--------------------------------------------------------------------------------
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: December 31, 2002
[ ] TRANSITION REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 0-30275
I-TRAX, INC.
------------------------------------------
(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) (Zip Code)
Issuer's telephone number: (215) 557-7488
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.001 par value
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. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $3,931,910.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold on March 21, 2003 on the
American Stock Exchange was $11,652,493. As of March 21, 2003, the number of
shares outstanding of each class of common equity was 9,372,727 shares of Common
Stock, $.001 par value.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the issuer's definitive proxy
statement for its 2003 Annual Meeting of Stockholders are incorporated by
reference in Part III of this report.
Transitional Small Business Disclosure Format (Check one): [ ] Yes [X] No
--------------------------------------------------------------------------------
I-TRAX, INC.
FORM 10-KSB ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
Item Page No.
PART I
1. Description of Business............................................................................ 1
2. Description of Properties..........................................................................19
3. Legal Proceedings..................................................................................20
4. Submission of Matters to a Vote of Security Holders................................................20
PART II
5. Market for Common Equity and Related Stockholder Matters...........................................21
6. Management's Discussion and Analysis of Financial Condition and Results of Operations..............25
7. Financial Statements...............................................................................32
8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............66
PART III
9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act .................................................................66
10. Executive Compensation.............................................................................66
11. Security Ownership of Certain Beneficial Owners and Management.....................................66
12. Certain Relationships and Related Transactions.....................................................66
13. Exhibits and Reports on Form 8-K...................................................................66
14. Controls and Procedures............................................................................70
PART I
ITEM 1. DESCRIPTION OF BUSINESS
This report includes and incorporates forward-looking statements. All
statements, other than statements of historical facts, included or incorporated
in this report regarding our strategy, future operations, financial position,
future revenues, projected costs, prospects, plans and objectives of management
are forward-looking statements. The words "anticipates," "believes,"
"estimates," "expects," "intends," "may," "plans," "projects," "will," "would"
and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words. We
cannot guarantee that we actually will achieve the plans, intentions or
expectations disclosed in our forward-looking statements and you should not
place undue reliance on our forward-looking statements. Actual results or events
could differ materially from the plans, intentions and expectations disclosed in
the forward-looking statements we make. We have included important factors in
the cautionary statements included or incorporated in this report, particularly
under the heading "Risk Factors" beginning on page 13 that we believe could
cause actual results or events to differ materially from the forward-looking
statements we make. Our forward-looking statements do not reflect the potential
impact of any future acquisitions, mergers, dispositions, joint ventures or
investments we may make.
Business Overview
I-trax provides focused disease management and comprehensive health
management solutions designed to improve the health of the populations we serve
while reducing the cost of medical care.
Our solutions are designed to meet the needs of insurers, employers and
consumers seeking to reduce costs and improve the quality of care by enabling
healthcare organizations to evolve from fragmented care management practices
into a cohesive and efficient system of healthcare management. Our solutions are
fully integrated, use a single-data platform that allows all caregivers to share
records and enable our clients to provide true coordination of care. By
facilitating real-time communication between all stakeholders within today's
complex healthcare system, I-trax's health management solutions reduce costs and
enable the best possible delivery of care.
Ours is a three-pronged approach that results in savings and consumer
satisfaction: Prediction + Prevention + Care Management = Performance
Prediction
First, we use historical information to predict future healthcare
costs. Experts agree that predictive modeling provides a comprehensive advantage
to health plans, employers and providers, which leads to cost effective medical
management and greater profitability. By using predictive modeling, we identify
our clients' future healthcare costs, the health conditions that will drive
those costs and the people within our clients' populations who are at risk for
those conditions. Armed with this information, we target appropriate resources
to address the costly conditions and the populations that are at risk for those
conditions, thus managing costs while improving care.
Prevention
Second, we use what we believe to be state-of-the-art demand management
and nurse triage services to effect our targeted interventions. These services
incorporate nationally recognized, evidence-based clinical guidelines to ensure
that all caregivers and consumers are following the best practices. We also link
the key stakeholders in this care delivery effort--consumers, physicians and
care managers--through secure, web-based solutions. These solutions facilitate
real-time sharing of information and support the adherence to our population and
disease management programs. Finally, we staff our state-of-the-art Care
Communications Center with skilled nurses and other healthcare professionals 24
hours per day, 7 days per week. The Center helps consumers make informed
decisions about their health and provides ongoing support for those with chronic
diseases.
The products and services we use to deliver targeted interventions
include: MyNurseLine(TM), a technology-enabled nurse triage service;
DoctorsLine(TM), an after-hours custom triage and administrative outsourcing
service; Health-e-Community(TM), a specialized enrollment, marketing and
fulfillment service; eImmune(R), a clinical immunization and related adverse
events tracking system; and Medicive(R) Medical Enterprise Data System, a
proprietary software architecture developed to collect, store, retrieve and
analyze a broad range of information used in the healthcare industry, which
serves as the foundation for our Care Coordination Platform offerings. Our Care
Coordination Platform includes: Health-e-Coordinator(TM), a web-based care
management application; MyFamilyMD(TM), a consumer health management portal; and
CarePrime(R), a clinical care application for physicians and clinicians.
Care Management
Finally, we believe that we offer the industry's most comprehensive
health management and disease management solution. We assist clients in managing
the healthcare of their populations by outsourcing clinical and administrative
services as part of a strategic partnership. Through long-term partnerships with
our clients, we align our assets and core competencies to develop targeted
solutions to meet the needs of the populations our clients serve. Our disease
management solutions currently address congestive heart failure (CHF), coronary
artery disease (CAD), asthma, diabetes, lower back pain and chronic obstructive
pulmonary disease (COPD). We also develop programs using evidenced-based
guidelines based on our clients' requests. Health-e-Life Program(TM) is our
comprehensive end-to-end solution for care management.
Performance
Everything we do is built on information, which drives decision-making
and results. Information guides the identification of consumers, the utilization
of protocols that provide high quality and cost effective care, the
communication among the key stakeholders and ultimately the return on capital
invested in providing healthcare. When all of these components are in place, we
believe that consumer satisfaction will increase and the costs of providing
quality healthcare will decrease.
Corporate History
I-trax, Inc.--Holding Company
I-trax was incorporated in the State of Delaware on September 15, 2000
at the direction of the Board of Directors of I-trax Health Management
Solutions, Inc. ("Health Management"), I-trax's then parent company. On February
5, 2001, I-trax became the holding company of Health Management at the closing
of a reorganization pursuant to Section 251(g) of Delaware General Corporation
Law. The holding company reorganization was described in greater detail in
I-trax's registration statement on Form S-4 (Registration Number 333-48862),
filed with the Securities and Exchange Commission on October 27, 2000. At the
effective time of the reorganization all of the stockholders of Health
Management became the stockholders of I-trax and Health Management became a
wholly owned subsidiary of I-trax. Further, all outstanding shares of Health
Management were converted into shares of I-trax in a non-taxable transaction.
Health Management no longer files reports with the Securities and Exchange
Commission. However, I-trax does file reports with the Securities and Exchange
Commission, and its common stock is traded on the American Stock Exchange under
the symbol "DMX."
The holding company structure has allowed us greater flexibility in our
operations and expansion and diversification plans, including in the acquisition
of WellComm Group, Inc. on February 6, 2002 and iSummit Partners, LLC, doing
business as "MyFamilyMD," on February 7, 2001.
I-trax acquired WellComm effective February 6, 2002 in a two-step
reorganization pursuant to a Merger Agreement dated January 28, 2002 by and
among I-trax, WC Acquisition, Inc., an Illinois corporation and a wholly-owned
subsidiary of I-trax, WellComm and WellComm's two principals. The initial step
of the reorganization transaction involved a merger of WC Acquisition with and
into WellComm, in which merger WellComm continued as the surviving corporation.
The second step of the reorganization transaction involved a statutory merger of
WellComm with and into I-trax, in which merger I-trax continued as the surviving
corporation.
2
At the closing of the WellComm merger, we delivered to the WellComm
stockholders approximately $2,200,000 in cash and 1,488,000 shares of our common
stock, and to each of two senior officers of WellComm options to acquire 56,000
shares of our common stock at a nominal exercise price. After the merger, three
executive officers of WellComm joined us as senior executives and WellComm's two
principal stockholders were elected to our Board of Directors.
We funded the acquisition of WellComm by selling a 6% convertible
senior debenture in the aggregate principal amount of $2,000,000 to Palladin
Opportunity Fund LLC pursuant to a Purchase Agreement dated as of February 4,
2002 between Palladin and us. Pursuant to the purchase agreement, we also issued
Palladin a warrant to purchase up to 307,692 shares of our common stock at an
exercise price of $5.50 per share. The outstanding principal and any interest
under the debenture are payable in full on or before February 3, 2004. Further,
outstanding principal and any interest may be converted at any time at the
election of Palladin into our common stock. The current conversion price under
the debenture is $3.03. The current conversion price is subject to "reset" as of
August 4, 2003 but only if the closing bid price for our common stock, averaged
during a period of 20 consecutive trading days ending on August 3, 2003, is less
than the then current conversion price.
I-trax acquired iSummit effective February 7, 2001 in an exchange
transaction pursuant to a Contribution and Exchange Agreement dated September
22, 2000, as amended, by and among iSummit, I-trax, Health Management and
iSummit's three members. I-trax issued 580,682 shares of common stock to acquire
iSummit (reflecting a post closing adjustments to the aggregate number of issued
shares effective as of December 31, 2001).
I-trax Health Management Solutions, Inc.--Operating Subsidiary
Health Management is a predecessor to I-trax and is our operating
subsidiary. It was incorporated in the State of Delaware under the name of
Marmac Corporation in May 1969. In December 1979, it changed its name to Ibex
Industries International, Inc. On April 1, 1996, Health Management purchased the
assets of certain physician practices, changed its name to U.S. Medical
Alliance, Inc., and commenced operations as a physician practice management
company.
As U.S. Medical Alliance, Health Management completed one additional
physician practice acquisition. However, it did not have adequate liquidity or
capital resources to withstand the downturn in the physician practice management
industry, nor the ability to acquire profitable physician practices. In January
1997, the Board of Directors, in an effort to reorganize Health Management,
elected Frank A. Martin as its President. Mr. Martin negotiated the return of
the previously acquired physician practice assets to the physicians in exchange
for the cancellation of any Health Management capital stock or notes associated
with those acquisitions. Health Management changed its name to I-Trax.com, Inc.
in August 1999.
Health Management merged with Member-Link effective December 30, 1999
pursuant to a Merger Agreement dated as of December 14, 1999. In the merger,
Health Management issued an aggregate of 1,554,368 shares (as adjusted) of its
common stock. And on February 7, 2001, Health Management and I-trax completed
the previously described holding company reorganization. Health Management
assumed its current name, I-trax Health Management Solutions, Inc., on March 21,
2001.
Our Market and Business Strategy
We believe that the market for our population health management
solutions is large and continues to grow. Experts in disease management
outsourcing estimate that the disease management industry generated outsource
fees of approximately $73 million in 1997 and approximately $425 million in
2001. Same experts also estimate that these outsource fees could reach $20
billion in 2010.
As the costs of medical care continue to grow, there is a growing
recognition throughout the healthcare community of the need for targeted,
coordinated, and effective healthcare management solutions. Further, we believe
that increased interest in population health and disease management among health
plans, employers and governmental agencies and optimistic results from numerous
ongoing population health and disease management programs indicate that
population health and disease management are effective and will become a
permanent aspect of healthcare.
3
Because our solutions are scalable and can be tailored to fit into most
healthcare organizations, we feel we have a competitive advantage. We have
identified, and are targeting, the following segments of the healthcare industry
as purchasers of our solutions:
o Self-Insured Employers. As the ultimate payor for health related
costs, self-insured employers have a significant stake in making
sure that employees and their dependents are empowered with tools
to make the best and most educated healthcare decisions. We
believe that correct and informed decisions will not only reduce
direct healthcare costs, but also reduce employee absenteeism and
improve employees' focus at work. Where employees are older or
retired and at risk for chronic diseases, early risk
identification and targeted interventions will help reduce costs
and improve quality of life.
o Military and Government. The eImmune(R) application is the first
application we designed and built. It now used to manage records
for 2.5 million individuals. With recent increased funding to
state health programs, this application is now very expandable.
o Public Health Agencies. Public health agencies are charged with
coordinating care to a significant portion of America's uninsured
population. Our care coordination tools and disease management
programs are well suited to benefit this segment of the healthcare
market. Furthermore, eImmune(R) and our other software
applications are ideally suited for aggregating and analyzing vast
of amounts of data required to, among other things, track
immunizations and detect trends that can provide important
surveillance information in the event of an outbreak of infectious
diseases associated with bio-terrorism.
o Hospitals and Health Systems. Hospitals and health systems are
under increasing financial pressure to balance the expense of high
quality medical care with public and private insurers'
reimbursements. Our solutions assist hospitals and health systems
to reduce costs while enhancing the service and care provided to
patients. Our flexible call center solution offers multi-lingual
24 per day, 7 days per week technology-enabled nurse triage and
disease management services, which permit hospitals and health
systems to reduce operational costs.
o Health Plans and Health Insurers. We believe that the era of
health maintenance organizations denying access to care as a
measure to reduce costs is over. We believe that health plans and
health insurers are under increasing pressure to revise their
methods to reduce medical errors, coordinate care and implement
technology enabled population health management solutions and
disease management programs. We believe that denial of access was
a short-term solution that is now causing escalated costs.
Population health management is a long-term solution with proven
return on investment.
o Colleges and Universities. America's colleges and universities
have an increasing need to communicate with their students,
streamline and automate the collection of medical histories during
the enrollment process, and improve communication between the
student and student health services in a secure, confidential
manner. Furthermore, colleges and universities seeking to improve
the healthcare services offered to enrolled students are beginning
to value 24 hours per day, 7 days per week nurse triage and health
information services that we offer.
We are now servicing and continuing to add clients in each of our
targeted markets. To devise acceptable pricing plans, we work with each of our
clients individually. Generally, our clients pay us for each completed
transaction or on a "per member, per month" or "per member, per year" basis.
4
Our Products and Services
I-trax provides focused disease management and comprehensive health
management solutions designed to improve the health of the populations we serve
while reducing the cost of medical care. Ours is a three-pronged approach that
results in savings and consumer satisfaction:
Prediction + Prevention + Care Management = Performance
Prediction
We use historical information to predict future healthcare costs.
Experts agree that predictive modeling provides a comprehensive advantage to
health plans, employers and providers, which leads to cost effective medical
management and greater profitability. By using predictive modeling, we identify
our clients' future healthcare costs, the health conditions that will drive
those costs and the people within our clients' populations who are at risk for
those conditions. Armed with this information, we target appropriate resources
to address the costly conditions and the populations that are at risk for those
conditions, thus managing costs while improving care.
Prevention
We use what we believe to be state-of-the-art demand management and
nurse triage services to effect our targeted interventions. These services
incorporate nationally recognized, evidence-based clinical guidelines to ensure
that all caregivers and consumers are following the best practices. We also link
the key stakeholders in this care delivery effort--consumers, physicians and
care managers--through secure, web-based solutions. These solutions facilitate
real-time sharing of information and support the adherence to our population and
disease management programs. Finally, we staff our state-of-the-art Care
Communications Center with skilled nurses and other healthcare professionals 24
hours per day, 7 days per week. The Center helps consumers make informed
decisions about their health and provides ongoing support for those with chronic
diseases.
Our prevention products and services include:
MyNurseLine(TM). MyNurseLine(TM) is our technology-enabled, clinical
nurse triage service that is available 24 hours per day, 7 days per week. The
service provides clients with tailored communication center solutions to meet
their healthcare needs. By utilizing state-of-the-art information technology,
MyNurseLine(TM) affords consumers access to affordable, high quality health and
wellness information through our Care Communications Center, ultimately reducing
costs and improving general health status.
MyNurseLine(TM) service allows for rapid assessment of callers'
condition, triaging them to the appropriate level of care ranging from emergency
care referral to guided self-care at home. Recent studies cited by the Wall
Street Journal indicate that 37% to 54% of the 95 million yearly emergency room
visits are for conditions that do not require immediate treatment, such as sore
throats and ankle sprains. By using MyNurseLine(TM) nurse triage a client can
reduce medical costs by directing callers to appropriate levels of care thereby
reducing unnecessary over utilization of services. MyNurseLine(TM) service
features:
o Fully operational, 24 hours a day, 7 days per week.
o Calls answered by registered nurses, with a minimum of three-years of
recent clinical experience, including experience in critical care and
case management.
o Seamless continuity for patients or members because nurses answering
calls become part of our client's staff by using greeting and
procedures customized and to client specifications.
o Triage protocols provided by Barton D. Schmitt, MD, FAAP and the
American Institute for Preventive Medicine and organized into
manageable topics such as chest pain, fever and rashes.
o High level of quality assurance by physicians and registered and
telephone triage certified nurses serving as clinical team leaders.
5
o Multi-lingual triage and support.
o Selection of 1,800 standard patient call reports, including caller
satisfaction, telephone activity by day-of-week and patient chart
reports. Reports may be faxed or emailed to clients daily.
DoctorsLine(TM). DoctorsLine(TM) service is our after-hours custom
triage and administrative outsourcing service for physicians. DoctorsLine(TM)
service provides physicians with a cost effective solution to address telephone
coverage and general administrative needs. This service is uniquely designed to
be highly flexible so that physicians can switch their telephone coverage during
times of vacations, staff meetings as well as for standard after-hours coverage.
Nurses staffing the DoctorsLine(TM) service resolve over 80% of all
after-hours triage calls by using Barton Schmitt pediatric triage protocols,
American Institute of Preventative Medicine adult triage protocols and, if
applicable, the treating physicians protocols, thus reducing significantly
unnecessary emergency room visits and costs. DoctorsLine(TM) service features
many of the features included in the NurseLine(TM) service, including:
o Ability for each physician to customize patient orders according to
the physician's practice management specifications.
o Call-in of drug prescriptions by nurses in non-emergency situations.
o Seamless coverage if office staff is unable to answer telephones for
any reason, including after-hours, holidays, vacations, office
closings and family functions.
o Patient encounter and caller detail reports sent daily to each client
to ensure coordination of information and care.
o Custom reporting options including quality assurance, costs savings,
benefits and management reports.
Health-e-Community(TM). Health-e-Community(TM) services provide
healthcare organizations with enrollment, marketing and fulfillment services.
Health-e-Community(TM) services are designed to help clients who are instituting
or have already started disease management programs for their populations by
augmenting and enhancing the resources allocated by our clients. We have had
particular success in specialized patient enrollments, including those requiring
multi-lingual capabilities.
Health-e-Community(TM) services support increased communications
between members and care providers and facilitate real-time communication
between our Care Communications Center staff and our clients' administrative,
clinical and care management teams. We gather, process and deliver data
real-time to help our clients monitor and measure outcomes. Our timely response
ensures greater success for our clients' health management programs.
Health-e-Community(TM) service includes:
o Disease management program enrollment.
o Specialized patient enrollment, education and communication.
o Health risk assessments and surveys.
o Targeted health screenings.
o Health information and literature fulfillment services.
o Class registration.
o Customer contact management.
o Physician referrals for consumers.
o Community services referral.
o Patient test result line with personal identification number secure access.
o Emergency room pre-certification.
o Membership management.
o Physician, hospital and clinic database management.
6
o Quality assurance reports.
o Service measurement, demographic and outcome reporting.
o Admission and revenue justification.
o Complaint and suggestion tracking.
eImmune(R). The eImmune(R) application is a comprehensive clinical
software product for processing, recording and tracking immunizations and
related adverse events. The eImmune(R) application is designed for use by state
registries, physician networks, managed care plans, school nurses and individual
physicians. The program enables caregivers to follow standards of care and
adhere to documentation requirements, including capturing ICD-9 codes, CPT codes
and lab information.
The eImmune (R) application was developed in conjunction with Walter
Reed Army Medical Center, Allergy and Immunology Department, in Washington,
D.C., to maintain all military immunizations at that site. First installed at
Walter Reed in January 1998, the eImmune(R) application now manages records for
2.5 million individuals. An upgraded, secure, web-enabled version of eImmune(R)
software released in August 2000 now operates at a number of sites, including
the Pentagon and the Office of Attending Physician, U.S. Congress. The
eImmune(R) application:
o Tracks administration of vaccines.
o Retrieves and records vital patient information, including medical and
medication history and allergies.
o Produces standard and ad-hoc encounter reports, labels for yellow-shot
records and adverse event reports in a Vaccine Adverse Event Reporting
System format.
o Provides information on dosing schedules for vaccines and skin test
materials and manufacturer specific contraindications and warnings.
o Generates vaccination schedules and reminder notices, which include
specific product information.
o Follows customary information flow required during the patient
encounter using touch screen and point and click data entry.
o Utilizes intuitive user interfaces for easy navigation facilitating
point of care data entry.
o Coordinates with I-trax's consumer Internet portal, which provides
users with access to their official immunization records.
o Supports integration with existing software.
o Maintains a confidential and secure platform.
The eImmune(R) application's system-wide benefits include:
o A secure, web-enabled clinical immunization documentation and tracking
system which can be used in routine immunizations as well as
large-scale immunization efforts, including as part of a bioterrorism
preparedness plan.
o Automated data collection, tracking and analysis of outcomes and
critical health data enabling quicker response to public health
threats such as emerging infectious diseases or bioterrorism.
7
o A comprehensive framework integrating health data with immunization
information to facilitate timely and accurate reporting of information
to the Centers of Disease Control and state and local health
departments to comply with government requirements.
o Architecture that supports integration with existing immunization
registry systems to provide states with an enhanced comprehensive
solution to meet the requirements established by United States
Department of Health and Human Services.
o Improved operational efficiency and reduction of paperwork thereby
allowing health providers more time to deliver care.
Medicive(R) Medical Enterprise Data System. All I-trax software
applications and health management solutions are built on a common platform--The
Medicive(R) Medical Enterprise Data System. The Medicive(R) system is a
proprietary database developed to collect, store, retrieve and analyze a broad
range of information used in the healthcare industry. It is through the
Medicive(R) system that I-trax solutions are able to be completely integrated
and enable true coordination of care, thereby delivering the right information
to the right person at the right time. The Medicive(R) platform is the
foundation of our Care Coordination Platform.
A key feature of the Medicive(R) platform is the architecture's ability
to accept new and critical data, which is important for an industry experiencing
rapid advances in clinical care, laboratory research, facilities improvements,
diagnostic modalities, as well as changes in treatment protocols. Using
point-of-care user interfaces, Medicive(R) collects data such as demographics
and staff and physician assessments, and allows the user to view a record over
time, call it up in graphical display, to generate reports, and to make quick
comparisons in easy-to-read formats. We believe that our technology is
"user-friendly" and personalized because we developed it in concert with a team
of health care providers, technology experts and third-party users. The ability
to monitor patient care data longitudinally not only gives the provider an
unprecedented view of the progress of treatments and factors that contribute to
a particular disease, but also provides a comprehensive picture of the
management of the disease and treatment outcomes promoting successful health
care delivery. As a result, our technology promotes user interaction,
facilitates decision-making and supports health care management, thus expanding
our offering into an enterprise-wide system covering all aspects of a customer's
business process.
The flexibility of Medicive(R) Medical Enterprise Data System's
construction is due primarily to the effort that went into its architecture
design. Medicive(R) system has been structured to capture information about the
general healthcare process or activity and then to narrow the healthcare process
or activity to the most specific level. Thus, the architecture permits new data
to be added to the database because, in most instances, new data are extensions
of existing data. We believe that Medicive(R) Medical Enterprise Data System's
flexibility gives us an advantage over competitors that may need to spend far
more time to modify their systems to accommodate new healthcare processes or
activities. The Medicive(R) Medical Enterprise Data System contains and
organizes several industry standard medical data elements and is capable of
producing ICD9 diagnosis codes, CPT procedure codes, SNOMED, or Medcin coded
medical data. These codes are commonly used in the medical profession to
identify specific disease states.
Medicive(R)'s schema is completely platform independent. Deployed
systems have utilized Microsoft SQL Server 7.0. However, I-trax can create
execution files to put the Medicive(R) platform on any SQL platform available
today, including, Oracle(R) 8i, Sybase(R) Adaptive Server, or IBM(R) DB2.
Health-e-Coordinator(TM). Health-e-Coordinator(TM) software enables
true coordination of care by connecting all healthcare professionals involved in
the treatment and monitoring of patients. It is a sophisticated web-based
application designed to support disease management, patient care management,
education and referral according to current published clinical guidelines.
Health-e-Coordinator(TM) software serves as an over-arching application to view
and manage all information that resides in our Medicive(R) Medical Enterprise
Data System, regardless of which other I-trax software applications are used to
collect the information.
Health-e-Coordinator(TM) is ideally suited for disease management and
care management by clinicians in a communications center venue or an outpatient
setting. It is designed to manage large volume of members or patients while
ensuring consistency and quality among caregivers. Key features of
Health-e-Coordinator(TM) software include:
8
o Schedule and Task List. This feature not only organizes patient care,
but also assists healthcare providers to manage workflow. Providers
can quickly access member activities from various activity lists. Each
clinician can view a list of the members they need to contact and
quickly view each member's health summary or complete health record to
help focus their activities.
o Member Record. This feature enables documentation of members past
medical history, medications and vaccinations. Member Record also
permits documentation and generation of surveys, assessments and care
plans.
o Messaging. This feature provides for the secure transfer of
information from patients to providers. The messaging feature
encourages the patient to participate in the management of their care.
o Reports. Reports are available to support the management and oversight
of work processes and outcomes for all healthcare providers involved
in the care process. The application provides a number of standard
management reports and enables the end-user to generate custom reports
to meet their specific requirements. All reports are immediately
available to authorized users via the Internet.
o Resource Library. This feature provides users easy accessible disease
specific information to enhance the care process should members have
specific educational needs. The information can be mailed or e-mailed
to members, therefore enhancing the interaction between the clinician
and the member.
MyFamilyMD(TM). The MyFamilyMD(TM) web-based platform is designed to
allow patients to chronicle their daily health routines, including medications,
allergies, exercise and achievement of health goals. By providing easy-to-use
graphs and reports, the MyFamilyMD(TM) platform empowers patients to monitor and
control their health by reviewing trends in their healthcare regimen.
The cornerstone of the MyFamilyMD(TM) platform is its ability to
provide the tools for consumers to collaborate with their healthcare provider
about their daily management. The MyFamilyMD(TM) platform provides capability
for prescription refill requests, appointment requests, health assessments,
interactive tools for weight and blood sugar management, lab tracking and health
history forms for pre- and post-encounter information exchange. The platform's
messaging system is built to facilitate user compliance with the Health
Insurance Portability and Accountability Act of 1996 and related regulations
("HIPAA") standards to ensure the utmost security and confidentiality of
personal and medical information.
The MyFamilyMD(TM) platform uses what we believe to be leading-edge
personalization to deliver relevant news, articles and messaging from qualified
medical sources based on the user's medical history and health concerns, thus
providing timely information without burdening users with the tedious manual
Internet searches. The MyFamilyMD(TM) platform features:
o A personal health record to store and maintain health interests,
medical concerns, medications, diet and exercise habits and
immunizations, among other information.
o Secure messaging of non-urgent, routine requests, such as
appointments, refill requests, immunizations and screening tests.
o Interactive MedWizard(R) applications that help to monitor blood
glucose, insulin dosing, blood pressure, weight, height, pulse, peak
flow, lab values and other variables. Members can custom-design
journals or daily diaries to track a series of symptoms and health
care concerns.
o Risk assessments that evaluate the risk for diabetes and asthma, and
recommend appropriate safety habits and information about when to seek
appropriate medical care.
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o Daily, personalized content from qualified medical sources about
health maintenance and conditions such as diabetes, asthma and other
medical concerns of patient health interest.
o Automated recall alerts for medications, vaccines and consumer
products.
CarePrime(R). CarePrime(R) is a web-based communication tool for
physicians and their staff that permits secure messaging between the physicians,
their staff and patients, and facilitates online appointment requests and
referrals. The CarePrime(R) and MyFamilyMD(TM) applications promote a
partnership between patients and physicians by allowing providers, with
permission, to access their patients' personal health record kept in the
MyFamilyMD(TM) application.
Replacing or supplementing patients' paper files, the CarePrime(R)
application provides healthcare providers a web based tool for reviewing a
snapshot of client's health information, immunization compliance, medical
history, demographics, allergies and applicable evidence-based clinical
guidelines. The CarePrime(R) application brings important information to the
provider's fingertips. The CarePrime(R) application features include:
o Secure messaging for non-urgent requests such as prompting diabetic
patients to schedule eye examinations and providing parents with
immunization reminders for their children.
o Group messaging, with message tracking, to all patients or a
predefined group of patients on topics such as air quality alerts, or
scheduling school physical examinations.
o Custom and automated, based on established rules, patient
notifications such as exam reminders.
o Communication with patients when they update their Personal Health
Record MyFamilyMD(TM), and forward the information to their providers
via a secure Internet portal, to be received through CarePrime(R)
application.
o Easy differentiation between customer or patient and provider or
professional entered data.
o Completion and submission of health forms and immunization records
electronically via the MyFamilyMD(TM) application to the CarePrime(R)
application, which are then physician-verified and become the core of
an electronic medical record.
o Quick provider access to reports on vaccine recalls, dosing schedules
for vaccines, and patient adverse reactions.
o Patient compliance monitoring by providers in an easy-to-use format.
Care Management
We believe that we offer the industry's most comprehensive health
management and disease management solution. We assist clients in managing the
healthcare of their populations by outsourcing clinical and administrative
services as part of a strategic partnership. Through long-term partnerships with
our clients, we align our assets and core competencies to develop targeted
solutions to meet the needs of the populations our clients serve. Our disease
management solutions currently address congestive heart failure (CHF), coronary
artery disease (CAD), asthma, diabetes, lower back pain and chronic obstructive
pulmonary disease (COPD). We also develop programs using evidenced-based
guidelines based on our clients' requests.
Health-e-Life(TM) Program. Our Health-e-Life(TM) Program provides
interactive tools for healthcare providers and their well patients which are
intended to reduce the possibility of acute or chronic conditions. The
components of the program are delivered through I-trax's
Health-e-Coordinator(TM) care coordination tool, our web portals CarePrime(R)
and MyFamilyMD(TM) and our communications center staffed by skilled nurses and
other health professionals 24 hours per day, 7 days per week. Features and
benefits of I-trax's Health-e-Life(TM) Program include:
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o Proven success demonstrated with clinical and financial outcomes.
o Protocols designed and reviewed by physicians and experts in disease
management.
o Integration of industry-leading technology, proven clinical protocols,
and clients' business practices to drive custom results.
o Utilization of care processes with focus on self-care, advocacy, and
education and change management tailored to each enrolled member.
o Utilization of clinical expertise and technology to integrate
individual member needs including co-morbidities and cultural factors
without increasing program costs.
o Stratification of populations using clinically validated statistical
analysis.
o Life assessment and coaching regarding stress, self-advocacy,
lifestyle changes and self-assessment.
o Educations about risk prevention, healthy lifestyles, diet and
exercise, and other self care activities.
o Risk assessments for leading causes of morbidity and mortality.
o MyFamilyMD(TM) interactive health platform for members with web
access, including health record management and messaging.
o Personalized daily content about health concerns and conditions.
o Status reporting to physicians about changes in members' health.
o Home monitoring and home visits as needed.
o Flexible program implementation, including complete outsourcing to
I-trax, or licensing of I-trax's technology with in-house management,
with expert consulting available.
Customer Service
We obtain new business, in part, based upon referrals from satisfied
customers, such as Walter Reed Army Medical Center and Los Angeles County. We
have received referrals from Walter Reed Medical Center in two primary forms.
First, the immunology department at Walter Reed has referred its own departments
to us for possible product purchase. Second, Walter Reed has provided some of
our prospective customers with positive information relating to our products and
our commitment to customer service. In addition, customers, such as Walter Reed
Army Medical Center, have returned to purchase some of our new products and
upgrades on our existing products. We attribute this success, in part, on our
high level of customer service. We intend to continue this high level of
customer service, as we believe it is a key factor for its success in this
market. Management has recently implemented a staffing plan in advance of growth
to assure that premier standards in customer service are met.
Competition
Numerous companies are operating in the disease management segment of
the larger healthcare industry. Many of these companies are larger than we are
and have greater resources, including access to capital. We believe, however,
that our total population health management solutions are unique. We also
believe that our software applications and our broad based expertise in
designing and deploying scalable, military grade software applications
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allow us to compete effectively against these larger competitors. We consider
the following types of companies to compete with us in providing a similar
product:
o Disease management and care enhancement companies, such as American
Healthways, Lifemasters, Matria, Allere and McKesson.
o Established providers of existing, healthcare information technology.
These firms have competencies in hospital information systems but also
offer general electronic medical records, practice management systems,
clinical data repositories, hospital information systems, accounting
systems. E.g. Cerner Corporation, Siemens, McKesson, GE Medical
Systems, Philips, IDX, Epic and Landacorp.
o Health-related, online services or web sites targeted at consumers,
such as careenhance.com, drweil.com, healthcentral.com,
healthgate.com, intelihealth.com, mayoclinic.com, thriveonline.com,
webmd.com and wellmed.
o Hospitals, HMOs, pharmaceutical companies, managed care organizations,
insurance companies, other healthcare providers and payors that offer
disease management solutions.
One or more of these companies could choose to expand their markets so
as to compete more directly with us. Most of them are better capitalized than we
are, and therefore such an entry into our niche would add to the competitive
pressures of our business. Nonetheless, we believe we enjoy two primary
competitive advantages. First, we have a standing strategic relationship with
one early adopter of our technology, Walter Reed Army Medical Center, which has
used our custom applications since 1995. Second, we have a time advantage in
software and database development over any new direct competitor.
Intellectual Property
Our proprietary software applications are protected by United States
copyright laws. We have registered the use of certain of our trade names and
service names in the United States. We also have the rights to a number of
Internet domain names, including I-trax.com and .net, MyFamilyMD.com and .net,
eImmune.com and .net, CarePrime.com and .net and healthecoordinator.com. In
addition, we continue to explore potential availability of patent protection for
our business processes and innovations.
Research and Development
We conduct research and development on three levels on a continuing
basis. First, we continually study the business process in the medical
community. A pivotal part of the success of our services is understanding the
exact needs of our customers, and applying that knowledge to the graphic user
interface, thus allowing our systems to integrate into the user's workflow
without disruption. I-trax was founded on this principle. We are constantly
studying the changing work environment and clinical landscape of our customers
and the industry as a whole. New disease modules, such as a diabetes-tracking
module, are under development and modifications and additional functionality
will continue to be added to currently available services.
Second, as a by-product of the business process study, the invention
and development of unique problem solving tools embedded in our software
applications make possible the process of entering and retrieving vast amounts
of information in short periods of time. Constant development, re-engineering
and implementation of these tools is a priority of the design and engineering
staff and will continue to be our focus, allowing us to maintain a leading role
in information systems development.
Third, further technology platform research, development and
engineering are conducted on a continual basis. New technologies, such as
Internet applications and the commercial software that support it, lack certain
capabilities and functionalities required to allow the medical and healthcare
industry to migrate to a total eHealth strategy. We believe we are in the
process of creating software components to solve these problems and are
constantly educating ourselves on available and emerging technologies that will
help support and enhance our services.
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We have spent approximately $1.3 million on research and development
activities over the past two fiscal years, the majority of which was
attributable to the completion of MedWizards(R) health assessment tools, and
Health-e-Coordinator(TM) and CarePrime(R) applications. We expect to continue to
spend funds on adding functionality to the MyFamilyMD(TM) application by adding
MedWizard(R) tools, on CarePrime(R), which interacts with the MyFamilyMD(TM)
application and its MedWizards(R) tools, and on Health-e-Coordinator(TM)
software by adding additional disease capabilities.
Employees
We believe our success depends to a significant extent on its ability
to attract, motivate and retain highly skilled, vision-oriented management and
employees. To this end, we focus on incentive programs for our employees and
endeavor to create a corporate culture that is challenging, rewarding and fun.
As of March 24, 2003, we had 56 full-time and 20 part-time employees.
Risk Factors
In addition to other information in this report, you should carefully
consider the following risks and the other information in evaluating I-trax and
its business. Our business, financial condition and results of operations could
be materially and adversely affected by each of these risks. Such an adverse
effect could cause the market price of our Common Stock to decline, and you
could lose all or part of your investment.
We Have a History of Operating Losses and Anticipate Continued Operating
Losses Through the Third Quarter of 2003
We have used substantial cash to fund our operating losses, and we have
never earned a profit. Through December 31, 2002, we have used approximately
$12.8 million of cash to fund our operating activities. Moreover, we expect to
use additional cash to fund our operating losses through the third quarter of
2003. Our ability to achieve profitability will depend, in part, on:
o the commercial success of our service and software applications;
o successful deployment and retention of our services and software
applications by our customers; and
o our sales and marketing activities.
The success of our business model depends on attracting customers, such
as public health agencies, hospitals, health plans, self-insured employers, and
colleges and universities, to our population health management solutions.
Although we believe that this business model will be successful, we cannot
assure you that we will achieve or sustain profitability or that our operating
losses will not increase in the future.
We Will Require Additional Capital To Improve Our Products and Services
At present, we have projected sufficient funding to cover our operating
expenses and therefore to mitigate questions about our ability to continue as a
going concern. Additional funds, however, will be required to complete our
planned product development efforts and to expand our sales and marketing
activities. We will have to obtain such funds through equity or debt financing,
strategic alliances with corporate partners and others, or through other
sources. We do not have any committed sources of additional financing, and we
cannot provide assurance that additional funding, if necessary, will be
available on acceptable terms, if at all. If adequate funds are not available,
we may have to delay, scale-back or eliminate certain aspects of our operations
or attempt to obtain funds through arrangements with collaborative partners or
others. And this will cause us to loose what we believe is a current competitive
advantage in the technology-enabled population health management field.
Therefore, if we are unable to obtain adequate funds, our business, financial
condition and results of operations may be adversely affected.
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The Segment of the Healthcare Industry in Which We Operate Is Relatively
New and Our Sales Cycle Is Long and Complex
The disease and population health management business, although growing
rapidly, is a relatively new segment of the overall healthcare industry and has
many entrants. Many companies use the generic label of "disease management" to
characterize activities ranging from the sale of medical supplies and drugs to
services aimed at managing demand for healthcare services. Because this segment
of the industry is relatively new, potential purchasers take a long time to
evaluate and purchase such services, lengthening our sales cycle. Further, the
sales and implementation process for our services and software applications is
lengthy, involves a significant technical evaluation and requires our customers
to commit a great deal of time and money. Finally, the sale and implementation
of our solutions are subject to delays due to our customers' internal budgets
and procedures for approving large capital expenditures and deploying new
services and software applications within their organizations. The sales cycle
for our solutions, therefore, is unpredictable and has generally ranged from 3
to 24 months from initial contact to contract signing. The time it takes to
implement our solutions is also difficult to predict and has lasted as long as
18 months from contract execution to the commencement of live operation. During
the sales cycle and the implementation period, we may expend substantial time,
effort and money preparing contract proposals, negotiating the contract and
implementing the solution without receiving any related revenue.
Our Limited Operating Experience May Cause Us to Misjudge the Segment of
the Healthcare Industry in Which We Are Operating
We have only recently begun to design, build and offer disease
management and comprehensive health management solutions. Our enterprise
software applications have been operational for less than four years, our
web-based solutions have been operational for less than two years and our
disease management and comprehensive health management solutions have been
operational for only one year. Accordingly, we have a limited operating history
in our business. Furthermore, we are also facing other risks and challenges,
including a lack of meaningful historical financial data upon which to plan
future budgets, increasing competition, the need to develop strategic
relationships, and other risks described below. We cannot guarantee that we will
be able successfully to implement our business model. An investor in our common
stock must consider the risks, uncertainties, expenses and difficulties
frequently encountered by companies in their early stages of development. As a
result of the absence of meaningful history and experience in our business, we
may easily misjudge the nature or size of our perceived markets, or the amount
of work or capital necessary to complete our pending products or to implement
our business plan.
We May Be Unable to Implement Our Business Strategy to Deploy Our Products
Effectively and Attract Customers
Although we believe that there is significant demand for our services
and products in the overall healthcare market, there are many reasons why we may
be unable to execute our business strategy, including our possible inability to:
o deploy our services and software applications on a large scale;
o attract a sufficiently large number of public health agencies,
hospitals, health plans, self-insured employers and colleges and
universities to subscribe for our services and software applications;
o increase awareness of our brand;
o strengthen user loyalty;
o develop and improve our services and software applications;
o continue to develop and upgrade our services and software
applications; and
o attract, retain and motivate qualified personnel.
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The Healthcare Industry Is Subject to Cost Pressures
The healthcare industry is currently under pressure by governmental and
private-sector revenue sources to cut spiraling costs. These pressures will
continue and possibly intensify. Although we believe that our services and
software applications assist public health agencies, hospitals, health plans and
self-insured employers to control the high costs associated with the treatment
of chronic diseases, the pressures to reduce costs immediately may hinder our
ability (or the length of time we require) to obtain new contracts. In addition,
the focus on cost reduction may pressure our customers to restructure contracts
and reduce our fees.
Government Regulation Could Adversely Affect Our Business
Many of our existing and potential clients are subject to considerable
state and federal government regulations. Many of these regulations are vaguely
written and subject to differing interpretations that may, in certain cases,
result in unintended consequences that may affect our ability to effectively
deliver our services. Regulatory and legislative efforts currently focus on the
confidentiality of patient identifiable medical information, as evidenced by
such legislation as the Health Insurance Portability and Accountability Act of
1996 (or "HIPAA"). While we believe that our ability to obtain patient
identifiable medical information for disease management purposes from certain of
our clients is protected in recently released federal regulations governing
medical record confidentiality, state legislation or regulations will preempt
federal legislation if it is more restrictive. Accordingly, new federal or state
legislation or regulations restricting the availability of this information to
us or leaving uncertain whether disease management is an allowable use of
patient identifiable medical information would have a material negative effect
on us.
Although we are not directly subject to many of the regulations
governing healthcare delivery, our clients, such as public health agencies,
hospitals, health plans, and self-insured employers, must comply with
regulations including the licensing and reimbursement requirements of federal,
state and local agencies. Further, certain of our professional healthcare
employees, such as doctors and nurses, are subject to individual licensing
requirements. All of our healthcare professionals who are subject to licensing
requirements are licensed in the state in which they are physically present.
Multiple state licensing requirements for healthcare professionals who provide
services telephonically over state lines may require us to license some of our
healthcare professionals in more than one state. We continually monitor the
developments in telemedicine. There is no assurance, however, that new judicial
decisions or federal or state legislation or regulations would not increase the
requirement for multi-state licensing of all central operating unit call center
health professionals, which would significantly increase our administrative
costs.
We are indirectly affected by changes in the laws governing health
plan, hospital and public health agency reimbursement under governmental
programs such as Medicare and Medicaid. There are periodic legislative and
regulatory initiatives to reduce the funding of the Medicare and Medicaid
programs in an effort to curtail or reduce overall federal healthcare spending.
Federal legislation has and may continue to significantly reduce Medicare and
Medicaid reimbursements to most hospitals. These reimbursement changes are
negatively affecting hospital revenues and operations. There can be no assurance
that such legislative initiatives or government regulations would not adversely
affect our operations or reduce demand for our services.
Various federal and state laws regulate the relationship among
providers of healthcare services, other healthcare businesses and physicians.
The "fraud and abuse" provisions of the Social Security Act provide civil and
criminal penalties and potential exclusion from the Medicare and Medicaid
programs for persons or businesses who offer, pay, solicit or receive
remuneration in order to induce referrals of patients covered by federal
healthcare programs (which include Medicare, Medicaid, TriCare and other
federally funded health programs). Although we believe that our business
arrangements with our clients are in compliance with these statutes, these fraud
and abuse provisions are broadly written and the full extent of their
application is not yet known. We are therefore unable to predict the effect, if
any, of broad enforcement interpretation of these fraud and abuse provisions.
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Our Dependence on the Internet and Internet-Related Technologies Subjects
Us to Frequent Change and Risks
Our web-based software applications that form the backbone of our
disease management and comprehensive health management solutions depend on the
continuous, reliable and secure operation of Internet servers and related
hardware and software. In the past, several large Internet commerce companies
have suffered highly publicized system failures, which depressed their stock
prices, caused significant negative publicity and sometimes led to litigation.
It is possible that we may also suffer service outages from time to time. To the
extent that our service is interrupted, our users will be inconvenienced and our
reputation may be diminished. If access to our system becomes unavailable at a
critical time, users could allege we are liable, which could depress our stock
price, cause significant negative publicity and possibly lead to litigation.
Although our computer and communications hardware is protected by physical and
software safeguards, it is still vulnerable to fire, storm, flood, power loss,
telecommunications failures, physical or software break-ins and similar events.
We will not have 100% redundancy for all of our computer and telecommunications
facilities. A catastrophic event could have a significant negative effect on our
business, results of operations, and financial condition.
We also depend on third parties to provide certain of our clients with
Internet and online services necessary for access to our servers. It is possible
that our clients will experience difficulties with Internet and other online
services due to system failures, including failures unrelated to our systems.
Any sustained disruption in Internet access provided by third parties could have
a material adverse effect on our business, results of operations and financial
condition.
Finally, we retain confidential healthcare information on our servers.
It is, therefore, critical that our facilities and infrastructure remain secure
and are perceived by clients to be secure. Although we operate our software
applications from a secure facility managed by a reputable third party, our
infrastructure may be vulnerable to physical break-ins, computer viruses,
programming errors or similar disruptive problems. A material security breach
could damage our reputation or result in liability to us.
We May Be Sued by Our Users if We Provide Inaccurate Health Information on
Our Web Site or Inadvertently Disclose Confidential Health Information to
Unauthorized Users
Because users of our web site will access health content and services
relating to a medical condition they may have or may distribute our content to
others, third parties may sue us for defamation, negligence, copyright or
trademark infringement, personal injury or other matters. We could also become
liable if confidential information is disclosed inappropriately. These types of
claims have been brought, sometimes successfully, against online services in the
past. Others could also sue us for the content and services that will be
accessible from our web site through links to other web sites or through content
and materials that may be posted by our users in chat rooms or bulletin boards.
Any such liability will have a material adverse effect on our reputation and our
business, results of operations or financial position.
Our Business Will Be Adversely Affected If We Lose a Key Employee or Fail
to Recruit and Retain Other Skilled Employees
Our Chairman and Chief Executive Officer, Frank A. Martin, is an integral
part of our business and our future success greatly depends upon his retention.
Our failure to retain Mr. Martin could significantly reduce our ability to
compete and succeed in the future.
Our future success also depends on our ability to attract, retain and
motivate highly skilled employees. As we secure new contracts and implement our
services and products, we will need to hire additional personnel in all
operational areas. We may be unable to attract, assimilate or retain such highly
qualified personnel. We have in the past experienced, and we expect to
experience in the future, difficulty in hiring and retaining highly skilled
employees with appropriate qualifications. If we do not succeed in attracting
new personnel or retaining and motivating our current personnel, our business
will be adversely affected.
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We May Be Unable to Compete Successfully Against Companies Offering
Similar Products
Many healthcare companies are offering disease management services and
healthcare focused software solutions. Further, a vast number of Internet sites
offer healthcare content, products and services. In addition, traditional
healthcare providers compete for consumers' attention both through traditional
means as well as through new Internet initiatives. Although we believe our
technology-enabled service solutions are unique and better than our
competitors', we compete for customers with numerous other businesses.
Many of these potential competitors are likely to enjoy substantial
competitive advantages compared to us, including:
o greater name recognition and larger marketing budgets and resources;
o larger customer and user bases;
o larger production and technical staffs;
o substantially greater financial, technical and other resources; and
o a wider array of online products and services.
To be competitive, we must continue to enhance our products and services,
as well as our sales and marketing channels and our financial condition.
We May Be Exposed to Liability Claims
We maintain professional malpractice, errors and omissions and general
liability insurance for all of our locations and operations. Although we believe
that these insurance policies are adequate in amount and coverage for our
current operations, there can be no assurance that coverage is sufficient to
cover all future claims or will continue to be available in adequate amounts or
at a reasonable cost.
I-trax Health Management Solutions, Inc., our operating subsidiary, had
engaged in the physician practice management business. While we are no longer
engaged in that business, Health Management may be subject to unknown
liabilities arising from such prior business operations, which may have a
material adverse effect on our business, operations, financial condition, or
prospects.
Member-Link Systems, Inc., a company we acquired in 1999 by way of a
merger with Health Management, was engaged in the business of marketing, selling
and installing eImmune(R) and AsthmaWatch(R) applications. Since beginning its
operations in 1996 until March 15, 2000, Member-Link and Health Management did
so without obtaining product or professional liability insurance. Accordingly,
if any customer of Member-Link or Health Management should in the future claim
that the software applications Member-Link and Health Management sold prior to
obtaining insurance on March 15, 2000 were defective, we would not have the
protection of insurance in satisfying or defending against such claims. At this
time we are not aware of any such claims. Any such claims, however, could have a
material adverse effect on our business, results of operations, financial
condition and prospects.
Our clients may sue us if any of our software applications or services
is defective, fails to perform properly or injures the user. Even though we
currently have insurance, claims could require us to spend significant time and
money in litigation, to pay significant damages and to reserve for such
liability on our financial statements. At this time we are not aware of any such
claims. However, any such claims, whether or not successful, could seriously
damage our reputation and our business, results of operations or financial
position.
If Our Intellectual Property Rights Are Undermined by Third Parties, Our
Business Will Suffer
Our intellectual property is important to our business. We rely on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions to protect our intellectual property. Our
17
efforts to protect our intellectual property may not be adequate. Our
competitors may independently develop similar technology or duplicate our
products or services. Unauthorized parties may infringe upon or misappropriate
our products, services or proprietary information. In addition, the laws of some
foreign countries do not protect proprietary rights as well as the laws of the
United States do, and the global nature of the Internet makes it difficult to
control the ultimate destination of our products and services. In the future,
litigation may be necessary to enforce our intellectual property rights or to
determine the validity and scope of the proprietary rights of others. Any such
litigation would probably be time-consuming and costly. We could be subject to
intellectual property infringement claims as the number of our competitors grows
and the content and functionality of software applications and services overlap
with competitive offerings. Defending against these claims, even if not
meritorious, could be expensive and divert our attention from operating our
company. If we become liable to third parties for infringing their intellectual
property rights, we could be required to pay a substantial damage award and
forced to develop noninfringing technology, obtain a license or cease selling
the applications that contain the infringing technology. We may be unable to
develop noninfringing technology or obtain a license on commercially reasonable
terms, or at all. We also intend to rely on a variety of technologies that we
will license from third parties, including any database and Internet server
software, which will be used to operate our applications. These third-party
licenses may not be available to us on commercially reasonable terms. The loss
of or inability to obtain and maintain any of these licenses could delay the
introduction of enhancements to our software applications, interactive tools and
other features until equivalent technology could be licensed or developed. Any
such delays could materially adversely affect our business, results of
operations and financial condition.
Provisions of Our Certificate of Incorporation Could Impede a Takeover of
Our Company Even Though a Takeover May Benefit Our Stockholders
Our Board of Directors has the authority, without further action by the
stockholders, to issue from time to time, up to 2,000,000 shares of preferred
stock in one or more classes or series, and to fix the rights and preferences of
such preferred stock. We are subject to provisions of Delaware corporate law
which, subject to certain exceptions, will prohibit us from engaging in any
"business combination" with a person who, together with affiliates and
associates, owns 15% or more of our common stock (referred to as an interested
stockholder) for a period of three years following the date that such person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. Additionally, our bylaws establish an advance notice
procedure for stockholder proposals and for nominating candidates for election
as directors. These provisions of Delaware law and of our certificate of
incorporation and bylaws may have the effect of delaying, deterring or
preventing a change in our control, may discourage bids for our common stock at
a premium over market price and may adversely affect the market price, and the
voting and other rights of the holders of our common stock.
Our Officers and Directors Have Effective Control of the Company and Other
Stockholders May Have Little or No Voice in Corporate Management
Our Chairman, the venture capital firm with which our Chairman is
affiliated, three other members of our management team and two directors
beneficially own, in the aggregate, approximately 30% of the outstanding shares
of our common stock. As a result, these stockholders, acting together,
effectively control the election of directors and matters requiring approval by
our stockholders. Thus, they may be able to prevent corporate transactions such
as future mergers that might be favorable from our standpoint or the standpoint
of the other stockholders.
The Loss of Any of Our Very Limited Number of Customers Will Have a
Material Adverse Effect on Our Business
Historically, a very limited number of customers has accounted for a
significant percentage of our revenues. In 2001, our largest customer, Walter
Reed Army Medical Center, accounted for 84% of our revenues. In 2002, our
largest customers, UICI and Aetna Health Management, Inc. accounted for 42% and
30% of our revenues, respectively. We anticipate that our results of operations
in any given period will continue to depend to a significant extent upon a small
number of customers. Accordingly, if we were to lose the business of even a
single customer, our results of operations would be materially and adversely
affected.
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Shares Eligible for Future Sale Upon the Conversion of the Debenture and
Upon the Exercise of Issued Options And Warrants may cause significant dilution
Palladin Opportunity Fund, LLC purchased from us a debenture with the
principal amount of $2,000,000. The debenture is convertible into such number of
shares of our common stock as determined by dividing the principal amount
thereof by the then current conversion price. If converted on March 21, 2003,
the debenture would convert into approximately 661,000 shares of our common
stock. But this number of shares could prove to be significantly greater when
the conversion price of the debentures is "reset" in August 4, 2003, the date
that is 18 months after the issue date. Our stockholders, therefore, could
experience substantial dilution of their investment upon conversion of the
debenture. The shares of common stock issuable upon the conversion of the
debentures are registered under the Securities Act of 1933, as amended, and may
be sold by Palladin, subject to certain limitations, at any time.
As of December 31, 2002, approximately 3,843,755 shares of our common
stock were reserved for issuance upon exercise of our outstanding warrants and
options and an additional 1,061,538 shares of our common stock were reserved for
issuance upon conversion of the debenture and exercise of the warrants issued in
connection with the debenture.
If We Cannot Repay the Debenture We Sold to Palladin, We Will Be In
Default on a Material Obligation, Which Will Cause Us to Suffer a Material
Adverse Event
We owe Palladin $2,000,000 under a 6% convertible senior debenture. If
Palladin does not convert this sum into our common stock, this sum, together
with interest, must be repaid on February 3, 2004. If we do not have sufficient
funds to repay this sum on debenture's due date, we will be in default on a
material obligation and as a result our operations may be materially and
adversely effected.
The Price of Our Common Stock Is Volatile
Our stock price has been and we believe will continue to be volatile.
The stock's volatility may be influenced by the market's perceptions of the
healthcare sector in general, or other companies believed to be similar to us or
by the market's perception of our operations and future prospects. Many of these
perceptions are beyond our control. In addition, our stock is not heavily traded
and therefore the ability to achieve relatively quick liquidity without a
negative impact on our stock price is limited.
ITEM 2. DESCRIPTION OF PROPERTIES
Our executive, administrative and sales offices are located in
Philadelphia, Pennsylvania, where we lease approximately 4,659 square feet of
office space pursuant to a lease expiring in June 2005 at a current base annual
rate of $128,123. The property is in good condition.
Our technology development offices are located in Reston, Virginia,
where we lease approximately 1,381 square feet of office space pursuant to a
lease expiring in August 2003 at a current base annual rate of $42,673. The
property is in good condition.
Our Customer Contact Center is located in Omaha, Nebraska, where we
lease approximately 6,212 square feet of office space pursuant to a lease
expiring in May 2007, at a current base annual rate of $55,908. The property is
in good condition.
We do not invest in real estate or interest in real estate, in real
estate mortgages or in securities or of or interests in persons primarily
engaged in real estate activities.
19
ITEM 3. LEGAL PROCEEDINGS
Threatened Litigation
In 1998, a former Chief Executive Officer, stockholder and creditor of
Health Management (the "Plaintiff") commenced an action in New Jersey state
court against, among others, the present Chief Executive Officer of Health
Management. Health Management is identified in the caption as a defendant. The
complaint alleges breach of contract, breach of fiduciary duty, breach of the
covenant of good faith and fair dealing, securities fraud, common law fraud,
negligent misrepresentation and racketeering activity. See Nazir Memon v. Frank
Martin, et al, CAM-L-04026-98. The allegations in this action reference
circumstances relating to Health Management's prior line of business of
physician practice management. In 1999, the court entered two orders dismissing
the action "without prejudice" for procedural reasons. Furthermore, in 1999 the
Plaintiff filed for bankruptcy protection. As part of the bankruptcy
proceedings, the Plaintiff, the present Chief Executive Officer and Health
Management entered into a stipulation limiting the period within which the
Plaintiff can bring a new action alleging Plaintiff's claims. Plaintiff sought
to reactivate his prior state court action in January 2001 (within the
stipulated period), rather than commence a new action. The stipulated time
period for commencing a new action has expired.
By Opinion-Letter/Order dated August 22, 2001, the New Jersey Superior
Court, Civil Division, ruled in favor of I-trax by barring Plaintiff from
reactivating the civil action by the bankruptcy stipulation. By order date March
10, 2003, the New Jersey Superior Court, Appellate Division likewise ruled in
favor of I-trax by affirmed the lower court decision. At this time, this matter
has been finally resolved in favor of I-trax because Plaintiff has exhausted all
rights to appeal.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the
quarter ended December 31, 2002.
20
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market For Our Common Stock
Our common stock trades on the American Stock Exchange under the symbol
"DMX." Prior to January 15, 2003, our common stock was quoted on OTC Bulletin
Board under the symbol "IMTX" and "ITRX." The following table sets forth the
high and low closing prices for our common stock for the periods indicated. All
closing prices have been adjusted to reflect a 1-for-5 reverse stock split
effected as of close of business on January 3, 2003.
High Low
---- ---
2003
First Quarter (through March 21, 2003) $ 5.000 $ 1.370
2002
Fourth Quarter 4.300 2.500
Third Quarter 5.100 2.750
Second Quarter 6.625 4.150
First Quarter 7.650 5.100
2001
Fourth Quarter $ 8.350 $ 1.800
Third Quarter 3.850 1.800
Second Quarter 5.155 2.900
First Quarter 15.000 3.440
We obtained the information presented above from Nasdaq.com.
As of January 10, 2003, there were approximately 843 registered and
"street name" holders of our common stock. On March 21, 2003, the last reported
sales price of our common stock was $1.80.
Dividend Policy
We have never paid or declared any cash dividends on our common stock
or other securities and do not anticipate paying cash dividends in the
foreseeable future.
21
Equity Compensation Plan Information
The following table represents information about all equity
compensation plans under which equity securities of I-trax are authorized for
issuance as of December 31, 2002. All share and exercise price information
presented below reflects a 1-for-5 reverse stock split effected as of close of
business on January 3, 2003.
Number of shares of
common stock available
Number of shares of for issuance under
common stock issuable Weighted average equity compensation
upon the exercise of exercise price of plans (excluding shares
outstanding options, outstanding options, of common stock
Plan Category warrants and rights (a) warrants and rights (b) reflected in column (a))
-------------------------------------- ------------------------- -------------------------- --------------------------
Equity compensation plans approved 1,271,802 $ 5.04 528,198
by security holders (1)
Equity compensation plans not
approved by security holders (2) 2,571,953 $ 3.55 0
--------- --------- ---------
Totals: 3,843,755 $ 4.04 528,198
-------------------------------------- ========= ========= =========
(1) Includes I-trax's 2000 and 2001 Equity Compensation Plans. The number of
shares authorized for issuance under I-trax's 2001 Equity Compensation Plan
increases automatically on the first day of each year beginning with the year
2002 by 200,000 shares. Accordingly, as of January 1, 2003, 1,400,000 shares
were authorized for issuance under the 2001 Plan.
(2) Includes options to acquire an aggregate of 439,000 shares granted outside
of I-trax's 2000 and 2001 Equity Compensation Plans and warrants to acquire an
aggregate of 2,132,953 shares. Options granted outside of I-trax's 2000 and 2001
Equity Compensation Plans have terms similar to options granted pursuant to such
plans including, exercise prices established with reference to our common
stock's market price, vesting terms and exercise terms. Warrants are granted as
necessary to secure financings and have terms of five or seven years. Please see
Notes 19 and 20 to our financial statements appearing below for further
discussion.
Recent Sales of Unregistered Securities
In October 2001, we initiated a private placement of up to 1,200,000
shares of our common stock to accredited investors at $2.50 per share, seeking
to raise approximately $2,500,000 in cash and to convert into our common stock
approximately $500,000 accrued by us on account of services rendered to us by
certain consultants and vendors. As of December 31, 2001, we sold 780,200
shares, yielding proceeds of $1,950,500, issued 156,995 shares in exchange for
previously rendered services and issued 133,800 shares in exchange for surrender
of debt held by our Chief Executive Officer and Chief Operating Officer. During
the month of January 2002, we sold an additional 22,000 shares under this
private placement, yielding additional proceeds of $55,000. We closed the
private placement on January 31, 2002. The funds raised in this private
placement, with the exception of a portion of the proceeds used to cover
expenses related to the offering, have been used to fund our operations. In
issuing shares in this private placement, we relied on an exemption from
registration under Section 4(2) of the Securities Act and Regulation D
thereunder. We filed with the Securities and Exchange Commission a Form D in
connection with the issuance of our shares in this private placement.
Effective January 4, 2002, four institutional investors and one I-trax
officer exercised warrants using a "cashless" feature of the warrants, and upon
this exercise the institutional investors received 340,316 shares of our common
stock and the employee received 10,580 shares of our common stock. These shares
were valued at $7.48 for purposes of the warrants' "cashless" feature. In
undertaking this offering, we relied on an exemption from registration under
Section 4(2) of the Securities Act.
We acquired WellComm effective as of February 6, 2002 in a two-step
merger transaction pursuant to a Merger Agreement dated as of January 28, 2002,
as amended. To acquire WellComm, we issued a total of 1,488,000 shares of our
common stock to seven WellComm stockholders. We recorded an accounting expense
of
22
$6.55 per share in connection with this issuance. In undertaking this offering,
we relied on an exemption from registration under Section 4(2) of the Securities
Act.
Effective February 4, 2002, we sold a 6% senior convertible debenture,
initially convertible into 400,000 shares of our common stock at a conversion
price of $5.00 per share. Effective February 4, 2003, the conversion price under
the debenture was reset to $3.03 and it is therefore convertible into 660,939
shares of our common stock. With the 6% senior convertible debenture, we also
sold a warrant to acquire 307,692 shares of our common stock, at an exercise
price of $5.50 per share. The purchaser was an institutional investor. In
undertaking this offering, we relied on an exemption from registration under
Section 4(2) of the Securities Act.
As of June 30, 2002, we sold 505,500 shares of our common stock at
$3.75 per share pursuant to a private placement initiated on February 7, 2002.
All participants were 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. We filed a Form D with the Securities and
Exchange Commission in connection with the issuance of our common stock in this
transaction.
Effective as of March 20, 2002, we issued 15,000 shares of our common
stock to two companies as consideration for investor relations services. We
recorded an accounting expense of $5.50 per share in connection with this
issuance. The companies are 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 March 20, 2002, we issued 6,200 shares of our common
stock and a warrant to acquire 40,000 shares of our common stock to an
investment banker as consideration for services rendered in connection with the
WellComm financing. For purposes of this issuance, each issued share of common
stock was valued at $6.55 per share. The exercise price under the warrant is
$5.00 per share. The investment baker 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 March 20, 2002, we issued 16,000 shares of our common
stock to an employee as consideration for services rendered in connection with
the WellComm acquisition. For purposes of this issuance, we valued each issued
share of our common stock at $6.55 per share. In undertaking this issuance, we
relied on an exemption from registration under Section 4(2) of the Securities
Act.
Effective as of October 1, 2002, a former I-trax employee exercised
options to acquire 2,727 shares of our common stock by surrendering to the
exercise price of $2.75 per share. 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 October 15, 2002, one I-trax officer exercised a
warrant to acquire 2,000 shares of our common stock by paying the exercise price
of $.75 per share. In undertaking this offering, we relied on an exemption from
registration under Section 4(2) of the Securities Act.
Effective as of October 15, 2002, we issued 5,128 shares of our common
stock to a consultant in exchange for previously rendered personnel recruiting
services. For purposes of this issuance, we valued each issued share of our
common stock at $3.25 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.
Effective as of October 15, 2002, we issued 13,333 shares of our common
stock to a consultant in exchange for previously rendered investor relations
services. For purposes of this issuance, we valued each issued share of our
common stock at $3.25 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.
Effective October 31, 2002, we issued a customer a warrant to acquire
400,000 shares of our common stock at $5.50 per share in connection with a joint
marketing agreement. The customer 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.
23
Effective as of November 4, 2002, we issued 3,579 shares of our common
stock to a consultant as consideration for investor relations services. We
recorded an accounting expense of $4.40 per share in connection with 1,704 of
such shares and $4.00 per share in connection with 1,875 of such shares. 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.
24
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis together with our
financial statements and the notes to our financial statements included
elsewhere in this report.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements, which are based upon
current expectations and involve a number of risks and uncertainties. In order
for I-trax, Inc. to utilize the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, investors are hereby cautioned that
these statements may be affected by important factors, which are set forth below
and elsewhere in this report, and consequently, actual operations and results
may differ materially from those expressed in these forward-looking statements.
The important factors include the Company's ability to continue as a going
concern and the Company's ability to execute contracts for disease management
services and software technology.
Our Business
I-trax has historically developed enterprise and client server
applications for collecting disease specific data at the point-of-care for
several large hospitals and medical centers. In 2001, we expanded our product
lines by developing additional software applications, adding services, and
completing several strategic acquisitions.
I-trax now provides focused disease management and comprehensive health
management solutions designed to improve the health of the populations we serve
while reducing the cost of medical care. Our solutions are designed to meet the
needs of insurers, employers and consumers seeking to reduce costs and improve
the quality of care by enabling healthcare organizations to evolve from
fragmented care management practices into a cohesive and efficient system of
healthcare management. Our solutions are fully integrated, use a single-data
platform that allows all caregivers to share records and enable our clients to
provide true coordination of care.
Our Services
Our services are divided into three portfolios: Prediction, Prevention and
Care Management. The specific services in each portfolio are:
Prediction
First, we license third party software to analyze our clients'
historical information to predict future healthcare costs. By using predictive
modeling, we identify our clients' future healthcare costs, the health
conditions that will drive those costs and the people within our clients'
populations who are at risk for those conditions.
Prevention
Second, we use what we believe to be state-of-the-art demand management
and nurse triage services to effect our targeted interventions. Our services
incorporate nationally recognized, evidence-based clinical guidelines to ensure
that all caregivers and consumers are following the best practices. We also link
the key stakeholders in this care delivery effort--consumers, physicians and
care managers--through secure, web-based solutions. These solutions facilitate
real-time sharing of information and support the adherence to our population and
disease management programs. Our prevention products and services include:
o MyNurseLine(TM)--24 hours per day, 7 days per week demand management
and nurse triage service staffed by skilled nurses;
o DoctorsLine(TM)--an after-hours custom triage and administrative
outsourcing service;
o Health-e-Community(TM)--a specialized enrollment, marketing and
fulfillment service;
o eImmune(R)--a clinical immunization and related adverse events
tracking system;
25
o Medicive(R) Medical Enterprise Data System--a proprietary software
architecture developed to collect, store, retrieve and analyze a broad
range of information used in the healthcare industry, which serves as
the foundation for our Care Coordination Platform offerings;
o Health-e-Coordinator(TM)--a web-based care management application;
o MyFamilyMD(TM)--a consumer health management portal; and
o CarePrime(R)--a clinical care application for physicians and
clinicians.
Care Services
Finally, we offer what we believe to be the industry's most
comprehensive health management and disease management solutions. Our disease
management solutions currently address congestive heart failure (CHF), coronary
artery disease (CAD), asthma, diabetes, lower back pain and chronic obstructive
pulmonary disease (COPD). We also develop programs using evidenced-based
guidelines based on our clients' requests. Health-e-Life Program(TM) is our
comprehensive end-to-end solution for care management.
Listing on the American Stock Exchange
Effective January 3, 2003 we completed a 1-for-5 reverse stock split.
Our Board of Directors and stockholders authorized the reverse stock split in
connection with the then pending application to list our common stock on the
American Stock Exchange. We began trading on the American Stock Exchange on
January 15, 2003 under the symbol "DMX."
Significant Transactions
On September 30, 2002, we entered into a license and maintenance
agreement with UICI, a company listed on the New York Stock Exchange. Pursuant
to the agreement, we granted to UICI an exclusive license to certain I-trax
software, including MyFamilyMD(TM) and CarePrime(R), in the student market and a
non-exclusive license to such software for use by UICI for its other businesses.
We also agreed to maintain the licensed software. The agreement is valued at
approximately $2,800,000.
The license agreement resulted from a relationship between I-trax and
UICI's wholly owned subsidiary, Student Resources, based in St. Petersburg,
Florida. Student Resources and I-trax entered the student health market in
second quarter of 2002 by piloting at five colleges and universities, covering a
total of approximately 77,000 students, a web-based service, utilizing
MyFamilyMD(TM) and CarePrime(R) applications. The service connects students to
their college or university health centers, providing them online access to
secure and confidential electronic appointment requests, lab results,
prescription refill requests and explanation of benefits. The solution enables
students to build their personal health record, utilize private and secure
messaging and receive targeted health education content, and complete required
school health forms online.
On October 31, 2002, UICI and I-trax entered into a Joint Marketing
Agreement. Under this agreement, each party will, using its reasonable
discretion, market to its clients the other party's products and services. In
connection with the agreement, I-trax issues UICI a seven year warrant to
acquire up to 400,000 shares of common stock at $5.50 per share.
Effective February 6, 2002, I-trax acquired WellComm in a two-step
reorganization pursuant to a Merger Agreement dated January 28, 2002 by and
among I-trax, WC Acquisition, Inc., an Illinois corporation and a wholly-owned
subsidiary of I-trax, WellComm and WellComm's two principals. The initial step
of the reorganization transaction involved a merger of WC Acquisition with and
into WellComm, in which merger WellComm continued as the surviving corporation.
The second step of the reorganization transaction involved a statutory merger of
WellComm with and into I-trax, in which merger I-trax continued as the surviving
corporation.
At the closing of the WellComm merger, we delivered to the WellComm
stockholders approximately $2,200,000 in cash and 1,488,000 shares of our common
stock, and to each of two senior officers of WellComm options to acquire 56,000
shares of our common stock at a nominal exercise price. After the merger, three
executive
26
officers of WellComm joined us as senior executives and WellComm's two principal
stockholders were elected to our Board of Directors.
We funded the acquisition of WellComm by selling a 6% convertible
senior debenture in the aggregate principal amount of $2,000,000 to Palladin
Opportunity Fund LLC pursuant to a Purchase Agreement dated as of February 4,
2002 between Palladin and us. Pursuant to the purchase agreement, we also issued
Palladin a warrant to purchase an aggregate of up to 307,692 shares of our
common stock at an exercise price of $5.50 per share. The outstanding principal
and any interest under the debenture are payable in full on or before February
3, 2004. Further, outstanding principal and any interest may be converted at any
time at the election of Palladin into our common stock. The current conversion
price under the debenture is $3.03. The current conversion price is subject to
"reset" as of August 4, 2003 but only if the closing bid price for our common
stock, averaged during a period of 20 consecutive trading days ending on August
3, 2003, is less than the then current conversion price.
Corporate Overview
I-trax was incorporated in the State of Delaware on September 15, 2000
at the direction of the Board of Directors of I-trax Health Management
Solutions, Inc. ("Health Management"), I-trax's then parent company. On February
5, 2001, I-trax became the holding company of Health Management at the closing
of a reorganization pursuant to Section 251(g) of Delaware General Corporation
Law. The holding company reorganization was described in greater detail in
I-trax's registration statement on Form S-4 (Registration Number 333-48862)
filed with the Securities and Exchange Commission on October 27, 2000. At the
effective time of the reorganization, all of the stockholders of Health
Management became the stockholders of I-trax and Health Management became a
wholly owned subsidiary of I-trax. Further, all outstanding shares of Health
Management were converted into shares of I-trax in a non-taxable transaction.
Health Management no longer files reports with the Securities and Exchange
Commission. However, I-trax does file reports with the Securities and Exchange
Commission, and its common stock is traded on the American Stock Exchange under
the symbol "DMX."
The holding company structure has allowed us greater flexibility in our
operations and expansion and diversification plans, including in the acquisition
of WellComm Group, Inc. on February 6, 2002 and iSummit Partners, LLC, doing
business as "MyFamilyMD," on February 7, 2001.
I-trax acquired iSummit effective February 7, 2001 in an exchange
transaction pursuant to a Contribution and Exchange Agreement dated September
22, 2000, as amended, by and among iSummit, I-trax, Health Management and
iSummit's three members. I-trax issued 580,682 shares of common stock to acquire
iSummit (reflecting a post closing adjustments to the aggregate number of issued
shares effective as of December 31, 2001).
I-trax now conducts its business through two wholly owned entities,
Health Management and WellComm Group, LLC. WellComm Group, LLC was formed
following the acquisition of WellComm Group, Inc. to hold its assets.
Our Customers
As of December 31, 2002, we served approximately 65 customers. Our
customers include physician groups, hospitals, health plans, including plans
providing Medicaid and Medicare covered services, universities and colleges and
agencies and branches of the United States government.
We continue to focus our marketing efforts on the following markets:
health plans and health insurers; self-insured employers; military, government
and public health agencies; college and university student health services; and
hospital and health systems.
Results of Operations
In 2001 and 2002, we expended a predominant portion of our resources to
build and deliver eImmune(R) and C-Trax(TM) applications to Walter Reed Army
Medical Center in accordance with prior contractual obligations. Further, during
this period, we changed our focus from developing custom software applications
for few clients to
27
combining all of our services and applications to deliver a single solution to
the population and disease management market place.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001.
Revenue for 2002 was $3,931,910, an increase of $3,318,840 or 541% from
$613,070 for 2001. Total revenue was comprised of two components: (1) prevention
and care services revenue of $1,706,602 derived from contracts we assumed
effective February 1, 2002 as a result of the WellComm acquisition; and (2)
technology license and services revenue of $2,225,308 derived from licensing of
eImmune(R), AsthmaWatch(R), Health-e-Coordinator(TM), CarePrime(R) and
MyFamilyMD(TM) applications, including a perpetual and exclusive license of
CarePrime(R) and MyFamilyMD(TM) that represented revenue of approximately
$1,700,000 to UICI for use in the student health market. We expect that in
future periods we will generate a significant portion of our revenue from
delivery of prevention services, such as MyNurseLine(TM), and care services that
we deliver using the Health-e-Program(TM).
Cost of revenue for 2002 was $1,229,044, an increase of 1134% from
$99,584 for 2001. The increase is attributable to the personnel costs required
to service our prevention and care services contracts, which we assumed
effective February 1, 2002. We expect that in future periods our cost of revenue
will increase or decrease in proportion to volume of business. This is because
we expect to derive a significant portion of our future revenue from prevention
and care services contracts, which require human involvement proportionate to
the size of the contract.
Research and development costs were $410,220 for 2002 as compared to
$818,176 for 2001, a decrease of 50%. The decrease was attributable in
significant part to a shift of some software development work from a
subcontractor to in-house. Despite the decrease, we expect to continue to spend
funds on adding functionality to our products including to the MyFamilyMD(TM)
application by adding MedWizard(R) tools, on CarePrime(TM) application, which
interacts with MyFamilyMD(TM) and its MedWizard(R) tools, and on
Health-e-Coordinator(TM) application by adding additional disease capabilities.
All product development costs for 2002 were expensed.
General and administrative expenses (excluding salary and related
benefits which are discussed separately below) were virtually unchanged,
$1,711,430 in 2001 and $1,721,685 in 2002, even though 2002 general and
administrative expenses include approximately of $630,000 of expenses
attributable to the operation of WellComm, which we assumed effective February
1, 2002. Our ability to maintain general and administrative expenses constant is
attributable to post-WellComm acquisition efficiencies, personnel reductions and
stringent budgetary controls implemented in the fourth quarter of 2001. We do
not anticipate increasing spending in 2003. We believe that with the addition of
WellComm's personnel, we have the resources to handle increased revenue with
minimal incremental costs up to a certain level, and then have the ability to
ramp-up expenses with additional business.
Salary and related benefits were $4,233,209 for 2002 as compared to
$6,996,108 for 2001. The 2001 expenses include approximately $3,900,000
attributable to a non-cash charge associated with stock purchase warrants we
issued to employees and officers in exchange for surrender of accrued salary
under our salary deferment program. Excluding this component, the increase in
salary and related benefits from 2001 to 2002 was approximately $1,150,000, of
which approximately $700,000 was the result of the WellComm acquisition
completed effective February 1, 2002, and the balance of which relates to hiring
additional management and sales personnel.
Acquired in process research and development was $1,642,860 in 2001 and
was directly attributable to the acquisition of iSummit on February 7, 2001. An
independent third-party valuation company derived this amount after a detailed
analysis of all the underlying facts.
Depreciation and amortization expenses were $2,045,461 in 2002, as
compared to $779,014 in 2001. The increase is primarily attributable to the
amortization of the value of intangible assets acquired in the WellComm
acquisition.
Marketing and advertising expenses were $773,963 in 2002 as compared to
$989,972 in 2001. The decrease of 22% resulted from stringent budgetary
constraints.
28
Interest expense for 2002 was $1,107,632 increasing by $583,000 or 111%
from $524,632 for 2001. For 2002, interest expense includes the amortization and
accretion on items related to the $2,000,000 debenture as follows: $434,798
associated with the beneficial conversion feature of the debenture; $408,041
associates with the value of the warrants issued with the debenture; and
$147,654 associated with the option liability stemming from the option we
granted Palladin to purchase from us an additional debenture. Generally, the
beneficial conversion value represents the benefit to the investor that results
from purchasing an immediately convertible debenture with a conversion price
that is less than fair market value on the date of purchase after first
allocating a portion of the proceeds from the debenture to the associated
warrants. For 2001, the incurred interest charges were associated with certain
promissory notes converted into common stock.
Amortization of debt issuance and conversion costs was $187,337 and
$1,424,688 for 2002 and 2001, respectively. The significant decrease is due
solely to the fact that in 2001, we re-priced the exercise price of certain
warrants issued in connection with convertible promissory notes. The re-price of
the warrants from $10 to $2.50 resulted in a one-time charge of approximately
$1,400,000.
Our net loss was $9,424,973 in 2002 as compared to a net loss of
$14,359,432 in 2001, a decrease of 34%. In both periods, we had significant
transactional charges. In 2002, we incurred a charge of approximately $434,798
on account of an interest expenses associated with the beneficial conversion
value associated with the debenture we issued to Palladin, additional
depreciation and amortization of $1,753,144 in connection with intangible assets
acquired in the WellComm acquisition and a $1,648,333 impairment charge incurred
in connection with those same assets. In 2001, we incurred a one-time charge of
$1,642,860 on account of acquired in process research and development in the
iSummit acquisition, $1,424,688 for certain securities issuances and conversion
costs and $3,915,232 of stock based compensation associated with the conversion
of deferred salary in warrants.
Liquidity and Capital Resources
Working Capital Deficiency
We ended 2002 with approximately $360,000 in cash on our balance sheet. As
of December 31, 2002, we had a working capital deficiency of $2,384,004.
Further, during the past two years and as of the date of this report, cash flow
deficits from operations averaged approximately $300,000 per month. Through
December 31, 2002 and the date of this report, we have been able to finance
these deficits by sales of common stock to unrelated parties and loans from our
senior management team and their affiliates, including members of our senior
executive management team and a director. Although we expect to continue to run
cash flow deficits as of the date of this report, we also continue to make
progress towards producing positive cash flow from operations and we expect,
although no assurances exist, that we will reach operating cash flow break even
in the third quarter of 2003.
In 2002, we borrowed from certain executives and certain relatives of
such executives a total of $700,000. These loans bear interest at a rate of 8%
per annum and were used to fund working capital deficiencies. In February 2003,
pursuant to a promissory note, the former Chief Executive Officer of WellComm,
now a member of our Board of Directors advanced to us $200,000 for working
capital. The loan carries interest at 8% per year and matures in February 2004.
Additionally, during the three months ended March 31, 2003, our Chief
Executive and Operating Officers, along with certain stockholders advanced to
us, in the form of loans and equity, $540,000 for working capital. Our Chief
Executive and Operating Officers have committed to continue to fund us until we
generate positive cash flow from operations and raise additional funds in the
private placement, which we commenced subsequent to year-end, but at least
through January 1, 2004.
Sources and Uses of Cash
Despite our negative cash flows from operations, which amounted to
$2,871,201 in 2002 and $4,922,266 in 2001, we have been able to secure funds to
support our operations. In 2002, we secured funding by selling equity securities
and a debenture, which aggregated approximately $4,000,000. Of the $4,000,000,
approximately $2,200,000 we used to acquire WellComm and the remainder to fund
operations. Additionally, in the third quarter
29
of 2002, we received $2,500,000 from a customer as a deposit on a license and
future development work. In 2002, we also received (net of repayments) $510,000
from officers and related parties. In 2001, we used $4,922,266 to fund our
operations, of which sum $3,822,968 we raised by selling common stock, $682,809
we received by issuing promissory notes and $700,000, net of repayments, we
received from related parties.
As of December 31, 2002, our current liabilities were $3,640,334 of
which $225,000 is due on demand to a relative of a senior executive. In February
2003, $140,000 of the $225,000 was repaid. The remainder of current liabilities
of approximately $3,415,000 is made up, primarily, of trade payables of
approximately $918,791, accrued expenses of approximately $743,000, $300,000
credit line payable, which was assumed with the acquisition of WellComm and
approximately $1,379,922 of deferred revenue. We have good relationships with
all of our vendors.
As of December 31, 2002, the face value of our long-term debt amounted
to approximately $3,700,000. This sum is comprised of 6% convertible senior
debenture in the aggregate principal amount of $2,000,000 (but carrying value of
$842,839) held by Palladin, for which principal and deferred interest is not due
until February 3, 2004, $692,809 (but carrying value of $403,137) held by a
group of investors led by Psilos Group Partners, L.P., which includes Nantucket
Healthcare Ventures I, L.P., a venture fund managed by our Chief Executive
Officer, for which principal and interest is not due until March 2006, and
approximately $1,000,000 held by executive officer and members of our Board of
Directors.
Related Party Transactions
In 2002, certain of our officers and a relative of an officer advanced
to us funds for working capital. Such advances totaled $700,000, of which,
$350,000 are due on demand and $350,000 are due in February 2004. All advances
bear interest at a rate of 8% per annum.
Critical Accounting Policies
Legal Contingencies
As of December 31, 2002, we were involved in certain litigation. We
prevailed in the matter with finality in March 2003. As of December 31, 2002, we
had not accrued a loss contingency because the plaintiff's success in this
matter was not deemed probable nor could we have reasonably estimated any
adverse effect based on the then current facts.
Impairment of Goodwill and Intangible
We operate in an industry that is rapidly evolving and extremely
competitive. It is reasonably possible that our accounting estimates with
respect to the useful life and ultimate recoverability of our carrying basis of
goodwill and intangible assets could change in the near term and that the effect
of such changes on the financial statements could be material. During the
quarter ended December 31, 2002, we recorded an impairment charge of $1,648,332
in connection with the WellComm acquisition. The charge was related to the write
off of a portion of an intangible asset associated with customer relations.
Revenue Recognition
We derive our revenue pursuant to different type contracts, including
perpetual software licenses, subscription licenses and custom development
services, all of which may also include support services revenue such as
licensed software maintenance, training, consulting and web hosting
arrangements. As described below, significant management judgments and estimates
must be made and used in connection with the revenue recognized in any
accounting period. Material differences may result in the amount and timing of
our revenue for any period if our management made different judgments or
utilized different estimates.
We license our software products for a specific term or on a perpetual
basis. Most of our license contracts also require maintenance and support. We
apply the provisions of Statement of Position 97-2, "Software Revenue
Recognition," as amended by Statement of Position 98-9 "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions" to all
transactions involving the sale of software products and
30
hardware transactions where the software is not incidental. For hardware
transactions where software is not incidental, we do not unbundle the fee and we
do not apply separate accounting guidance to the hardware and software elements.
For hardware transactions where no software is involved we apply the provisions
of Staff Accounting Bulletin 101 "Revenue Recognition." In addition, we apply
the provisions of Emerging Issues Task Force Issue No. 00-03 "Application of
AICPA Statement of Position 97-2 to Arrangements that Include the Right to Use
Software Stored on Another Entity's Hardware" to our hosted software service
transactions.
We recognize revenue from the sale of software licenses when persuasive
evidence of an arrangement exists, the product has been delivered, the fee is
fixed and determinable and collection of the resulting receivable is reasonably
assured. Delivery generally occurs when product is delivered to a common
carrier.
At the time of the transaction, we assess whether the fee associated
with our revenue transactions is fixed and determinable and whether or not
collection is reasonably assured. We assess whether the fee is fixed and
determinable based on the payment terms associated with the transaction. If a
significant portion of a fee is due after our normal payment terms, which are 30
to 90 days from invoice date, we account for the fee as not being fixed and
determinable. In these cases, we recognize revenue as the fees become due.
We assess collection based on a number of factors, including past
transaction history with the customer and the credit-worthiness of the customer.
We do not request collateral from our customers. If we determine that collection
of a fee is not reasonably assured, we defer the fee and recognize revenue at
the time collection becomes reasonably assured, which is generally upon receipt
of cash.
For arrangements with multiple obligations (for example, undelivered
maintenance and support), we allocate revenue to each component of the
arrangement using the residual value method based on the fair value of the
undelivered elements. This means that we defer revenue from the arrangement fee
equivalent to the fair value of the undelivered elements.
We recognize revenue for maintenance services ratably over the contract
term. Our training and consulting services are billed based on hourly rates, and
we generally recognize revenue as these services are performed. However, at the
time of entering into a transaction, we assess whether or not any services
included within the arrangement require us to perform significant work either to
alter the underlying software or to build additional complex interfaces so that
the software performs as the customer requests. If these services are included
as part of an arrangement, we recognize the entire fee using the percentage of
completion method. We estimate the percentage of completion based on our
estimate of the total costs estimated to complete the project as a percentage of
the costs incurred to date and the estimated costs to complete.
We recognize service revenue as the services are rendered. We contracts
with our customers to provide services based on an established monthly fee, a
per-call charge or a combination of both.
Although as of the date of these financials, we have not entered into
any risk-based contracts, we expect that in the very near future it will do so.
These types of contracts are generally for terms of three to five years, provide
for an automatic renewal and typically provide that a percentage of our fees may
be refundable ("performance based") based on achieving a targeted percentage
reduction in the customer's healthcare costs.
Material Equity Transactions
In 2002, we executed equity transactions with related and unrelated
parties in connection with the raising funds for working capital along with
issuing securities in lieu of compensation for services received. We believe
that we have valued all such transaction pursuant to the various accounting
rules and that they ultimately represent the economic substance of each
transaction.
31
ITEM 7. FINANCIAL STATEMENTS
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002
AND
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Item Page No.
Reports of independent accountants..........................................................................33
Balance sheet at December 31, 2002..........................................................................35
Statements of operations for the years ended December 31, 2002 and 2001.....................................36
Statement of stockholders' equity (deficiency) for the years ended December 31, 2002 and 2001...............37
Statements of cash flows for the years ended December 31, 2002 and 2001.....................................39
Notes to consolidated financial statements..................................................................41
32
Report of Independent Accountants
To the Board of Directors and
Stockholders of I-trax, Inc.:
We have audited the accompanying consolidated balance sheet of I-trax,
Inc. & Subsidiaries (the "Company") as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at December 31, 2002, and the results of its operations and cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 6 to the consolidated financial statements,
effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets.
Goldstein Golub Kessler LLP
New York, New York
March 5, 2003
33
Report of Independent Accountants
To the Board of Directors and
Stockholders of I-trax, Inc.:
We have audited the accompanying consolidated balance sheet of I-trax,
Inc. & Subsidiaries (the "Company") as of December 31, 2001 (not included
herein), and the related consolidated statements of operations, stockholders'
equity (deficiency) and cash flows for the year ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company at December 31, 2001, and the results of its operations and cash
flows for the year ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements as of December 31,
2001 and for the year then ended were prepared assuming that the Company would
continue as a going concern. As discussed in Note 1 to the financial statements,
the Company has a working capital deficiency and incurred losses from operations
for the years ended December 31, 2001 and 2000, which raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. Accordingly, the financial
statements as of December 31, 2001 did not include any adjustments that might
have resulted from the outcome of those uncertainties.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 29, 2002
34
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
ASSETS
Current assets
Cash $ 360,166
Deposit on potential acquisition 200,000
Accounts receivable, net 597,635
Prepaid expenses 77,569
Other current assets 20,960
-----------------
Total current assets 1,256,330
-----------------
Office equipment, furniture and leasehold improvements, net 412,779
Deferred marketing costs, net 1,284,445
Goodwill 8,424,062
Intangible assets, net 2,748,087
Debt issuance cost, net 249,273
Security deposits 31,564
-----------------
Total assets $ 14,406,540
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Credit line payable 300,000
Accounts payable 918,791
Accrued expenses 743,151
Due to related party 225,000
Capital lease payable 60,047
Deferred revenue 1,379,922
Other current liabilities 13,423
-----------------
Total current liabilities 3,640,334
-----------------
Capital lease obligation, net of current portion 96,765
Promissory notes and debenture payable, net of discount 1,245,876
Due to officers and directors 1,024,598
-----------------
Total liabilities 6,007,573
-----------------
Commitments and contingencies (Note 17)
Stockholders' equity
Preferred stock - $.001 par value, 2,000,000 shares authorized,
-0- issued and outstanding
Common Stock - $.001 par value, 100,000,000 shares authorized,
9,372,727 shares issued and outstanding 9,372
Additional paid in capital 39,236,119
Accumulated deficit (30,846,524)
-----------------
Total stockholders' equity 8,398,967
-----------------
Total liabilities and stockholders' equity $ 14,406,540
=================
See accompanying notes to financial statements.
35
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
------------------ ---------------
Revenue:
Technology licenses $ 2,225,308 $ 613,070
Services 1,706,602 --
------------------ ---------------
Total revenue 3,931,910 613,070
------------------ ---------------
Cost of revenue:
Technology licenses 67,788 99,584
Services 1,161,256 --
------------------ ---------------
Total cost of revenue 1,229,044 99,584
------------------ ---------------
Gross profit 2,702,866 513,486
Operating expenses:
General and administrative 1,721,685 1,711,430
Salary and related benefits, including $3,915,232 for 2001
of stock based compensation 4,233,209 6,996,108
Research and development 410,220 818,176
Acquired in progress research and development -- 1,642,860
Depreciation and amortization 2,045,461 799,014
Marketing and publicity 773,963 989,972
Impairment charge related to intangible assets 1,648,332 --
------------------ ---------------
Total operating expenses 10,832,870 12,957,560
------------------ ---------------
Operating loss (8,130,004) (12,444,074)
------------------ ---------------
Other income (expenses):
Amortization of debt issuance and conversion costs (187,337) (1,424,688)
Interest income -- 33,962
Interest expense (1,107,632) (524,632)
------------------ ---------------
Total other income (expenses) (1,294,969) (1,915,358)
------------------ ---------------
Net loss $ (9,424,973) $ (14,359,432)
================== ===============
Loss per common share:
Basic and diluted $ (1.04) $ (2.71)
================== ===============
Weighted average number of shares outstanding: 9,096,958 5,291,403
================== ===============
See accompanying notes to financial statements.
36
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Total
Additional Notes Stockholders'
Common Stock Paid-in Accumulated Receivable Equity
-----------------------------
Shares Amount Capital Deficit Officers (Deficiency)
-------------- -------------- --------------- -------------- -------------- --------------
Balances at January 1, 2001 3,850,969 $ 3,851 $ 6,684,441 $ (7,062,119) $ (999,500) $ (1,373,327)
Common stock issued in
connection with acquisition of
iSummit Partners, LLC 673,600 674 5,253,406 -- -- 5,254,080
Fair market value of detachable
warrants issued in connection
with amended and restated
promissory notes -- -- 459,854 -- -- 459,854
Sale of common stock, June 2001
private placement 440,000 440 1,099,560 -- -- 1,100,000
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 (100,000) (100) (999,900) -- 999,500 (500)
Issuance of common stock and
warrants in connection with
conversion of convertible
promissory notes 912,063 912 2,550,872 -- -- 2,551,784
Issuance of common stock and
warrants in connection
with conversion of
advances from officers 247,465 247 1,248,885 -- -- 1,249,132
Sale of common stock, net of
costs,
October 2001 private placement 842,395 842 2,042,116 -- -- 2,042,958
Issuance of common stock and
warrants as consideration for
services rendered 120,307 120 1,012,778 -- -- 1,012,898
Granting of warrants to employees
as consideration for deferring and
converting accrued salary amounting
to $814,595 into warrants -- -- 3,915,232 -- -- 3,915,232
Cancellation of shares in
connection with purchase price adjustment
for iSummit Partners, LLC (92,918) (93) (724,671) -- -- (724,764)
Issuance of common stock in
connection
with exercise of warrants 94,013 94 70,416 70,510
Mark-to-market of options granted
to officers in lieu of canceling
note and pledge agreement 350,000 350,000
Net loss for the year ended
December 31, 2001 -- -- (14,359,432) -- (14,359,432)
-------------- -------------- --------------- -------------- -------------- --------------
Balances at December 31, 2001 6,987,894 $ 6,987 $ 22,992,730 ($21,421,551) $ -- $ 1,578,166
-------------- -------------- --------------- -------------- -------------- --------------
See accompanying notes to financial statements.
37
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Common Stock Additional Total
----------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
-------------- ------------- ---------------- -------------- ---------------
Balances at December 31, 2001 6,987,894 $ 6,987 $ 22,992,730 $ (21,421,551) $ 1,578,166
Cancellation of unclaimed shares and reverse
stock split adjustment (45,332) (45) 45 -- --
Issuance of compensatory stock options -- -- 163,200 -- 163,200
Fair market value of detachable warrants
issued in connection with debenture and
beneficial conversion value -- -- 1,838,923 -- 1,838,923
Issuance of common stock and granting of
options in connection with the
acquisition of WellComm Group, Inc. 1,488,000 1,488 10,478,512 -- 10,480,000
Issuance of common stock and warrants as
consideration for finder fee 22,200 22 391,386 -- 391,408
Sale of common stock, net of $7,150 in costs 540,833 541 1,942,935 -- 1,943,476
Issuance of common stock and warrants as
consideration for services 23,708 24 1,677,243 -- 1,677,267
Issuance of common stock in connection with
exercise of options and warrants 355,424 355 1,145 -- 1,500
Mark-to-market of options granted to
officers in lieu of canceling note and
pledge agreement during 2001 -- -- (250,000) -- (250,000)
Net loss for the year ended December 31, 2002 -- -- -- (9,424,973) (9,424,973)
-------------- ------------- ---------------- -------------- ---------------
Balances at December 31, 2002 9,372,727 $ 9,372 $ 39,236,119 $ (30,846,524) $ 8,398,967
============== ============= ================ ============== ===============
See accompanying notes to financial statements.
38
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
----------------- ----------------
Operating activities:
Net loss $ (9,424,973) $ (14,359,432)
Adjustments to reconcile net loss to net cash used in operating
activities:
Accretion of discount on notes payable charged to interest 498,751 463,551
expense
Accretion of beneficial conversion value of debenture 434,798 --
Amortization of option liability (147,655) --
Amortization of debt issuance costs 187,337 --
Depreciation and amortization 2,045,461 799,014
Impairment charge related to intangible assets 1,648,332 --
Issuance of securities for services 230,467 6,576,003
Write-off of in process research and development acquired
in iSummit Partners, LLC acquisition -- 1,642,860
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in:
Accounts receivable (119,888) 217,145
Prepaid expenses 54,828 (62,539)
Other current assets (19,045) 2,666
(Decrease) increase in:
Accounts payable 235,686 192,462
Accrued expenses 273,608 (167,592)
Deferred revenue 1,231,092 (226,404)
----------------- ----------------
Net cash used in operating activities (2,871,201) (4,922,266)
----------------- ----------------
Investing activities:
Proceeds from repayment of note receivable 72,437 312,500
Deposit on potential acquisition (200,000) --
Cash used to acquire property and equipment (68,040) (1,990)
Proceeds from partial release of security deposit 38,839 61,486
Net cash to acquire WellComm Group, Inc. (2,199,136) --
----------------- ----------------
Net cash used in investing activities (2,355,900) 371,996
----------------- ----------------
Financing activities:
Principal payments on capital leases (21,918) (40,095)
Proceeds from credit line payable 125,000 --
Proceeds from issuance of promissory notes -- 692,809
Repayment to related parties (190,000) (480,000)
Proceeds from related parties 700,000 1,180,990
Proceeds from issuance of convertible promissory notes -- 270,000
Proceeds from sale of Common Stock 1,944,976 3,822,968
Proceeds from sale of option 161,078
Proceeds from issuance of debenture 1,838,923 --
----------------- ----------------
Net cash provided by financing activities 4,558,059 5,446,672
----------------- ----------------
Net (decrease) increase in cash (669,042) 896,402
Cash at beginning of period 1,029,208 132,806
----------------- ----------------
Cash at end of period $ 360,166 $ 1,029,208
================= ================
Supplemental disclosure of non-cash flow information:
Cash paid during the year for:
Interest $ 15,163 $ 7,468
================= ================
39
(Continues on following page.)
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
(Continues from previous page.)
2002 2001
---------------- -----------------
Schedule of non-cash investing activities:
Issuance of 673,600 shares of common stock in connection with
acquisition of iSummit Partners, LLC $ -- $ 5,254,080
============= ===========
Issuance of 1,488,000 shares of common stock and granting of 112,000 stock
options in connection with acquisition of WellComm Group,
Inc $ 10,480,000 $ --
============= ===========
Issuance of common stock and warrants for finder fee $ 391,408 $ --
============= ===========
Schedule of non-cash financing activities:
Issuance of common stock in connection with conversion of convertible
promissory notes and related party advances $ -- $ 2,551,784
============= ===========
Issuance of common stock in connection with conversion of advances
from officers $ -- $ 275,000
============= ===========
Issuance of common stock in connection with conversion of accounts
payable $ 16,667 $ 76,798
============= ===========
Acceptance (cancellation) of promissory notes in connection with sale
of common stock $ -- $ (999,500)
============= ===========
Acquisition of office equipment in connection with capital lease
obligation $ 107,709 $ --
============= ===========
Issuance of warrants in connection with marketing agreement $ 1,360,000 $ --
============= ===========
See accompanying notes to financial statements.
40
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 1--ORGANIZATION
I-trax, Inc. (the "Company") provides focused disease management and
comprehensive health management solutions designed to improve the health of the
populations it serves while reducing the cost of medical care. The Company was
incorporated in the State of Delaware on September 15, 2000. 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 stockholders of the Company and
Health Management became a wholly owned subsidiary of the Company. The Company's
common stock is traded on the American Stock Exchange under the symbol "DMX."
As of December 31, 2002, the Company had three wholly owned subsidiaries: Health
Management, a corporation, and iSummit Partners, LLC and WellComm Group, LLC,
each a single member limited liability company. The Company acquired iSummit
Partners, LLC in February 2001. iSummit Partners, LLC does not conduct any
operations but maintains ownership of certain intellectual property. The Company
formed WellComm Group, LLC to conduct the activities of WellComm Group, Inc.,
which the Company acquired on February 6, 2002, as further described in Note 8.
The Company conducts its operations through Health Management and WellComm
Group, LLC.
Effective January 3, 2003, the Company completed a 1-for-5 reverse stock split.
Accordingly, all information presented in these financial statements has been
adjusted retroactively to reflect this reverse stock split.
The accompanying financial statements as of December 31, 2001 and for the year
then ended were prepared assuming that the Company would have continued as a
going concern. For the years ended 2001 and 2000, the Company used cash in
operations of approximately $4,900,000 and $4,700,000 respectively. As of
December 31, 2001, the Company's accumulated deficit amounted to $21,421,551 of
which $14,359,432 resulted from losses generated during the year ended December
31, 2001. Of the total loss of $14,359,432 for 2001, $1,642,860 was a non-cash
charge to operations for the acquired in progress research and development in
connection with iSummit acquisition and $6,576,003 of non-cash charges as
consideration for payments for services rendered to the Company and for the
granting and re-pricing of warrants associated with the conversion of debt into
equity and for the borrowing of funds from related parties. As of December 31,
2001, the Company's working capital deficiency amounted to $624,863.
The financial statements as of December 31, 2001, did not include adjustments
relating to the recoverability and realization of assets and classification of
liabilities that might have been necessary should the Company had been unable to
continue in operation. The Company implemented several cash conservation
programs and raised sufficient funds during 2002 from various sources in order
to continue operations through December 31, 2002.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Income Taxes
The Company accounts for income taxes in accordance with Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," which requires the use of the "liability
method" of accounting for income taxes. Accordingly, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities, using enacted tax rates in
effect for the year in which the differences are expected to reverse. Current
income taxes are based on the respective periods' taxable income for federal and
state income tax reporting purposes.
41
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Loss Per Common Share
Loss per common share is computed pursuant to SFAS No. 128, "Earnings Per
Share." Basic loss per share is computed as net income (loss) available to
common shareholders divided by the weighted average number of common shares
outstanding for the period. Diluted loss per share reflects the potential
dilution that could occur from common shares issuable through stock options,
warrants, and convertible debt. As of December 31, 2002 and 2001, 3,843,755 and
2,348,744, respectively, options and warrants were excluded from the diluted
loss per share computation, as their effect would be anti-dilutive.
Use Of Estimates
In preparing the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
which affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Fair Value Disclosure At December 31, 2002
The carrying value of cash, accounts payable, accrued expenses and credit line
payable are reasonable estimates of their fair value because of short-term
maturity. The fair value of the promissory notes and debenture payable
approximates their principal amount of $2,692,800.
Office Equipment, Furniture And Leasehold Improvements
The Company records office equipment, furniture and leasehold improvements at
cost less accumulated depreciation and amortization, which is provided for on
the straight line basis over the estimated useful lives of the assets which
range between three and seven years. The Company expenses expenditures for
maintenance and repairs as incurred.
Accounts Receivable
The Company utilizes the allowance method for determining the collectibility of
its accounts receivable. The allowance method recognizes bad debt expense
following a review of the individual accounts outstanding in light of the
surrounding facts. Accounts receivables are reported at their outstanding unpaid
principal balances reduced by an allowance for doubtful accounts based on
historical bad debts, factors related to specific customers ability to pay and
economic trends. The Company writes off accounts receivables against the
allowance when a balance is determined to be uncollectible.
Research And Development Costs
Research and development costs are expensed as incurred. Such costs amounted to
$410,220 and $818,176 for the years ended December 31, 2002 and 2001,
respectively.
42
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Revenue Recognition
The Company recognizes revenue from technology licenses in accordance with
Statement of Position 97-2 "Software Revenue Recognition" as further modified by
Statement of Position 98-9 "Modification of SOP 97-2, "Software Revenue
Recognition with Respect to Certain Transactions." SOP 97-2 generally requires
revenue earned on software arrangements involving multiple elements such as
software products, upgrades, enhancements, post-contract customer support,
installation and training to be allocated to each element based on the relative
fair value of the elements.
The Company recognizes revenue from software development contracts on a
percentage-of-completion method with progress to completion measured based upon
labor hours incurred or achievement of contract milestones. Revenue from re-sale
of hardware and software, obtained from vendors, is recognized at the time
hardware and software is delivered to customers. Customer deposits represent
funds received in advance in excess of revenue recognized. The Company has
adopted the provisions of the Securities and Exchange Commission Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements," in
the fourth quarter of 2000, retroactively to January 1, 2000, as required by the
Securities and Exchange Commission. The adoption had no impact on the Company's
financial statements.
The Company recognizes service revenue as the services are rendered. The Company
contracts with its customers to provide services based on an established monthly
fee, a per-call charge or a combination of both.
During the third quarter of 2002, the Company entered into a License and
Maintenance Agreement with UICI, a New York Stock Exchange company, valued at
approximately $2,800,000. For the year ended December 31, 2002, the Company
recognized approximately $1,700,000, representing the amount allocated to the
software license. The balance representing services to be performed has been
deferred.
Software Development Costs
In accordance with the provisions of SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," the Company
capitalizes software development and production costs once technological
feasibility has been achieved. Software development costs incurred prior to
achieving technological feasibility are included in research and development
expense in the accompanying statement of operations. As of December 31, 2002,
the Company had not capitalized any software development costs. Commencing with
the first quarter of 2003, the Company expects to start capitalizing some of its
software development costs based on the expected completion of working models
for several of its software products.
Deferred Marketing Costs
Deferred marketing costs consist of the value of the warrant issued to a
customer in October 2002 in connection with a three-year joint marketing
agreement. The warrant to acquire 400,000 shares of common stock was valued at
$1,360,000 utilizing the Black-Scholes pricing model. The value of the warrant
is being amortized over the three-year life of the joint marketing agreement on
a straight-line basis. During the year ended December 31, 2002, $75,555 was
charged. The unamortized portion of the deferred marketing costs was $1,284,445
and is reflected on the accompanying consolidated balance sheet.
43
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Debt Issuance Costs
The Company recorded debt issuance costs in connection with the sale of a 6%
senior debenture in February 2002. These costs consist of a cash payment of
$130,000 and common stock and warrants issued to an unrelated party as a finder
fee. The Company is amortizing the total costs of $416,610 on a straight-line
basis over the two-year life of the debenture. For the year ended December 31,
2002, amortization of debt issuance costs amounted to $167,337. The unamortized
portion of debt issuance costs was $249,273 and is reflected on the accompanying
consolidated balance sheet.
Comprehensive Income
The Company adopted SFAS No. 130, "Accounting for Comprehensive Income." This
statement establishes standards for reporting and disclosing of comprehensive
income and its components (including revenues, expenses, gains and losses) in a
full set of general-purpose financial statements. The items of other
comprehensive income that are typically required to be disclosed are foreign
currency items, minimum pension liability adjustments, and unrealized gains and
losses on certain investments in debt and equity securities. The Company had no
items of other comprehensive income for the years ended December 31, 2002 and
2001.
Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123."
SFAS No. 148 amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for an entity that
chooses to change to the fair-value-based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
statement to require prominent disclosure about the effects that accounting for
stock-based employee compensation using the fair-value-based method would have
on reported net income and earnings per share and to require prominent
disclosure about the entity's accounting policy decisions with respect to
stock-based employees compensation. Certain of the disclosure requirements are
required for all companies, regardless of whether the fair value method or
intrinsic value method is used to account for stock-based compensation
arrangements. The amendments to SFAS No. 123 are effective for financial
statements for fiscal years ended after December 15, 2002 and for interim
periods beginning after December 15, 2002.
44
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Stock-Based Compensation (cont'd)
The Company accounts for its employee incentive stock option plans using the
intrinsic value method in accordance with the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," as permitted by SFAS No. 123. The adoption of the
disclosure requirements of SFAS No. 148 did not have a material effect on the
Company's financial position or results of operations. Had the Company
determined compensation expense base on the fair value at the grant dates for
those awards consistent with the method of SFAS 123, the Company's net loss per
share would have been increased to the following pro forma amounts:
2002 2001
------------ ------------
Net loss as reported $ (9,424,973) $(14,359,432)
Add back intrinsic value of the options issued to
employee and charged to operations 163,200 --
Deduct total stock based employee compensation
expense determined under fair value based methods
for all awards (2,844,904) (1,191,937)
------------ ------------
Pro forma net loss $(12,106,677) $(15,551,369)
============ ============
Basic and diluted net loss per share as reported $ (1.04) $ (2.70)
Pro forma basic and diluted net loss per share $ (1.33) $ (2.90)
The above pro forma disclosure may not be representative of the effects on
reported net operations for future years as options vest over several years and
the Company may continue to grant options to employees.
The fair market value of each option grant is estimated at the date of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions
Dividend yield 0.00%
Expected volatility 162%
Risk-free interest rate 5%
Expected life 5 year
Segment Reporting
The Company evaluates segment performance based on income from operations.
Through December 31, 2002, the Company has not measured segment performance
because the Company has operated in only one segment.
45
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
New Accounting Pronouncements
In October 2001, the FASB issued SFAS 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. Management periodically
evaluates carrying values of long-lived assets, including property, plant and
equipment and intangible assets, when events and circumstances indicate that
these assets may have been impaired. On January 1, 2002, the Company adopted
SFAS No. 144, which provides for the evaluation of impairment of long-lived
assets. An asset is considered impaired when undiscounted cash flows to be
realized from the use of such assets are less than its carrying value. In that
event, a loss is determined based on the amount the carrying value exceeds the
fair market value of such asset. The adoption of SFAS 144 did not have a
material impact on the financial statements of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission on FASB Statements 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Under certain provisions of SFAS No. 145, gains and losses related to the
extinguishment of debt are no longer automatically segregated on the income
statement as extraordinary items net of the effects of income taxes. Instead,
unless those gains and losses meet the usual criteria for extraordinary items
under APB No. 30, those gains and losses are included as a component of income
before income taxes. The provisions of SFAS No. 145 are effective for fiscal
years beginning after May 15, 2002 with early adoption encouraged. To date, the
Company has not recorded any gains or losses on its statements of operations as
extraordinary items.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred rather than when a company commits to such an
activity and also establishes fair value as the objective for initial
measurement of the liability. The provisions of SFAS 146 are effective for exit
or disposal activities initiated after December 31, 2002. The Company does not
expect the provisions of SFAS No. 146 to have a material effect on the Company's
financial position or results of operations.
The Company does not believe that any other recently issued and adopted, but not
yet effective, accounting standards would have a material effect on the
accompanying financial statements.
NOTE 3--DEPOSIT ON POTENTIAL ACQUISITION
On November 8, 2002, the Company entered into a merger agreement to acquire
DxCG, Inc. for a total purchase price of approximately $10,000,000, of which the
Company intended to pay $6,000,000 in cash and $4,000,000 in common stock. Under
the terms of this agreement and at the time this agreement was executed, the
Company deposited $200,000 into an escrow account. This sum was intended to be
released to DxCG if DxCG terminated the merger agreement because the Company
failed to satisfy certain conditions to closing, including third party financing
for the cash portion of the purchase price. The Company did not secure the
financing by January 31, 2003 as stipulated in the merger agreement and
accordingly the sum of $200,000 was released to DxCG in the first quarter of
2003 and charged to operations as an uncompleted acquisition cost.
46
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 4--NOTE RECEIVABLE
Pursuant to a promissory note and a security agreement dated December 19, 2000,
the Company loaned Diabetex Corporation, which is 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 December 31, 2001, Diabetex and certain of its related parties had paid the
Company a total of $312,500, which had been first applied to accrued interest
and reimbursable expenses and the balance to principal. As of December 31, 2001,
the principal and interest outstanding under the promissory note was $72,437, of
which $37,500 was paid on February 11, 2002 and the balance on July 15, 2002.
NOTE 5--OFFICE EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Office equipment, furniture and leasehold improvements are as follows at
December 31, 2002:
Office equipment $ 850,560
Furniture 143,404
Leasehold improvements 50,000
-------------
1,043,964
Less accumulated depreciation and amortization (631,185)
-------------
$ 412,779
=============
Certain office equipment is pledged as collateral for related capital lease
obligations. (See Note 11.)
Depreciation expense for the years ended December 31, 2002 and 2001 amounted to
$216,762 and $158,162, respectively.
NOTE 6--GOODWILL AND INTANGIBLE ASSETS
In July 2001, the FASB issued 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 were effective for business combinations for which the date of
acquisition was 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 were effective for fiscal years beginning after
December 15, 2001. The Company has adopted SFAS No. 142 as of January 1, 2002.
SFAS No. 142 eliminates the amortization of goodwill and certain other
intangible assets and requires the Company to complete a test for impairment of
these assets annually as well as a transitional goodwill impairment test within
six months of the date of adoption. The Company has completed its impairment
assessment as required by SFAS No. 142 and concluded that no impairment of
recorded goodwill exists. The impairment testing was based on capitalization of
earnings.
47
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 6--GOODWILL AND INTANGIBLE ASSETS (cont'd)
The changes in the carrying amount of goodwill for the year ended December 31,
2002 are as follows:
Total
----------------
Balance as of January 1, 2002 $ 2,224,726
Goodwill acquired during the year 6,199,336
----------------
Balance as of December 31, 2002 $ 8,424,062
================
SFAS No. 142 also requires disclosure of what net loss would have been in all
periods presented had SFAS No. 142 been in effect in such periods. The following
table is provided to disclose such net loss.
Year ended Year ended
December 31, 2002 December 31, 2001
Amount Per share Amount Per share
----------------- ---------------- ----------------- ----------------
Reported net loss $ (9,424,973) $ (1.04) $ (14,359,432) $ (2.71)
Add back goodwill amortization -- -- 640,851 .12
----------------- ---------------- ----------------- ----------------
Adjusted net loss $ (9,424,973) $ (1.04) $ (13,718,581) $ (2.59)
================ ================ ================ ================
The components of identifiable intangible assets, which are included in the
consolidated balance sheet as of December 31, 2002, are as follows:
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
----------------- --------------- -----------------
Amortized intangible assets:
Non-compete covenants 1,648,000 (377,667) 1,270,333
Customer relationships 2,853,231 (1,375,477) 1,477,754
------------------ ---------------- -----------------
Total $ 4,501,231 $ (1,753,144) $ 2,748,087
================== ================ =================
During the quarter ended December 31, 2002, the Company recorded an impairment
charge of approximately $1,650,000 related to customer relationships. This
charge related to a loss of expected business from a customer following the
acquisition of WellComm Group, Inc. as further discussed in Note 8. Total
amortization expense for all the intangibles amounted to $1,753,144 for the year
ended December 31, 2002. The estimated amortization expense for the years ending
December 31, 2003, 2004, 2005 and 2006 is $1,121,320, $1,121,320, $471,114 and
$34,333, respectively.
NOTE 7--ACQUISITION OF ISUMMIT PARTNERS, LLC
Effective February 7, 2001, the Company acquired iSummit Partners, LLC, doing
business as MyFamilyMD, by issuing a net of 580,682 shares of common stock
(after certain cancellation of shares resulting from a purchase price
adjustment) to the owners of iSummit in exchange for all of the issued and
outstanding limited liability company membership interests of iSummit. The
acquisition was valued at $5,254,080, of which $3,590,341 was allocated to
goodwill, after allocating $1,642,860 to in-progress research and development
(representing undeveloped software) and $20,879 to tangible assets. The
allocation of purchase price was prepared based on a formal valuation by an
independent appraiser.
48
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 7--ACQUISITION OF ISUMMIT PARTNERS, LLC (cont'd)
The Company amortized the goodwill through December 31, 2001. Accordingly, from
February 7, 2001 (date of acquisition) through December 31, 2001, the Company
recorded amortization expense of $640,851.
The following summary table sets forth the pro-forma statement of operations for
the year ended December 31, 2001 as if the acquisition was consummated at
January 1, 2001.
Year ended
December 31,
2001
----------------
Total revenue $ 613,070
============
Total expenses $ 14,972,502
============
Net loss $(14,359,432)
============
Pro forma basic and diluted net loss per share $ (2.71)
============
Weighted average number of shares outstanding 5,291,403
============
NOTE 8--ACQUISITION OF WELLCOMM GROUP, INC.
On February 6, 2002, the Company acquired all of the issued and outstanding
common stock of WellComm Group, Inc., as stipulated in the Merger Agreement
dated January 28, 2002, as amended, by issuing 1,488,000 shares of common stock
valued at $9,746,400, granting 112,000 options valued at $733,600 to acquire
common stock at a nominal exercise price and paying approximately $2,200,000 in
cash. In addition, the Company issued 16,000 shares of common stock to an
employee for introducing the Company to WellComm valued at $104,800 and charged
to operations. The aggregate acquisition price amounted to approximately
$12,660,000. The value of common stock issued and stock options granted was
determined based on the average market price of common stock immediately before
and after the acquisition was agreed to and announced. For accounting purposes,
the effective date of the acquisition is January 31, 2002.
WellComm was a disease management company that offered a wide array of expertise
including a nurse contact center specializing in disease management, triage,
health information surveys and research services for the healthcare industry.
The Company acquired WellComm in order to enhance its portfolio of product
offerings by combining technology and services.
The financial statements include the operations of WellComm from February 1,
2002 forward.
The purchase price allocation is based on a formal valuation prepared by an
independent appraiser. Of the total purchase price, the Company allocated
approximately $1,648,000 to non-compete covenants, approximately $4,501,000 to
customer relationships, $311,000 to net assets acquired with the remainder of
approximately $6,200,000 assigned to goodwill. Non-compete covenants will be
amortized on a straight-line basis over a four-year life and customer
relationships will be amortized over a three-year life.
49
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 8--ACQUISITION OF WELLCOMM GROUP, INC. (cont'd)
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the acquisition date.
Current assets $ 635,000
Property and equipment 190,000
Intangible assets 6,149,000
Goodwill 6,200,000
-----------
Total assets acquired $13,174,000
===========
Current liabilities $ 485,000
Long term debt 29,000
-----------
Total liabilities assumed 514,000
-----------
Net assets acquired $12,660,000
===========
The following unaudited pro forma results of operations of the Company give
effect to the acquisition of WellComm as though the acquisition was consummated
at the beginning of the year for each of the respective periods.
Year ended
December 31,
2002 2001
----------------- ---------------
Total revenue $ 4,185,689 $ 5,900,772
================= ================
Total expenses $ 13,688,289 $ 20,063,645
================= ================
Net loss $ (9,502,600) $ (14,162,873)
================= ================
Pro forma net loss per share: $ (1.03) $ (2.09)
Basic and Diluted
================= ================
Weighted average number of shares outstanding: 9,220,958 6,779,403
Basic and Diluted ================= ================
NOTE 9--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, a company in the business of providing disease management
services to patients suffering from cardiac disease. Among other things, the
letter of intent contemplated 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 contemplated that an
outstanding loan by the Company to CardioContinuum in the amount of $100,000,
and all accrued but unpaid interest thereunder, as of January 8, 2001, would be
surrendered by the Company to CardioContinuum for cancellation as an up front
license payment for the subject intellectual property. Following
CardioContinuum's 2001 bankruptcy filing, the Company wrote off the deposit on
the intellectual property since it would not have been able to realize any value
from the license and repayment of the note was unlikely. The deposit was charged
to operations during the year ended December 31, 2001.
50
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 10--ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 2002:
Interest $ 317,712
Salaries 385,869
Other 39,570
--------------
Total $ 743,151
==============
NOTE 11--CAPITAL LEASE OBLIGATIONS
In April 2000, the Company acquired a telephone system for $34,290 by entering
into capital lease obligations with interest at approximately 10% per annum,
requiring 60 monthly payments of $731, which include principal and interest. The
related equipment secures the lease.
In October 2000, the Company acquired web hosting equipment for $107,288 by
entering into a capital lease obligation with interest at approximately 9% per
annum, requiring 36 monthly payments of $3,572, which include principal and
interest. The related equipment secures the lease.
In July 2002, the Company acquired a new telephony system for its call center
with a total cost of $107,709 by entering into a capital lease obligation with
interest at approximately 8% per annum, requiring 60 monthly payments of
approximately $2,278, which includes principal and interest. The related
equipment secures the lease.
The future minimum lease commitments under the capital leases as of December 31,
2002 are as follows:
For the year ending December 31:
-------------------------------
2003 $ 77,228
2004 41,508
2005 35,660
2006 32,736
2007 15,946
--------------
Total future payments 203,078
Less amount representing interest (46,266)
--------------
Present value of minimum lease payments 156,812
Less current portion 60,047
--------------
Net long term portion $ 96,765
==============
At December 31, 2002 equipment under capital leases is carried at a book value
of $124,061.
51
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 12--RELATED PARTIES TRANSACTIONS
2001 Related Party Transactions
During the year ended December 31, 2001, the Company's Chief Executive Officer,
Chief Operating Officer and a key employee have periodically loaned funds to the
Company for working capital. As of December 31, 2001, the Company had borrowed
$739,598 net of certain repayments and the conversion discussed below. As
consideration for the advances, the Company issued to such individuals,
detachable stock purchase warrants to acquire an aggregate of 218,600 shares of
common stock at exercise prices ranging from $2.50 to $5 per share. The Company
valued the detachable warrants using the Black-Scholes pricing model, thereby
recording a charge to earnings for financing costs of $630,469.
In connection with the Company's Chief Executive Officer and Chief Operating
Officer converting a total of $618,663 of advances at $2.50 per share, the
Company issued an aggregate of 247,465 shares of its common stock.
From November 2000 through May 2001, the Company issued several convertible
promissory notes with an aggregate face amount of $2,200,000. Of such total,
$500,000 was from the Company's Chief Executive Officer and Chief Operating
Officer during October 2000, which was subsequently converted into common stock
as further discussed in Note 16.
As of December 31, 2001, a venture fund managed by the Company's Chief Executive
Officer loaned the Company $75,000 and received warrants to purchase 39,480
shares of common stock at $.50 per share. (See Note 14 for additional
information.)
In connection with signing of their employment agreements, the Company's Chief
Executive and Operating Officers had each purchased from the Company 50,000
shares of common stock for a purchase price of $10 per share. The shares were
purchased pursuant to a subscription agreement and a note and pledge agreement.
Each note was for a principal amount of $499,750 (net of a $250 bonus), bearing
interest at approximately 6% per annum, and provided that the unpaid principal
amount was due in five equal annual installments beginning on December 29, 2001.
Effective during the second quarter 2001, pursuant to board resolutions, such
notes and pledge agreements were canceled. Further, on April 10, 2001, each of
such executive officers was granted 70,000 incentive stock options pursuant to
the Company's 2001 Equity Compensation Plan. Pursuant to FASB Interpretation No.
44, variable accounting at the end of each interim period must be applied to
50,000 of the 70,000 options granted on April 10, 2001 since they are deemed a
re-price of the cancelled pledge and note agreements. Accordingly, since fair
value of common stock was $6.25 per share at December 31, 2001 and such options
have an exercise of $2.75 per share, the Company recorded the intrinsic value of
$3.50 or a total of $350,000 as compensation expense on account of the
re-pricing. The Company will continue to mark-to-market these options at the end
of each respective interim period until they are exercised.
On December 31, 2001, the Company issued 94,013 shares of common stock in
connection with the Chief Executive Officer exercising 94,013 warrants by
converting $70,510 of advance into equity. Such warrants were granted in
connection with the salary deferment program.
52
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 12--RELATED PARTIES TRANSACTIONS (cont'd)
2002 Related Party Transactions
At December 31, 2001, the Company had loans outstanding from certain officers
amounting to $739,598. During the year ended December 31, 2002, the Company
borrowed an additional $700,000 from other officers and a relative of an
officer. During the year ended December 31, 2002, repayments of these loans
amounted to $190,000. At December 31, 2002, $225,000 of the outstanding amount
has been classified as a current liability as it is due on demand and $1,024,598
has been classified as a long term liability as it is subordinate to the
convertible debenture.
Interest expense associated with related party loans and advances amounted to
$79,735 and $38,708 for the years ended December 31, 2002 and 2001,
respectively.
NOTE 13--CREDIT LINE
The Company, by virtue of acquiring WellComm, assumed a revolving line of credit
that allows the Company to borrow up to $300,108. Amounts outstanding under the
line of credit bear interest at 0.5% over the National Prime Rate, as reported
by the Wall Street Journal and are payable monthly. As of December 31, 2002,
$300,000 was outstanding under the line of credit. WellComm's assets
collateralize the line of credit. The line, which was due on August 2002, has
been extended through April 30, 2003. The Company is in the process of extending
this line of credit.
NOTE 14--PROMISSORY NOTES PAYABLE
On March 2, 2001 the Company entered into an Amended and Restated Promissory
Note and Warrant Purchase Agreement with Psilos Group Partners, L.P., its
affiliates and a venture capital fund managed by the Company's Chief Executive
Officer (collectively, the "Psilos Investor Group") pursuant to which the Psilos
Investor Group agreed to loan the Company up to $1,000,000. As consideration,
the Company granted the Psilos Investor Group detachable warrants to acquire
common stock at $0.50 per share. The loan bears interest at 8% per annum, with a
default rate of 12% per annum, and is due five years from original date of
issuance. As of December 31, 2002, the Psilos Investor Group funded an aggregate
of $692,809 of the $1,000,000, which sum is included in promissory notes and
debenture payable on the accompanying consolidated balance sheet. The Company
also granted warrants to purchase 364,694 shares of common stock. These warrants
were exercised during the first quarter of 2002 and the Company issued an
aggregate 340,317 shares of common stock, net of shares surrendered as exercise
price.
The Company valued the issued detachable warrants at $459,854 using the
Black-Scholes pricing model, thereby allocating a portion of the proceeds from
the debt to the warrants utilizing the relevant fair value of the debt and
warrants to the actual proceeds from the debt. This amount was recorded as a
discount to the related promissory notes and netted against the related debt.
Furthermore, the discount is being accreted to interest expense over the
five-year term of the underlying promissory notes. For the years ended December
31, 2002 and 2001, the amount accreted to interest expense was $90,708 and
$79,372, respectively. At December 31, 2002, the carrying value of the notes
amounted to $403,037 and is included in the promissory notes and debenture
payable in the accompanying consolidated balance sheet.
53
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 15--CONVERTIBLE DEBENTURE
The Company funded the cash portion of WellComm's acquisition price by selling a
6% convertible senior debenture in the aggregate principal amount of $2,000,000
to Palladin Opportunity Fund LLC pursuant to a Purchase Agreement dated February
4, 2002. Pursuant to the Purchase Agreement, the Company also issued a warrant
to Palladin to purchase an aggregate of up to 307,692 shares of common stock.
The outstanding principal and any accrued interest under the debenture are
payable in full on or before February 3, 2004. Palladin can also convert the
outstanding principal and any accrued interest at any time into common stock.
The conversion price (as of February 3, 2003, 12 months from issuance of
debenture) is $3.026 per share. The conversion price is subject to "reset" as of
the date that is 18 months after the issue date. On the date of reset, the
conversion price may be reduced if the average of closing bid prices for the
common stock during a period of 20 consecutive trading days ending on the date
which immediately precedes the reset date is less than the then applicable
conversion price, in which case, the reset conversion price will be reset to
equal such average. The warrant entitles Palladin to purchase shares of the
Company's common stock at the price of $5.50 per share.
Pursuant to the Purchase Agreement, Palladin also received a one-year option to
purchase an additional 6% convertible senior debenture in the face amount of
$1,000,000 and an additional warrant to purchase up to 153,846 shares of common
stock. In connection with this option, the Company recorded a liability of
$161,077, which is being accreted to interest expense over the one-year life of
the option. For the year ended December 31, 2002, the Company amortized $147,654
to offset interest expense.
Finally, pursuant to a related registration rights agreement, the Company
registered all of the shares of common stock underlying the Palladin debenture
and warrant in a registration statement on Form SB-2, which was declared
effective by the Securities and Exchange Commission in July 2002.
The Company valued the warrant issued to Palladin at $890,272 using the
Black-Scholes pricing model, thereby allocating a portion of the proceeds from
the debt to the warrant and the option using the relevant fair value of the debt
and warrant to the actual proceeds from the debenture. The Company recorded
$890,272 as a discount to the debenture and this amount will be accreted to
interest expense over the life of the debenture. For the year ended December 31,
2002, $408,041 of the discount was accreted to interest expense. The Company
also recorded $434,798 of interest expense from February 4, 2002 through
December 31, 2002 for the amortization of the portion of the beneficial
conversion value of the debenture. The amount allocated to the beneficial
conversion feature was $948,651. The beneficial conversion value represents the
difference between the fair market value of the common stock on the date the
debenture was sold and the price at which the debt could be converted into
common stock. As of December 31, 2002, the carrying value of the debenture
amounted to $842,839 and is included in the promissory notes and debenture
payable in the accompanying consolidated balance sheet. Lastly, in connection
with facilitating the transaction with Palladin, the Company recorded $416,610
of debt issuance costs comprised of $130,000 of cash, 6,200 shares of common
stock valued at $40,610 and a warrant to acquire 40,000 shares of common stock
at $5.00 valued at $246,000 per share issued to a third party that brokered the
transaction. These costs are being amortized over the life of the debenture. For
the year ended December 31, 2002, amortization expense amounted to $187,337.
54
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 16--CONVERTIBLE PROMISSORY NOTES PAYABLE
From November 2000 through May 2001, the Company issued several convertible
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 these promissory notes and accrued and unpaid interest thereon were
convertible into common stock at $10.00 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
440,000 shares of common stock at an exercise price of $10.00.
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 an Exchange Agreement discussed below, the Company accreted $365,143 of
the discount to interest expense.
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,
representing the principal amounts of the promissory notes, and $80,157, the
interest accrued thereon through May 15, 2001, into common stock at the exchange
price of $2.50 per share. In addition, as consideration for the exchange, the
Company reset the exercise price of the warrants to $2.50 per share.
Accordingly, the Company issued a total of 912,063 shares of common stock in the
exchange. For accounting purposes, the Company recorded the conversion at
$2,551,784 (net of the un-amortized discount) into equity. In connection with
the Company reducing the conversion price from $10.00 to $2.50 for the purpose
of inducing note holders to convert, during the second quarter, the Company
recorded debt conversion costs amounting to $794,219 which represented the
difference between the adjusted conversion price and the fair market value of
the Company's securities on the date of conversion.
NOTE 17--COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company is a party to various employment agreements with certain of its
officers and key employees. Such employment agreements range between three to
five years with annual salaries ranging from $100,000 to $175,000. The
aggregated annual minimum commitment under these agreement is $575,000.
Nature of Business
The Company is subject to risks and uncertainties common to growing technology
companies, including rapid technological developments, reliance on continued
development and acceptance of the Internet and health care applications
utilizing the Internet, intense competition and a limited operating history.
Significant Customers
Financial instruments, which may expose the Company to concentrations of credit
risk, consist primarily of accounts receivable. As of December 31, 2002, one
customer represented 46% of the total accounts receivable. For the year ended
December 31, 2002, the Company had two unrelated customers, which accounted for
42% and 30%, respectively, of total revenues. For the year ended December 31,
2001, the Company had one unrelated customer, which accounted for 84% of total
revenues.
55
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 17--COMMITMENTS AND CONTINGENCIES (cont'd)
Office Leases
During October 1999, the Company entered into a lease agreement for its
technology and product development offices. The lease was to expire on October
31, 2004 with annual rent of approximately $162,000 before annual escalations.
During December 2001, the Company was successful in negotiating out of this
lease by entering into an amendment\relocation lease agreement with the same
landlord for materially less space. The Company entered into an eighteen-month
lease, which requires monthly payment of approximately $3,600.
During April 2000, the Company entered into a lease agreement for its executive
offices. The lease expires June, 2005 and requires annual rent payments of
approximately $150,000 before annual escalations.
During May 2002, the Company entered into a lease agreement for its call center
located in Omaha, Nebraska. The lease expires during May 2007 with annual rent
of approximately $56,000 before annual escalations.
The Company's approximate future minimum annual rental payments including annual
escalations under the non-cancelable operating leases in effect as of December
31, 2002 are as follows:
For the year ending December 31:
-------------------------------
2003 $ 224,000
2004 206,000
2005 119,000
2006 56,000
2007 24,000
-------------
$ 629,000
=============
Rent expense for the years ended December 31, 2002 and 2001 amounted to
approximately $275,000 and $312,000, respectively.
56
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 17--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, the present Chief Executive Officer of Health Management.
Health Management is identified in the caption as a defendant. The complaint
alleges breach of contract, breach of fiduciary duty, breach of the covenant of
good faith and fair dealing, securities fraud, common law fraud, negligent
misrepresentation and racketeering activity. See Nazir Memon v. Frank Martin, et
al, CAM-L-04026-98. The allegations in this action reference circumstances
relating to Health Management's prior line of business of physician practice
management. In 1999, the court entered two orders dismissing the action "without
prejudice" for procedural reasons. Furthermore, in 1999 the Plaintiff filed for
bankruptcy protection. As part of the bankruptcy proceedings, the Plaintiff, the
present Chief Executive Officer and Health Management entered into a stipulation
limiting the period within which the Plaintiff can bring a new action alleging
Plaintiff's claims. Plaintiff sought to reactivate his prior state court action
in January 2001 (within the stipulated period), rather than commence a new
action. The stipulated time period for commencing a new action has expired.
By Opinion-Letter/Order dated August 22, 2001, the New Jersey Superior Court,
Civil Division, ruled in favor of I-trax by barring Plaintiff from reactivating
the civil action by the bankruptcy stipulation. By order date March 10, 2003,
the New Jersey Superior Court, Appellate Division likewise ruled in favor of
I-trax by affirmed the lower court decision. At this time, this matter has been
finally resolved in favor of I-trax because Plaintiff has exhausted all rights
to appeal.
Profit Sharing Plan
The Company maintains a 401(k) profit sharing plan covering qualified employees,
which includes employer participation in accordance with the provisions of the
Internal Revenue Code. The plan allows participants to make pretax contributions
and the Company to match certain percentages of employee contributions depending
on a number of factors, including the participant's length of service. The
profit sharing portion of the plan is discretionary and noncontributory. All
amounts contributed to the plan are deposited into a trust fund administered by
an independent trustee. As of December 31, 2002, the Company has made no
contributions.
Risk Based Contracts
The Company enters into risk-based contracts in certain disease management
arrangements. These contracts are generally for terms of three to five years and
provide that a percentage of the Company's fees may be refunded to a client if
the Company does not save the client a certain percentage of the expenses
incurred by individuals whose health is managed by the Company. As of December
31, 2002, the Company had not entered into these types of contracts.
NOTE 18--PROVISION FOR INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related to differences between the financial statement and tax bases of assets
and liabilities for financial statement and income tax reporting purposes.
Deferred tax assets and liabilities represent the future tax return consequences
of these temporary differences, which will either be taxable or deductible in
the year when the assets or liabilities are recovered or settled. Accordingly,
measurement of the deferred tax assets and liabilities attributable to the
book-tax basis differentials are computed at a rate of 34% federal and 6% state.
57
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 18--PROVISION FOR INCOME TAXES (cont'd)
As of December 31, 2002, the Company had deferred tax assets of approximately
$8,011,000 resulting from temporary differences and net operating loss
carry-forwards of approximately $19,036,000, which are available to offset
future taxable income, if any, through 2017. As utilization of the net operating
loss carry-forwards and temporary difference is not assured, the deferred tax
asset has been fully reserved through the recording of a 100% valuation
allowance.
The tax effects of temporary differences, loss carry-forwards and the valuation
allowance that give rise to deferred income tax assets are as follows:
December 31,
2002
---------------
Temporary differences:
Fair value of warrants $ 451,000
Compensation not currently deductible 1,088,000
Net operating losses 6,472,000
Less valuation allowance (8,011,000)
---------------
Deferred tax assets $ 0
===============
The reconciliation of the effective income tax rate to the federal
statutory rate for the years ended December 31, 2002 and 2001 is as
follows:
Federal income tax rate (34.0)%
Change in valuation allowance on net operating carry-forwards 34.0
---------------
Effective income tax rate: 0.0 %
===============
NOTE 19--STOCKHOLDERS' EQUITY
Amendment of the Company's Certificate of Incorporation
The Company amended its Certificate of Incorporation to increasing the number of
authorized shares of common stock from 50,000,000 to 100,000,000 shares on June
4, 2001. The holders of the majority of the Company's then outstanding shares of
common stock approved this amendment on May 21, 2001.
Unclaimed Shares and Reverse Stock Split Adjustment
The Company has been unable to locate one stockholder entitled to receive common
stock as a result of a 1999 merger. Accordingly, the Company has cancelled
45,141 unclaimed shares of common stock. In connection with a 1-for-5 reverse
stock split, the Company paid stockholders cash for all fractional shares that
resulted from the reverse stock split. Accordingly, a total of 191 shares were
cashed out.
58
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 19--STOCKHOLDERS' EQUITY (cont'd)
2001 Issuances of Common Stock and Warrants
In connection with the issuance of the promissory notes payable discussed in
Note 14, the Company granted the Psilos Investor Group detachable warrants to
acquire 0.5264 shares of common stock at $.50 per share for each $1 of the face
amount of the loan. As of December 31, 2002, the Psilos 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 received warrants to purchase
364,695 shares of common stock. The Company valued the detachable warrants
issued 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.
Effective as of June 25, 2001, the Company completed a private placement of
440,000 shares of its common stock at $2.50, 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 110,000 shares of common stock at an exercise price of $5.00
per share.
In connection with signing of their employment agreements, the Company's Chief
Executive and Operating Officers had purchased from the Company a total of
100,000 shares of common stock for a purchase price of $10 per share. The shares
were being purchased pursuant to a subscriptions agreement and a note and pledge
agreement. The note was for a principal amount of $999,500 (net of a $500
bonus), bearing interest at approximately 6% per annum, and provided that the
unpaid principal amount was due in five equal annual installments beginning on
December 29, 2001. During the second quarter 2001, pursuant to board
resolutions, such notes and pledge agreements were canceled. Thereafter, such
executive officers were granted an aggregate of 140,000 incentive stock options
pursuant to the Company's 2001 Equity Compensation Plan. Pursuant to FASB
Interpretation 44, variable accounting at the end of each interim period must be
applied to such options since they are deemed a re-pricing of the cancelled
pledge and note agreements. Accordingly, since the fair market value of common
stock was $6.25 per share at December 31, 2001 and such options have an exercise
of $2.75 per share, the Company recorded the intrinsic value of $3.50 per option
or $350,000 of compensation expense. The Company will continue to mark-to-market
these options at the end of each respective interim period until they are
exercised. In connection with the re-pricing, for the year ended December 31,
2002, the Company reversed a charge amounting to $250,000 for the mark-to-market
comparison.
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 convertible promissory
notes as discussed in Note 16, 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
$2.50 per share. Accordingly, during the second quarter, the Company issued a
total of 912,063 shares of common stock for conversion of such debt. In
addition, as consideration for the conversion, the Company reset the exercise
price of 440,000 warrants previously issued to such holders to $2.50 per share
from $10.00. For accounting purposes, the Company recorded the conversion at
$2,551,784 (net of un-amortized discount) into equity. In connection with the
Company reducing the conversion price from $10.00 to $2.50, the Company recorded
debt conversion costs amounting to $794,219, which represents the difference
between the adjusted conversion price and the fair market value of the Company's
securities on the date of conversion.
59
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 19--STOCKHOLDERS' EQUITY (cont'd)
2001 Issuances of Common Stock and Warrants (cont'd)
During 2001, the Company's Chief Executive and Operating Officers, and a Vice
President of Sales (and a shareholder), lent the Company funds for working
capital purposes. At various dates during the year, the officers elected to
convert a portion of their advances to the Company into equity. As consideration
for the advances, the Company granted such individuals detachable stock purchase
warrants to acquire 218,600 shares of common stock at exercise prices ranging
from $2.50 to $5 per share. The Company valued the detachable warrants issued to
such individuals using the Black-Scholes pricing model, thereby recording a
charge to earnings for financing costs of $630,469. Lastly, the Company issued
an aggregate of 247,465 shares of common stock to its Chief Executive and
Operating Officer in exchange for the conversion of a portion of their advances
amounting to $618,663.
During November and December of 2001, pursuant to a private placement, the
Company sold an aggregate of 842,395 shares of common stock for cash and
services for $2,042,958, net of $50,640 of direct costs.
During 2001, pursuant to various agreements and board resolutions, the Company
issued an aggregate of 120,307 shares of common stock to various consultants for
consideration of services received. The common stock was valued at the fair
market value of the stock on the date of issuance or $907,598 in the aggregate.
In addition, in July 2001, the Company granted an investment banker 36,000 five
year warrants with an exercise price of $3.75 for services from July 2001 to
July 2002. The Company valued such warrants at $72,000 by utilizing the
Black-Scholes pricing model. Pursuant to EITF 96-18, the Company, at the end of
each reporting period, must apply variable accounting treatment and re-value
these warrants. As of December 31, 2001, the Company recorded a charge to
earnings of $33,300 as an investor relations expense. For the year ended
December 31, 2002, the Company recorded a net reduction of $18,900 for investor
relations as a result of re-valuating the warrants on a quarterly basis.
Effective December 31, 2001, the Company terminated the salary deferment program
and granted each participant as consideration for participating in the program,
one warrant for each dollar deferred with exercise prices ranging between $2.50
to $5.00. Accordingly, the Company granted 142,197 warrants with an exercise
price of $2.50 each and 20,541 warrants with an exercise price of $5.00 each.
Additionally, individuals were given the option to convert the actual deferred
salaries into warrants with an exercise price of $.75 or elect to be paid in
cash over time. As of December 31, 2001, the Company had accrued $1,038,876 of
deferred salary of which $814,595 was converted into equity by granting such
individuals 465,483 warrants exercisable at $.75. Accordingly, the Company
granted an aggregate of 628,220 warrants for which it utilized the Black-Scholes
pricing model resulting in an additional charge to earnings of $3,100,635
representing additional compensation cost.
On December 31, 2001, the Company's issued 94,013 shares of common stock in
connection with the Chief Executive Officer exercising 94,013 warrants by
converting $70,510 of advance into equity. Such warrants were granted in
connection with the salary deferment program as discussed above.
As of December 31, 2001, the total number of warrants outstanding amounted to
1,703,502 with exercise prices ranging from $.50 to $5.00.
60
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 19--STOCKHOLDERS' EQUITY (cont'd)
2002 Issuance of Common Stock and Warrants
In connection with the sale of the $2,000,000 debenture, the Company also issued
a warrant to Palladin to purchase an aggregate of up to 307,692 shares of common
stock at the price of $5.50 per share. The Company valued the warrant at
$890,272 using the Black-Scholes pricing model, thereby allocating a portion of
the proceeds from the debt to the Warrant using the relevant fair value of the
debt and warrants to the actual proceeds from the debenture. The Company
recorded $890,272 as a discount to the debenture and this amount will be
accreted to interest expense over the life of the debenture. The Company also
recorded $434,798 of interest expense for the year ended December 31, 2002 for
amortization of the beneficial conversion value over the two year life of the
debenture.
On February 6, 2002, the Company acquired all of the issued and outstanding
common stock of WellComm as stipulated in the Merger Agreement dated January 28,
2002, as amended, by issuing 1,488,000 shares of common stock, granting 112,000
options to acquire common stock at a nominal price and paying $2,175,056 in
cash.
In connection with facilitating the transaction with Palladin, the Company paid
$130,000, issued 6,200 shares of common stock valued at $40,610 and granted a
warrant to acquire 40,000 shares of common stock at $5.00 per share to a third
party that brokered the transaction. Lastly, the Company issued 16,000 shares of
common stock valued at $104,800 to an employee for introducing the Company to
WellComm. The Company has valued the shares at the market price on day of
issuance or $145,408 and has valued the warrants utilizing the Black-Scholes
option-pricing model or $246,000.
During January 2002, the Company sold in a private placement an aggregate of
22,000 shares of common stock for $47,850, net of $7,150 of direct costs. This
private placement was commenced in November 2001. Additionally, pursuant to a
private placement commenced in February 2002, the Company sold 505,500 shares of
common stock, yielding proceeds of $1,895,626. In connection with the fund
raising efforts from an existing stockholder, the Company issued 13,333 shares
as consideration to such stockholder.
During the year ended December 31, 2002, pursuant to various agreements and
board approvals, the Company issued an aggregate of 23,708 shares of common
stock and granted 60,000 warrants to various consultants for services received
and for settlement of debt. The common stock was valued at fair market value on
the date of issuance or $114,167 in the aggregate, which was charged to
operations. The warrants were valued utilizing the Black-Scholes option-model.
Accordingly, the Company recorded a charge of $222,000 for investor relations as
a result of granting such warrants.
During the year ended December 31, 2002, the Company charged operations for
$163,200 related to the issuance of options to a former employee.
61
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 19--STOCKHOLDERS' EQUITY (cont'd)
2002 Issuances of Common Stock and Warrants (cont'd)
Effective October 31, 2002, the Company and one of its customers entered into a
three year Joint Marketing Agreement. Under this agreement, each party will,
using its reasonable discretion, market to its clients the other party's
products and services. In connection with the agreement, the Company granted
UICI, a New York Stock Exchange Company, a seven-year warrant to acquire up to
400,000 shares of common stock at $5.50 per share. The Company and UICI are also
parties to a license and maintenance agreement entered into on September 30,
2002, pursuant to which the Company granted UICI an exclusive license to certain
software in the student market and a non-exclusive license to such software for
use by UICI for its other businesses. The Company, utilizing the Black-Scholes
option-pricing model, has valued such warrant at approximately $1,360,000. Such
amount has been capitalized and it will be amortized on a monthly basis over the
life of the agreement of three years. For the year ended December 31, 2002, the
Company has charged $75,555.
During the year ended December 31, 2002, a total of 380,960, warrants and
options were exercised and accordingly, the Company issued an aggregate of
355,424 shares of common stock, net of shares surrendered as exercise price.
The following table summarizes the Company's activity as it relates to its
warrants for the year ended December 31, 2002:
Balance outstanding at January 1,2002 1,703,493
Quarter ended March 31, 2002
Granted 347,692
Exercised (376,232)
------------------
Balance outstanding at March 31, 2002 1,674,953
Quarter ended June 30, 2002
Granted --
Exercised --
------------------
Balance outstanding at June 30, 2002 1,674,953
Quarter ended September 30, 2002
Granted --
Exercised --
------------------
Balance outstanding at September 30, 2002 1,674,953
Quarter ended December 31, 2002
Granted 460,000
Exercised (2,000)
------------------
Balance outstanding at December 31, 2002 2,132,953
==================
Outstanding warrants are exercisable at prices ranging from $.75 to $5.50.
62
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 20--STOCK OPTIONS
Equity Compensation Plans and Non-Plan Stock Options
The Company has two equity compensation plans, which were adopted in 2000 and
2001. The purpose of the plans is to provide the opportunity for grants of
incentive stock options, nonqualified stock options and restricted stock to
employees of the Company and its subsidiaries, certain consultants and advisors
who perform services for the Company or its subsidiaries and non-employee
members of the Company's Board of Directors. The 2001 plan has several
additional features, including, a salary investment option grant program that
permits eligible employees to reduce their salary voluntarily as payment of
two-thirds of the fair market value of the underlying stock subject to the
option, with the remaining one-third of the fair market value payable as the
exercise price for the option and, if specifically implemented, automatic grant
program for non-employee members of the Board of Directors at periodic
intervals.
There are 600,000 shares of common stock authorized for issuance under the 2000
plan and 1,200,000 shares of common stock authorized for issuance under the 2001
plan. The number of shares authorized for issuance under the 2001 plan increases
automatically on the first day of each year beginning with the year 2002 by an
amount equal to the lesser of (a) three percent of the shares of common stock
then outstanding and (b) 200,000 shares. As a result, effective January 1, 2002,
the number of shares of common stock available for issuance under the 2001 plan
increased from 1,000,000 to 1,200,000.
The maximum aggregate number of shares of common stock that can be granted to
any individual during any calendar year is 70,000 under the 2000 plan and 80,000
and under the 2001 plan.
2000 Plan Grants
As of December 31, 2002, an aggregate of 430,134 options were outstanding under
the 2000 plan. Exercise prices of these options range from $5.00 to $10.00 per
share (depending on the fair market value of the stock on the date of grant).
2001 Plan Grants
As of December 31, 2002, an aggregate of 841,668 options were outstanding under
the 2001 plan. Exercise prices of these options range from $2.75 to $6.25
(depending on fair market value of the stock on the date of grant).
Non-Plan Stock Option Grants
As of December 31, 2002, the Company had outstanding an aggregate of 439,000
options outside of any stock option plan with exercise prices ranging from $.01
to $10.00 per share (depending on fair market value of the stock on the date of
grant).
63
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 20--STOCK OPTIONS (cont'd)
The table below summaries the activity in the Company's stock option plans for
the years ended December 31, 2001 and 2002:
Non-Qualified Non-Plan
Incentive Options Options Non-Qualified Total
Options
------------------------- -------------------- -------------------- -------------------- --------------------
Outstanding as of
January 1, 2001 343,000 180,445 89,000 612,445
Granted 120,500 346,926 120,000 587,426
-------------------- -------------------- -------------------- --------------------
Outstanding as of
December 31, 2001 463,500 527,371 209,000 1,199,871
Granted 342,878 95,700 230,000 668,578
Exercised -- (2,727) -- (2,727)
Forfeited/Expired (70,549) (84,371) -- (154,920)
-------------------- -------------------- -------------------- --------------------
Outstanding as of
December 31, 2002 735,829 535,973 439,000 1,710,802
==================== ==================== ==================== ====================
Vesting Dates:
December 31, 2003 179,342 137,670 75,834 392,846
December 31, 2004 119,641 27,667 39,168 186,476
December 31, 2005 68,048 19,335 26,668 114,051
December 31, 2006 10,000 -- -- 10,000
December 31, 2007 -- -- -- --
Thereafter -- -- 20,000 20,000
As of December 31, 2002, there were outstanding an aggregate of 987,429 of
exercisable plan and non-plan options with exercise prices ranging from $.01 to
$10.00.
The weighted average fair value of options granted during the year ended
December 31, 2002 amounted to $2,456,385.
For the year ended December 31, 2002 and 2001, the Company recorded $163,000 and
$29,741, respectively, of compensation.
NOTE 21--SUBSEQUENT EVENTS
Agreement to Acquire DxCG, Inc.
On November 8, 2002, the Company entered into a merger agreement to acquire
DxCG, Inc. for a total purchase price of approximately $10,000,000, of which the
Company intended to pay $6,000,000 in cash and $4,000,000 in common stock. Under
the terms of this agreement and at the time this agreement was executed, the
Company deposited $200,000 into an escrow account. This sum was intended to be
released to DxCG if DxCG terminated the merger agreement because the Company
failed to satisfy certain conditions to closing, including third party financing
for the cash portion of the purchase price. The Company did not secure the
financing.
64
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 21--SUBSEQUENT EVENTS (cont'd)
Related Party Transactions
During February 2003, pursuant to a promissory note, the former Chief Executive
Officer of WellComm, now a member of the Company's Board of Directors, advanced
$200,000 to the Company for working capital. The loan carries interest at 8% per
year and it matures during February 2004.
During the three months ended March 31, 2003, the Company's Chief Executive and
Operating Officers, along with certain stockholders advanced the Company
$540,000 for working capital. The Company's Chief Executive and Operating
Officers have committed to continue to fund the Company until it generates
positive cash flow from operations and raises additional funds in the private
placement described below, but at least through January 1, 2004.
Private Placement Memorandum
During March 2003, the Company commenced a private placement in order to raise
additional funds. The Company is offering to sell up to 1,000,000 Units of
equity securities, each consisting of one share of common stock and one warrant
to acquire one share of common stock.
65
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no changes and disagreements with accountants on accounting
or financial disclosure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16 (a) OF THE EXCHANGE ACT
See the information set forth in the section entitled "Proposal No. 1
Election of Directors" in I-trax's Proxy Statement for the 2003 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the end of the Company's fiscal year ended December 31, 2002 (the
"2003 Proxy Statement"), which is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
See the information set forth in the section entitled "Executive
Compensation" in the 2003 Proxy Statement, which is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the information set forth in the section entitled "Security
Ownership of Certain Beneficial Owners and Management" in the 2003 Proxy
Statement, which is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the information set forth in the section entitled "Certain
Relationships and Related Transactions" in the 2002 Proxy Statement, which is
incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
NUMBER EXHIBIT TITLE
------ -------------
2.1 Agreement and Plan of Merger dated December 14, 1999 between
I-Trax.com, Inc. and Member-Link Systems, Inc. (Incorporated by
reference to Exhibit 2.1 to I-Trax.com, Inc.'s Registration
Statement on Form 10-SB, Registration No. 000-30275, filed on April
10, 2000.)
2.2 Form of Agreement and Plan of Merger by and among I-Trax.com, Inc.,
I-trax, Inc. and I-Trax.com Acquisition Co. (Exhibit A to the
prospectus incorporated in I-trax, Inc.'s Registration Statement on
Form S-4, Registration No. 333-48862, filed on October 27, 2000.)
2.3 Merger Agreement dated as of January 28, 2002 by and among I-trax,
Inc., WC Acquisition, Inc., WellComm Group, Inc., John Blazek and
Carol Rehtmeyer. (Incorporated by reference to Exhibit 2.1 to
I-trax, Inc.'s Current Report on Form 8-K, filed on February 20,
2002.)
2.4 Amendment dated as of February 5, 2002 to Merger Agreement dated as
of January 28, 2002 by and among I-trax, Inc., WC Acquisition, Inc.,
WellComm Group, Inc., John Blazek and Carol Rehtmeyer. (Incorporated
by reference to Exhibit 2.2 to I-trax, Inc.'s Current Report on Form
8-K, filed on February 20, 2002.)
66
3.1 Certificate of Incorporation of I-trax, Inc. filed September 15,
2000 (Incorporated by reference to Exhibit 3.1 to I-trax, Inc.'s
Registration Statement on Form S-4, Registration No. 333-48862,
filed on October 27, 2000.)
3.2 Certificate of Amendment to Certificate of Incorporation of I-trax,
Inc. filed June 4, 2001. (Incorporated by reference to Exhibit 3.2
to I-trax, Inc.'s Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2001, filed on April 4, 2002.)
3.3 Certificate of Amendment to Certificate of Incorporation of I-trax,
Inc. filed on January 2, 2003.
3.4 By-laws of I-trax, Inc. (Incorporated by reference to Exhibit 3.2 to
I-trax, Inc.'s Registration Statement on Form S-4, Amendment No.1,
Registration No. 333-48862, filed on December 22, 2000.)
4.1 Form of Common Stock certificate of I-trax, Inc.'s Common Stock.
(Incorporated by reference to Exhibit 4.1 to I-trax, Inc.'s Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2001,
filed on April 4, 2002.)
4.2 6% Convertible Senior Debenture dated February 4, 2002 issued by
I-trax, Inc. to Palladin Opportunity Fund LLC. (Incorporated by
reference to Exhibit 4.1 to I-trax, Inc.'s Current Report on Form
8-K, filed on February 8, 2002.)
10.1 Office Lease dated October 22, 1999 by and between Reston Plaza I &
II, LLC and Member-Link Systems, Inc. (Incorporated by reference to
Exhibit 10.3 to I-Trax.com, Inc.'s Registration Statement on Form
10-SB, Registration No. 000-30275, filed on April 10, 2000.)
10.2 Amendment Office Lease (Relocation) made as of January 31, 2002 by
and between TMT Reston I & II, Inc. (as successor to Reston Plaza I
& II, LLC) and I-trax Health Management Solutions, Inc. (as
successor to Member-Link Systems, Inc.). (Incorporated by reference
to Exhibit 10.2 to I-trax, Inc.'s Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2001, filed on April 4, 2002.)
10.3 Lease Agreement dated April 10, 2000 between I-Trax.com, Inc. and
OLS Office Partners, L.P. (Incorporated by reference to Exhibit 10.1
to I-Trax.com, Inc.'s Quarterly Report Form 10-QSB for the quarter
ended June 30, 2000, filed on August 15, 2000.)
10.4 Lease Agreement dated May 28, 2002, between I-trax, Inc. and F & J
Enterprises, Inc. dba Bedford Plaza. (Incorporated by reference to
Exhibit 10.23 to I-trax, Inc.'s Registration Statement on Form SB-2,
Amendment No. 1, Registration No. 333-87134, filed on December 22,
2000.)
10.5 Contribution and Exchange Agreement dated as of September 22, 2000
by and among I-Trax.com, Inc., I-trax, Inc., iSummit Partners LLC
(d/b/a MyFamilyMD), and Stuart Ditchek, A. David Fishman, and
Granton Marketing Nederland BV. (Incorporated by reference to
Exhibit 10.7 to I-trax, Inc.'s Registration Statement on Form S-4,
Registration No. 333-48862, filed on October 27, 2000.)
10.6 Side Letter Agreement dated September 22, 2000 to the Contribution
and Exchange Agreement dated as of September 22, 2000 by and among
I-Trax.com, Inc., I-trax, Inc., iSummit Partners, LLC (d/b/a
MyFamilyMD), and Stuart Ditchek, A. David Fishman, and Granton
Marketing Nederland BV. (Incorporated by reference to Exhibit 10.8
to I-trax, Inc.'s Registration Statement on Form S-4, Registration
No. 333-48862, filed on October 27, 2000.)
67
10.7 Amendment, effective as of February 7, 2001, to the Contribution and
Exchange Agreement by and among I-Trax.com, Inc. and I-trax, Inc.,
on the one hand, and Stuart Ditchek, A. David Fishman, Granton
Marketing Nederland BV and iSummit Partners, LLC (d/b/a MyFamilyMD),
on the other hand, dated as of September 22, 2000. (Incorporated by
reference to Exhibit 10.1 to I-trax, Inc.'s Current Report on Form
8-K, filed on February 22, 2001.)
10.8 Amendments, effective as of December 31, 2001, to the Contribution
and Exchange Agreement by and among I-Trax.com, Inc. and I-trax,
Inc., on the one hand, and Stuart Ditchek, A. David Fishman, Granton
Marketing Nederland BV and iSummit Partners, LLC (d/b/a MyFamilyMD),
on the other hand, dated as of September 22, 2000. (Incorporated by
reference to Exhibit 10.7 to I-trax, Inc.'s Annual Report on Form
10-KSB for the fiscal year ended December 31, 2001, filed on April
4, 2002.)
10.9 Employment Agreement entered into on September 28, 2000, effective
as of January 1, 2000 between I-Trax.com, Inc. and David C.
McCormack. (Incorporated by reference to Exhibit 10.15 to I-trax,
Inc.'s Registration Statement on Form S-4, Registration No.
333-48862, filed on October 27, 2000.)
10.10 Employment Agreement effective as of December 29, 2000 between
I-trax Health Management Solutions, Inc. (f/k/a I-Trax.com, Inc.)
and Frank A. Martin. (Incorporated by reference to Exhibit 10.17 to
I-trax Health Management Solutions, Inc. (f/k/a I-Trax.com, Inc.)
Annual Report on Form 10-KSB for the fiscal year ended December 31,
2000, filed on April 2, 2001.)
10.11 Employment Agreement effective as of December 29, 2000 between
I-trax Health Management Solutions, Inc. (f/k/a I-Trax.com, Inc.)
and Gary Reiss. (Incorporated by reference to Exhibit 10.19 to
I-trax Health Management Solutions, Inc. (f/k/a I-Trax.com, Inc.)
Annual Report on Form 10-KSB for the fiscal year ended December 31,
2001, filed on April 2, 2001.)
10.12 Consulting Agreement dated as of July 1, 2002, as amended, between
I-trax, Inc. and William S. Wheeler. (Incorporated by reference to
Exhibit 10.1 to I-trax, Inc.'s Quarterly Report on Form 10-QSB for
the quarter ended September 30, 2002, filed on November 14, 2002.)
10.13 I-Trax.com, Inc. 2000 Equity Compensation Plan. (Incorporated by
reference to Exhibit 10.16 to I-Trax.com's Registration Statement on
Form 10-SB, Registration No. 000-30275.)
10.14 I-trax, Inc. 2001 Equity Compensation Plan. (Incorporated by
reference to Attachment to I-trax's 2001 Preliminary Proxy Statement
on Schedule 14A, filed on April 20, 2001.)
10.15 Amended and Restated Amended and Restated Promissory Note and
Warrant Purchase Agreement dated as of March 2, 2001 among I-trax,
Inc. and the Lenders (as defined therein) including form of Stock
Purchase Warrant issued to Lenders attached thereto as Exhibit A and
form of Stock Purchase Warrant issued to Lenders attached thereto as
Exhibit B. (Incorporated by reference to Exhibit 10.21 to I-trax,
Inc.'s Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2000, filed on April 2, 2001.)
10.16 Purchase Agreement dated as of February 4, 2002 between I-trax, Inc.
and Palladin Opportunity Fund LLC. (Incorporated by reference to
Exhibit 10.1 to I-trax, Inc.'s Current Report on Form 8-K, filed on
February 8, 2002.)
68
10.17 Registration Rights Agreement dated as of February 4, 2002 between
I-trax, Inc. and Palladin Opportunity Fund LLC. (Incorporated by
reference to Exhibit 10.2 to I-trax, Inc.'s Current Report on Form
8-K, filed on February 8, 2002.)
10.18 Warrant to Purchase Common Stock of I-trax, Inc. dated February 4,
2002 issued by I-trax, Inc. to Palladin Opportunity Fund LLC.
(Incorporated by reference to Exhibit 10.3 to I-trax, Inc.'s Current
Report on Form 8-K, filed on February 8, 2002.)
10.19 Registration Rights Agreement dated as of February 5, 2002 by and
among I-trax, Inc., and John Blazek, as an attorney-in-fact, for
each stockholder of WellComm Group, Inc. (Incorporated by reference
to Exhibit 10.1 to I-trax, Inc.'s Current Report on Form 8-K, filed
on February 20, 2002.)
10.20 Employment Agreement dated as of February 5, 2002 between I-trax
Health Management Solutions, Inc. and John Blazek. (Incorporated by
reference to Exhibit 10.2 to I-trax, Inc.'s Current Report on Form
8-K, filed on February 20, 2002.)
10.21 Employment Agreement dated as of February 5, 2002 between I-trax
Health Management Solutions, Inc. and Carol Rehtmeyer. (Incorporated
by reference to Exhibit 10.3 to I-trax, Inc.'s Current Report on
Form 8-K, filed on February 20, 2002.)
10.22 Employment Agreement dated as of February 5, 2002 between I-trax
Health Management Solutions, Inc. and Jane Ludwig. (Incorporated by
reference to Exhibit 10.4 to I-trax, Inc.'s Current Report on Form
8-K, filed on February 20, 2002.)
10.23 License and Maintenance Agreement dated as of September 30, 2002,
between I-trax, Inc. and UICI, Inc. (Incorporated by reference to
Exhibit 10.1 to I-trax, Inc.'s Current Report on Form 8-k for filed
on October 8, 2002.)
10.24 Employment Agreement dated as of October 15, 2002 between I-trax
Health Management Solutions, Inc. and John Palumbo.
21 Subsidiaries of I-trax, Inc.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
We filed a current report on Form 8-K with the Securities and Exchange
Commission on October 8, 2002 to report the execution of a License and
Maintenance Agreement between UICI and us.
We filed a current report on Form 8-K with the Securities and Exchange
Commission on November 5, 2002 to report certain Regulation FD disclosures.
We filed a current report on Form 8-K with the Securities and Exchange
Commission on November 11, 2002 to report certain Regulation FD disclosures.
We filed a current report on Form 8-K with the Securities and Exchange
Commission on February 12, 2003 to report the dismissal of
PricewaterhouseCoopers, LLP as our auditors.
We filed a current report on Form 8-K with the Securities and Exchange
Commission on February 19, 2003 to report the engagement of Goldstein Golub
Kessler LLP as our auditors.
69
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, we carried
out an evaluation under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer of the effectiveness of our
disclosure controls and procedures. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are effective to ensure that information we are required
to disclose in reports filed or submitted under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. Subsequent to
the date of this evaluation, there were no significant changes in our internal
controls or in other factors that could significantly affect the disclosure
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
70
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized as of April 14, 2003.
I-TRAX, INC.
By: /s/ Frank A. Martin
-------------------
Frank A. Martin, Chairman and
Chief Executive Officer
By: /s/ Anthony Tomaro
------------------
Anthony Tomaro, Chief Financial Officer
(Principal Financial and Accounting
Officer)
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
--------------------- -------------------------- ----------------
/s/ Frank A. Martin Chairman, Chief Executive Officer April 14, 2003
--------------------
Frank A. Martin and Director
/s/ Carol Rehtmeyer Director April 14, 2003
---------------------
Carol Rehtmeyer
/s/ John Blazek Director April 14, 2003
---------------------
John Blazek
/s/ David R. Bock. Director April 14, 2003
---------------------
David R. Bock
--------------------- Director April ___, 2003
Philip D. Green
/s/ David Nash Director April 14, 2003
---------------------
Dr. Craig A. Jones
/s/ Michael M.E. Johns Director April 14, 2003
---------------------
Dr. Michael M.E. Johns
--------------------- Director April ___, 2003
Dr. Arthur N. Leibowitz
/s/ John R. Palumbo Director April 14, 2003
---------------------
John R. Palumbo
/s/ William S. Wheeler Director April 14, 2003
---------------------
William S. Wheeler
71
CERTIFICATION
I, Frank A. Martin, certify that:
1. I have reviewed this annual report on Form 10-KSB of I-trax, Inc.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
/s/ Frank A. Martin
-------------------
Frank A. Martin
Chief Executive Officer
72
CERTIFICATION
I, Anthony Tomaro, certify that:
1. I have reviewed this annual report on Form 10-KSB of I-trax, Inc.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
/s/ Anthony Tomaro, CPA
-----------------------
Anthony Tomaro, CPA
Chief Financial Officer
73