum or 12% per annum in an event of default. Furthermore,
the Company issued to the holders of the Promissory Notes detachable warrants to
purchase an additional 2,200,000 shares of the Company's Common Stock at an
22
exercise price of $2.00. The conversion price of the Promissory Notes and the
exercise price of the detachable purchase warrants were adjustable downward in
the event the Company raised more than $3,000,000 from the sale of its Common
Stock or securities convertible into Common Stock at a effective per share price
of less than $2.00.
At the request of the Company and pursuant to an Exchange Agreement
dated May 14, 2001 between the Company and the holders of the Promissory Notes,
the holders agreed to exchange $2,200,000, the principal amount of the
Promissory Notes, and $80,157, the interest accrued thereon through May 15,
2001, into Common Stock at the exchange price of $.50 per share. In addition, as
consideration for the exchange, the Company reset the exercise price of the
warrants to $.50 per share. Accordingly, the Company issued a total of 4,560,314
shares of the Company's Common Stock in the exchange. In connection with the
Company reducing the conversion price from $2 to $.50, it recorded debt
conversion costs amounting to $691,619, which represents the difference between
the adjusted conversion price and the fair market value of its securities on the
date of conversion.
Loans by Officers
During the nine months ended September 30, 2001, the Company's Chief
Executive Officer and Chief Operating Officer have periodically advanced funds
to the Company for working capital. As of September 30, 2001, the Company was
advanced a net of $881,000 after certain repayments and the conversion of a
$275,000 loan to the Company by the Company's Chief Executive Officer into
Common Stock. In addition, in October 2001, the Company's Chief Executive
Officer advanced an additional $175,000 to provide the Company working capital.
XL Health and Related Transactions
In December 2000, the Company entered into non-binding letters of
intent to acquire two corporations known as XL Health--Disease Management
Holdings, Inc., doing business as CardioContinuum, and Diabetex Corporation
("Diabetex"), two companies engaged in the business of providing disease
management services to cardiac and diabetes patients, respectively. Further, the
Company announced that the preferred stockholders of CardioContinuum led by
Psilos Group Partners, L.P. and its affiliates (the "C2 Investor Group") had
agreed to loan the Company up to $1,000,000 to facilitate the transactions. Upon
further due diligence, the Company elected not to acquire CardioContinuum.
Instead, on March 2, 2001 the Company entered into an Amended and Restated
Promissory Note and Warrant Purchase Agreement with the C2 Investor Group
pursuant to which the C2 Investor Group agreed to loan the Company up to
$1,000,000 and granted the Company a one year option to acquire all
CardioContinuum preferred stock and debt held by the C2 Investor Group for a
nominal consideration. As consideration, the Company granted the C2 Investor
Group detachable warrants to acquire 2.632 shares of its Common Stock at $.10
per share for each $1 of the face amount of the loan. 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 September 30, 2001, the C2 Investor Group
(which includes a venture fund managed by the Company's Chief Executive Officer)
funded an aggregate of $692,809 of the $1,000,000 and has received warrants to
purchase 1,823,473 shares of the Company's Common Stock.
Pursuant to a promissory note and a security agreement dated December 19, 2000,
the Company loaned Diabetex, $350,000 with a maturity date of February 19, 2002
or within 60 days of termination of merger discussions, bearing interest at 8%
per annum. In March 2001, the parties terminated the merger discussions.
Further, on April 30, 2001, the Company demanded that, pursuant to the terms of
the promissory note, Diabetex repay the principal amount of the promissory note
and all accrued interest thereon on or before June 29, 2001. As of September 30,
2001, Diabetex and certain of its related parties have paid the Company a total
of $275,000, which has been first applied to accrued interest and reimbursable
expenses and the balance to principal. As of September 30, 2001 the principal
outstanding under the promissory note equaled $107,225, of which $36,372 was
paid on October 23, 2001. The parties anticipate that the outstanding principal
along with all accrued interest will be repaid in November 2001.
23
Factors Affecting the Company's Business and Prospects
We expect to experience significant fluctuations in our future
quarterly operating results due to a variety of factors, many of which are
outside of our control. These issues are discussed more fully in the section
titled "Risk Factors" in Health Management's Form 10-KSB, filed on April 2,
2001.
The Company is susceptible to additional risk because each of its few
customers accounts for a large percentage of revenues. For the three months
ended September 30, 2001, the Company had one unrelated customer that accounted
for 80% of total revenues. As of September 30, 2001, the Company had one
unrelated customers that accounted for 76% of accounts receivables.
Market Risk
The Company has no material interest-bearing assets or liabilities, nor
does the Company have any current exposure for changes in foreign currency
exchange rates. The Company does not use derivatives or other financial
instruments. The Company's financial instruments consist of cash and
receivables. The market values of these financial instruments approximate book
value.
Inflation
The financial statements are presented on a historical cost basis and
do not fully reflect the impact of prior years' inflation. While the U.S.
inflation rate has been modest for several years, inflation issues may impact
the Company's business in the future. The ability to pass on inflation costs is
an uncertainty due to general economic conditions and competitive situations.
24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any material pending legal proceeding.
Litigation threatened against Health Management is described in Note
9--Commitments and Contingencies to the Company's Consolidated Financial
Statements above.
Item 2. Changes in Securities
Effective as of July 13, 2001, the Company issued 107,560 shares of its
Common Stock to an investment banker. These shares were issued in satisfaction
of accrued consulting fees of $76,798. For purposes of this issuance, each
shares of Common Stock was valued at $.71 per share. In addition, the Company
granted the investment banker a five year warrant to purchase up to 180,000
shares of Common Stock at a per share price of $.75. 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 and Regulation D
thereunder.
Effective as of September 30, 2001, the Company issued 10,973 shares of
its Common Stock to a consultant. These shares were issued in satisfaction of
accrued consulting fees of $21,946. For purposes of this issuance, each shares
of Common Stock was valued at $2.00 per share. The consultant is an accredited
investor. In undertaking this issuance, we relied on an exemption from
registration under Section 4(2) of the Securities Act and Regulation D
thereunder.
Item 3. Defaults upon Senior Securities
The Company did not default upon any senior securities during the
quarter ended September 30, 2001.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters to a vote of its stockholders
during the quarter ended September 30, 2001.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
25
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
I-TRAX, INC.
Date: November 13, 2001 By: /s/ Frank A. Martin
------------------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
26