UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 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 August 6, 2001, the Registrant
had 30,543,222 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....................................................23
Item 1. Legal Proceedings..........................................23
Item 2. Changes in Securities......................................24
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...........................26
PART I. FINANCIAL STATEMENTS
Item 1. Financial Statements
I-TRAX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Page Number
-----------
Balance sheets at June 30, 2001 (unaudited) and December 31, 2000 (audited) 4
Statements of operations for the three months ended June 30, 2001 and 2000 (unaudited) 5
Statements of operations for the six months ended June 30, 2001 and 2000 (unaudited) 6
Statement of stockholders' equity (deficiency) for the six months ended June 30, 2001 (unaudited) 7
Statements of cash flows for the six months ended June 30, 2001 and 2000 (unaudited) 8-9
Notes to financial statements (unaudited) 10
3
I-TRAX, INC. AND SUBSIDIARIES
BALANCE SHEETS
ASSETS
June 30, 2001 December 31,
(unaudited) 2000 (audited)
------------ ------------
Current Assets:
Cash $ 66,647 $ 132,806
Accounts receivables, net 147,831 217,145
Prepaid expenses 15,668 36,706
Other receivables, net of allowance for doubtful accounts
of $73,534 -- 4,581
Note receivable 364,729 --
------------ ------------
Total current assets 594,875 391,238
------------ ------------
Office equipment and furniture, net 344,908 409,172
Note receivable -- 350,000
Deposit on acquisition of intellectual property 100,000 --
Goodwill and intangibles, net 3,308,524 --
Security deposits 74,994 128,382
------------ ------------
Total Assets $ 4,423,301 $ 1,278,792
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable $ 634,177 $ 427,150
Accrued expenses 924,405 444,342
Convertible notes payable, net of discounts -- 1,284,540
Due to officers 100,000 --
Capital lease payable 25,135 39,240
Deferred revenue 186,312 375,234
------------ ------------
Total current liabilities 1,870,029 2,570,506
------------ ------------
Capital lease obligation, net of current portion 78,598 81,613
Promissory notes payable, net of discount 263,289 --
------------ ------------
Total liabilities 2,211,916 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,
29,688,722 and 19,483,084 issued and outstanding, respectively 29,689 19,483
Additional paid in capital 15,570,374 6,668,809
Accumulated deficit (13,388,678) (7,062,119)
Notes receivable - officers -- (999,500)
------------ ------------
Total stockholders' equity (deficiency) 2,211,385 (1,373,327)
------------ ------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 4,423,301 $ 1,278,792
============ ============
See accompanying notes to financial statements (unaudited).
4
I-TRAX, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
Three months Three months
ended ended
June 30, June 30,
2001 2000
(unaudited) (unaudited)
------------ ------------
Revenue $ 270,470 $ 64,227
------------ ------------
Operating expenses:
Cost of revenue 20,578 45,513
General and administrative 1,516,827 1,143,983
Research and development 123,059 --
Amortization of goodwill 179,517 --
Marketing and advertising 39,229 78,295
------------ ------------
Total operating expenses 1,879,210 1,267,791
------------ ------------
Operating loss (1,608,740) (1,203,564)
------------ ------------
Other income (expenses):
Provision for contingent liabilities -- (176,500)
Debt conversion costs (869,168) --
Miscellaneous income -- 46,107
Interest income 15,322 --
Interest expense (146,748) (1,651)
------------ ------------
Total other income (expenses) (1,000,594) (132,044)
------------ ------------
(Loss) before provision for income taxes (2,609,334) (1,335,608)
------------ ------------
Provision for income taxes -- --
------------ ------------
Net (loss) (2,609,334) (1,335,608)
------------ ------------
Loss per common share:
Basic and diluted (.11) (.08)
============ ============
Weighted average number of shares outstanding: 23,821,568 16,928,084
============ ============
See accompanying notes to financial statements (unaudited).
5
I-TRAX, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
Six months Six months
ended ended
June 30, June 30,
2001 2000
(unaudited) (unaudited)
------------ ------------
Revenue $ 460,410 $ 64,227
------------ ------------
Operating expenses:
Cost of revenue 36,124 45,513
General and administrative 3,095,749 1,748,295
Acquired in progress research and development 1,642,860 --
Research and development 350,323 --
Amortization of goodwill 281,817 --
Marketing and advertising 105,366 122,152
------------ ------------
Total operating expenses 5,512,239 1,915,960
------------ ------------
Operating loss (5,051,829) (1,851,733)
------------ ------------
Other income (expenses):
Provision for contingent liabilities -- (176,500)
Debt conversion costs (869,168) --
Miscellaneous income 6,636 57,360
Interest income 17,483 --
Interest expense (429,681) (1,675)
------------ ------------
Total other income (expenses) (1,274,730) (120,815)
------------ ------------
(Loss) before provision for income taxes (6,326,559) (1,972,548)
------------ ------------
Provision for income taxes -- --
------------ ------------
Net (loss) $ (6,326,559) $ (1,972,548)
============ ============
Loss per common share:
Basic and diluted (.28) (.11)
============ ============
Weighted average number of shares outstanding: 22,609,279 17,378,084
============ ============
See accompanying notes to financial statements (unaudited).
6
I-TRAX, INC. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE SIX MONTHS ENDED JUNE 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 9,000 9 54,591 -- -- 54,600
Net loss for the six months ended
June 30, 2001 -- -- -- (6,326,559) -- (6,326,559)
------------ ------------ ------------ ------------ ------------ ------------
Balances at June 30, 2001 29,688,722 $ 29,689 15,570,374 $(13,388,678) $ -- $ 2,211,385
========== ============ ========== ============ ============ ============
See accompanying notes to financial statements (unaudited).
7
I-TRAX, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
Six months Six months
ended ended
June 30, 2001 June 30, 2000
(unaudited) (unaudited)
----------- -----------
Operating activities:
Net loss $(6,326,559) $(1,972,548)
Adjustments to reconcile net loss to net
cash used for operating activities:
Accretion of discount on notes payable charged to interest expense 384,696
Depreciation and amortization 358,257 15,062
Provision for contingent liabilities -- 164,000
Issuance of various securities on conversions and services 907,409 240,000
Write-off of in progress research and development acquired
in MyFamilyMD acquisition 1,642,860 --
Decrease (increase) in:
Accounts receivable 69,314 158,421
Prepaid expenses 21,038 (5,612)
Other current receivables 4,581 (61,960)
Security deposits -- (88,000)
(Decrease) increase in:
Accounts payable 207,027 107,502
Accrued expenses 480,063 (20,000)
Deferred revenue (188,922) --
----------- -----------
Net cash used for operating activities (2,440,236) (1,463,135)
----------- -----------
Investing activities:
Deposit on acquisition of intellectual property (100,000) --
Proceeds from partial release of security deposit 53,388 --
Purchase of office equipment and furniture -- (387,275)
----------- -----------
Net cash used for investing activities (46,612) (387,275)
----------- -----------
Financing activities:
Repayment of notes payable -- (37,500)
Repayments to related parties -- (18,000)
Principal payments on capital leases (17,120) --
Proceeds from issuance of promissory notes payable 692,809 --
Proceeds from officers 855,000 --
Repayments to officers (480,000) --
Proceeds from sale of Common Stock 1,100,000 1,794,881
Proceeds from issuance of convertible promissory notes 270,000 --
----------- -----------
Net cash provided by financing activities 2,420,689 1,739,381
----------- -----------
Net (decrease) in cash (66,159) (111,029)
Cash and cash equivalents at beginning of period 132,806 195,728
----------- -----------
Cash and cash equivalents at end of period 66,647 84,699
=========== ===========
Supplemental disclosure of non-cash flow information:
Cash paid during the period for:
Interest $ 3,908 $ 1,675
=========== ===========
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 $ --
=========== ===========
Acquisition of office equipment in connection
with capital lease obligation $ -- $ 34,290
=========== ===========
--continued--
8
I-TRAX, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
(CONTINUED FROM PREVIOUS PAGE)
Six months Six months
ended ended
June 30, 2001 June 30, 2000
(unaudited) (unaudited)
---------- ----------
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 from officer $ 416,112 $ --
========== ==========
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 June 30, 2001, the Company's
accumulated deficit amounted to $13,388,678. Additionally, as of June 30, 2001,
the Company had a working capital deficiency of $1,275,154.
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.
During the first quarter, the Company engaged an investment banker to assist in
raising up to $5,000,000 of financing either through issuance of securities or
via a debt instrument with potential conversion features into the Company's
Common Stock.
Additionally, in July 2001, the Company renewed an agreement with a financial
advisor to assist the Company in raising capital and provide investor relation
services.
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
June 30, 2001 and the results of the operations and cash flows for the three and
six month periods ended June 30, 2001 and 2000. The results for the three and
six month periods ended June 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 six months ended June 30, 2001, the
Company's basic and diluted earnings per share were the same.
These unaudited financial statements should be read in conjunction with our
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 June 30, 2001, no repayment has been made; however,
arrangements were made whereby the Company received $187,500 on August 9, 2001
with the remaining balance to be received within 30 days.
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 ("iSummit Partners"), 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 iSummit Partners in exchange for the assignment by the owners to
the Company of all of the issued and outstanding limited liability company
membership interests of iSummit Partners. 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 based
on a preliminary basis pending the completion of a formal valuation.
The Company is amortizing the goodwill over a five-year period on a
straight-line basis. Accordingly, from February 7, 2001 (date of acquisition)
through June 30, 2001, the Company recorded amortization expense of $281,817.
The following summarized table sets forth the proforma statements of operations
as if the acquisition was consummated at the beginning of the year for each of
the respective periods.
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Total revenue $ 270,470 $ 64,227 $ 460,410 $ 64,227
=========== =========== =========== ===========
Total expenses $ 2,879,804 $ 1,579,352 $ 6,861,047 $ 3,040,008
=========== =========== =========== ===========
Net Loss $(2,609,334) $(1,515,125) $(6,400,637) $(2,975,781)
=========== =========== =========== ===========
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, 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, it recorded debt conversion costs amounting to
$691,619, which represented the difference between the adjusted conversion price
and the fair market value of its 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 June 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 June 30,
2001, $30,334 of such discount was accreted to interest expense.
NOTE 8--ADVANCES FROM OFFICERS
During the six months ended June 30, 2001, the Company's Chief Executive Officer
and Chief Operating Officer have periodically advanced funds to the Company for
working capital. As of June 30, 2001, the Company was advanced a net of $100,000
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, 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
June 30, 2001, the Company had one unrelated customer, which accounted for 99%
of total revenues. As of June 30, 2001, the Company had one unrelated customer,
which accounted for 85% of accounts receivables.
14
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9--COMMITMENTS AND CONTINGENCIES (Cont'd)
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, Health Management and its present Chief Executive Officer
alleging 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. 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 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 commending a new
action. The court has not thus far permitted reactivation of the suit, and
Plaintiff has not commenced a new action. The stipulated time period for
commencing a new action has now expired. Although to date the Plaintiff has not
successfully reactivate the prior state court action, there is no assurance that
he will not be able to do so. Furthermore, although Health Management believes
that it has adequate defenses against all of the Plaintiff's claims, including
pursuant to a settlement agreement entered into by the Plaintiff, Health
Management and certain others in 1997, there is no assurance that these defenses
will prevail. In the event the prior state court action is reinstated and in the
event Health Management cannot assert successfully its defenses, it is possible
that the court may compel Health Management to repay an alleged loan in an
amount of $825,000 and that the outcome of the action would have a material
adverse effect on Health Management and the Company and the Company's financial
condition. As of June 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.
NOTE 10--STOCKHOLDERS' EQUITY (DEFICIENCY)
Amendment of the Company's Certificate of Incorporation
At the Company's 2000 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.
15
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10--STOCKHOLDERS' EQUITY (DEFICIENCY) (Cont'd)
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 June 30, 2001, the Company has granted an aggregate of 3,286,264 options
with an exercise price of $.55 pursuant to the 2001 Plan.
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. 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 $273,619, which represented the
difference between the adjusted conversion price and the fair market value of
its securities on the date of conversion.
16
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10--STOCKHOLDERS' EQUITY (DEFICIENCY) (Cont'd)
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 25, 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 25, 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.
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 June 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 June 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.
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 six month periods
ended June 30, 2001 are compared to the unaudited results of operations for the
comparable periods ended June 30, 2000. Such information is based upon the
historical financial information available as of the dates indicated. Results of
operations for the three and six month periods ended June 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 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
outstanding ownership interest in MyFamilyMD. At
18
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 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 June 30, 2001, the Company
recorded amortization expense of $281,817.
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 six month periods ended June 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
quarter 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), eCareCoordinator(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 database
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 substantial operating
losses through the fourth quarter of 2001.
Results of Operations
Three Months Ended June 30, 2001 Compared to Three Months Ended
June 30, 2000
Total revenues for the three months ended June 30, 2001 amounted to
$270,470 whereas total revenues for the three months ended June 30, 2000
amounted to $64,227. 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 licensing and subscriptions to the Company's
products delivered over the Internet.
The product development costs amounted to $123,059 for the three months
ended June 30, 2001 as compared to $0 for the three months ended June 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 and 2000 and through June 30,
2001 were expensed.
Selling, general and administrative expenses increased materially to
$1,516,827 for the three months ended June 30, 2001 as compared to $1,143,983
for the three months ended June 30, 2000. The significant increase, which
amounted to $372,844, is composed primarily of increased salaries and related
benefits. The increase is directly associated with the Company's continued
effort to build a strong sales, marketing and software development teams.
For the quarters ended June 30, 2001 and 2000, the Company generated
losses amounting to $2,609,334 and $1,335,608, respectively. The increase in
losses (net of increase in revenue) is directly attributable to the Company's
increased general and administrative expenses amounting to $372,844, research
and development expenses amounting to $123,059, amortization of goodwill of
$179,517, interest expense of $146,748, 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.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30,
2000
Total revenues for the six months ended June 30, 2001 amounted to
$460,410 whereas total revenues for the six months ended June 30, 2000 amounted
to $64,227. 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
20
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 $350,323 for the six months
ended June 30, 2001 as compared to $0 for the six months ended June 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 June 30, 2001
were expensed.
Selling, general and administrative expenses increased materially to
$3,095,749 for the six months ended June 30, 2001 as compared to $1,748,295 for
the six months ended June 30, 2000. The significant increase, which amounted to
$1,347,454, is composed primarily of increased salaries and related benefits
amounting to $1,188,286. The increase is directly associated with the Company's
continued effort to build a strong management, sales, marketing and software
development teams. Other components of expenses representing the remaining
increase in general and administrative expenses were: marketing, professional
and consulting fees.
For the six months ended June 30, 2001 and 2000, the Company generated
losses amounting to $6,326,559 and $1,972,548, 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, research and development expenses amounting to
$350,323, amortization of goodwill of $281,817 resulting from such acquisition,
interest expense of $429,681, 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 June 30, 2001, the Company's
accumulated deficit amounted to $13,388,678 of which $6,326,559 was from its
first two quarters' losses, inclusive of a purchased in-progress research and
development of $1,642,860. Additionally, as of June 30, 2001, the Company had a
working capital deficiency amounting to $1,275,154.
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 June 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.
During the fiscal quarter ended March 31, 2001, the Company engaged an
investment banker to assist in raising up to $5,000,000 of financing either
through issuance of equity, debt or a combination. The Company has estimated
that these funds, if raised, will be sufficient to finish the development of its
products and initiate its marketing campaign. Additionally, in July 2001, the
Company renewed an agreement with a financial advisor who is also assisting the
Company in raising capital.
For the six months ended June 30, 2001 and 2000, the Company used
$2,440,236 and $1,463,135, respectively, in cash for operating activities funded
by advances from officers and sale of securities to unrelated
21
parties amounting to $2,437,809 in the six months ended June 30, 2001, and by
proceeds from sale of Common Stock of $1,794,880 in the six months ended June
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 second quarter of 2001, and
beyond. As of June 30, 2001, the Company had accrued approximately $759,000 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
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 six months ended June 30, 2001, the Company's Chief
Executive Officer and Chief Operating Officer have periodically advanced funds
to the Company for working capital. As of June 30, 2001, the Company was
advanced a net of $100,000 after certain repayments and the conversion of a
$275,000 loan to the Company by the Company's Chief Executive Officer into
Common Stock.
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
22
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 June 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 June 30,
2001, no repayment has been made; however, arrangements were made whereby the
Company received $187,500 on August 9, 2001 and the remaining balance within 30
days.
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 June 30, 2001, the Company had one unrelated customer that accounted for
99% of total revenues. As of June 30, 2001, the Company had one unrelated
customers that accounted for 85% 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.
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.
23
Item 2. Changes in Securities
Effective as of November 13, 2000 through May 2001, we completed an
offering of convertible promissory notes and stock purchase warrants to
accredited investors. In undertaking this offering, we relied on an exemption
from registration under Section 4(2) of the Securities Act and Regulation D
thereunder. The convertible promissory notes had a maturity date of one year
from the date of issue and accrue interest at 8% per annum with a default rate
of 12% per annum. The principal amount of, and accrued and unpaid interest
under, the convertible promissory notes were convertible into shares of the
Company's Common Stock. The stock purchase warrants granted holders a right to
purchase 2 shares of the Company's Common Stock for each $1 in original
principal amount of convertible promissory notes. The initial conversion price
of the convertible promissory notes and the exercise price of the stock purchase
warrants were $2 per share, subject, in each case, to full-ratchet anti-dilution
adjustment in the event of a subsequent offering with an effective per share
price of less than $2. An individual and an affiliated fund, which collectively
purchased convertible promissory notes with an aggregate principal amount of
$1,000,000, led this private placement. In addition, an aggregate of $500,000
advanced to us by our Chief Executive Officer and Chief Operating Officer in
October 2000 were converted into this offering. As of March 31, 2001 we raised
$2,050,000 pursuant to this offering. During the quarter ended June 30, 2001, we
raised $150,000 pursuant to this offering. We filed with the Securities and
Exchange Commission a Form D in connection with the issuance of the convertible
promissory notes and stock purchase warrants.
On June 25, 2001 and pursuant to an Exchange Agreement dated May 14,
2001, the holders of the Company's convertible promissory notes agreed to
exchange the principal amount of such promissory notes and interest accrued
thereon through May 15, 2001 in the aggregate amount of $2,280,157 for Common
Stock at the exchange price of $.50 per share. In addition, as consideration for
the exchange, the Company reset the exercise price of warrants to acquire
2,200,000 shares of Common Stock 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 undertaking this exchange, we relied on an exemption from
registration under Section 4(2) of the Securities Act and Regulation D
thereunder.
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, among other things, to loan the
Company up to $1,000,000. 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 March 31, 2001, the C2 Investor Group funded
$618,000 of the $1,000,000 and had received warrants to purchase 1,626,074
shares of the Company's Common Stock. In undertaking this offering, we relied on
an exemption from registration under Section 4(2) of the Securities Act and
Regulation D thereunder. All C2 Investors are accredited investors. During the
quarter ended June 30, 2001, an additional member of the C2 Investor Group, and
an affiliate of the Company's Chief Executive Officer, funded $75,000 of the
loan and received warrants to purchase 197,400 shares of the Company's Common
Stock.
On June 25, 2001 and pursuant to an Exchange Agreement, the Company's
Chief Executive Officer exchanged a bridge loan in the amount of $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, the company issued to the Chief
Executive Officer stock purchase warrants to acquire 515,000 shares of Common
Stock at an exercise price of $.50 per share as consideration for this and
bridge financing. In undertaking this offering, we relied on an exemption from
registration under Section 4(2) of the Securities Act and Regulation D
thereunder.
On June 25, 2001, as consideration for bridge financing, the Company
issued to its Chief Operating Officer stock purchase warrants to acquire 240,000
shares of Common Stock at an exercise price of $.50 per share. In undertaking
this offering, we relied on an exemption from registration under Section 4(2) of
the Securities Act and Regulation D thereunder.
Effective as of June 25, 2001, the Company completed a private
placement of 2,200,000 shares of its Common Stock at $.50 to two accredited
investors, 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
24
warrants to acquire a total of 550,000 shares of Common Stock at an exercise
price of $1.00 per share. Both participants in the private placement are
accredited investors. In undertaking this offering, we relied on an exemption
from registration under Section 4(2) of the Securities Act and Regulation D
thereunder.
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. The investment
banker is an accredited investor. In undertaking this offering, we relied on an
exemption from registration under Section 4(2) of the Securities Act and
Regulation D thereunder.
Item 3. Defaults upon Senior Securities
The Company did not default upon any senior securities during the
quarter ended June 30, 2001.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders in Philadelphia,
Pennsylvania on May 21, 2001. Of the 23,705,584 shares outstanding as of the
record date, 17,077,976 shares were present or represented by proxy at the
meeting. At these meetings the following actions were voted upon:
(1) To elect the following directors to serve for a term ending upon
the 2002 Annual Meeting of Stockholders or until their successors are elected
and qualified:
For Against
-------------------------------
David R. Bock 15,761,207 0
Philip D. Green 15,755,207 0
Michael M.E. Johns, M.D. 15,761,207 0
Craig Jones, M.D. 15,761,207 0
Hans C. Kastensmith 15,761,207 0
Frank A. Martin 15,761,207 0
John R. Palumbo 15,761,207 0
William S. Wheeler 15,761,207 0
(2) To approve the amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock from
50,000,000 to 100,000,000:
For Against Abstain
-----------------------------------------------------------------
16,947,805 416 129,755
(3) To adopt the Company's 2001 Equity Compensation Plan:
For Against Abstain
-----------------------------------------------------------------
16,093,859 27,820 226,264
(4) To ratify the appointment of PricewaterhouseCoopers, LLP as the
Company's independent auditors for the fiscal year ending December 31, 2001:
For Against Abstain
-----------------------------------------------------------------
16,947,806 415 129,755
Item 5. Other Information
None.
25
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
26
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
I-TRAX, INC.
Date: August 13, 2001 By: /s/ Frank A. Martin
--------------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
27