U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB/A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: December 31, 2003
[ ] 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.
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(Name of small business issuer in its charter)
Delaware 23-3057155
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Logan Square
130 N. 18th Street, Suite 2615
Philadelphia, Pennsylvania 19103
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(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: $4,188,860.
The aggregate market value of the voting common stock held by non-affiliates
computed with reference to the price at which the stock was sold on March 25,
2003 on the American Stock Exchange was $112,921,667. As of March 25, 2003, the
number of outstanding shares of common stock, par value $.001 per share, was
28,374,852.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the issuer's definitive proxy
statement for its 2004 Annual Meeting of Stockholders are incorporated by
reference in Part III of this report.
Transitional Small Business Disclosure Format (Check one): [ ] Yes [X] No
Explanatory Statement
This amendment amends I-trax, Inc.'s Annual Report on Form 10-KSB for
the year ended December 31, 2003, filed with the Securities and Exchange
Commission on April 8, 2004 and amended on June 3, 2004, to change the value
assigned to I-trax's common stock for purposes of matters related to the
acquisition of CHD Meridian Healthcare from $4.96 to $3.63 in Managements
Discussion and Analysis of Financial Condition and Results of Operations (Item
6) and in Note 19 to I-trax's financial statements.
This amendment also deletes from the Annual Report, as amended, (1) the
consolidated financial statements of Meridian Healthcare Associates, Inc. and
subsidiaries (d/b/a CHD Meridian Healthcare) for the years ended December 31,
2003, 2002 and 2001 and (2) unaudited combined condensed balance sheet of I-trax
and CHD Meridian Healthcare on a pro forma basis as if the merger had been
consummated on December 31, 2003 and the unaudited combined condensed statements
of operations on a pro forma basis as if the merger had been consummated on
January 1, 2002. These financial statements and pro forma information are
contained in an amendment filed on August 11, 2004 to I-trax's Current Report on
Form 8-K, originally filed on March 30, 2004 and previously amended on June 2,
2004.
Except as described above, no other changes have been made to our
Annual Report on Form 10-KSB/A for the year ended December 31, 2003 filed on
June 3, 2004.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations of I-trax, Inc. and its subsidiaries should
be reviewed in conjunction with our audited financial statements and related
notes appearing in this Annual Report on Form 10-KSB for the fiscal years ended
December 31, 2003 and 2002.
I-trax is a combination of two companies that merged on March 19, 2004:
I-trax, Inc. and Meridian Occupational Healthcare Associates, Inc., a private
company, which does business as CHD Meridian Healthcare. Although this Annual
Report on Form 10-KSB describes the business of the merged companies, because
the merger occurred subsequent to the year ended December 31, 2003, certain
portions of this report, including the results of operations presented in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, are limited to I-trax. To present the performance and results of
operations of the merged companies for the years ended December 31, 2003 and
2002, we are including in this report the balance sheet of CHD Meridian
Healthcare as of December 31, 2003 and the statements of operations for the
years ended December 31, 2003 and 2002, and the unaudited combined condensed
balance sheet of I-trax and CHD Meridian Healthcare on a pro forma basis as if
the merger had been consummated on December 31, 2003 and the unaudited combined
condensed statements of operations on a pro forma basis as if the merger had
been consummated on January 1, 2002.
The following discussion also contains forward-looking statements,
which are based upon current expectations and involve a number of risks and
uncertainties. In order for I-trax 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 most important factor is our ability
successfully to integrate our operations and health management programs with the
operations and services of CHD Meridian Healthcare and successfully introduce to
our market place our combined products and services. This and other risks
concerning the merged companies business are discussed above beginning on page
7. The acquisition is discussed further below.
Our consolidated financial statements and applicable notes are prepared
in accordance with the generally accepted accounting principles in the United
States of America. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets and
liabilities and the reported amounts of revenues and expenses during the covered
periods. We base our estimates and judgments on our historical experience and on
various other factors that we believe are reasonable under the circumstances. We
1
evaluate our estimates and judgments, including those related to revenue
recognition, bad debts, restructuring costs, and goodwill and other intangible
assets on an ongoing basis. Notwithstanding these efforts, there can be no
assurance that actual results will not differ from the respective amount of
those estimates.
Business Description
Following I-trax and CHD Meridian Healthcare merger, we offer two
categories of services, which can be integrated or blended as necessary or
appropriate based on each client's needs. The first category includes on site
services such as occupation health, primary care, corporate health and pharmacy,
which were historically offered by CHD Meridian Healthcare. The second category
includes personalized health management programs, which were historically
offered by I-trax.
Also as the result of the merger, we believe we are the nation's
largest provider of on-site corporate health management services. Our health
management services are designed to allow employers to contract directly for a
wide range of employee healthcare needs. We can deliver these services at or
near the client's work site by opening, staffing and managing a clinic or
pharmacy dedicated to the client and its employees, or remotely by using the
Internet and our state-of-the-art Care Communications Center staffed with
trained nurses and other healthcare professionals 24 hours per day, 7 days per
week. Our array of services provides each client with flexibility to meet its
specific pharmacy, primary care, occupational health, corporate health,
wellness, lifestyle management or disease management needs. Pursuant to
multi-year agreements, our clients can offer their employees, dependents and
retirees any combination of our various services which integrate seamlessly,
through on-site or off-site delivery platforms, or as a component of or
complement to existing health plan options.
Our primary target market is large and mid-sized self-insured employers
and business consortia. These entities are more likely to derive immediate and
meaningful financial benefit from our services because of their scale and focus
on controlling healthcare costs.
We currently operate approximately 160 locations in 32 states. We also
maintain contracts with approximately 150 clients, including many leading
employers. Our clients pay us directly for our services and include automotive
and automotive parts manufacturers, consumer products manufacturers, large
financial institutions, health plans, integrated delivery networks, and third
party administrators. Our client retention rate is high because we establish
strong client relationships, which are supported by the critical nature of our
services, the benefits achieved by employer and employee constituents, and the
utilization of multi-year service contracts.
Corporate Overview; Acquisition of CHD Meridian Healthcare
I-trax was incorporated in Delaware on September 15, 2000 at the
direction of the board of directors of I-trax Health Management Solutions, Inc.,
or 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
re-organization.
The holding company structure has allowed us greater flexibility in our
operations and expansion and diversification plans, including in the acquisition
of CHD Meridian Healthcare and WellComm Group, Inc.
On March 19, 2004 we finalized the acquisition of CHD Meridian
Healthcare. Under the merger agreement, we delivered to CHD Meridian Healthcare
stockholders 10,000,000 shares of I-trax common stock, 400,000 shares of I-trax
Series A Convertible Preferred Stock, each of which is convertible into 10
shares of I-trax common stock, and paid $25,508,000 in cash. Immediately prior
to the merger, CHD Meridian Healthcare also redeemed certain of its then
outstanding shares of common stock and options to purchase common stock for
which it paid approximately $9,492,000 in the aggregate. Further, if CHD
Meridian Healthcare, continuing its operations following the closing of the
merger as a subsidiary of I-trax, achieves calendar 2004 milestones for earnings
before interest, taxes, depreciation and amortization, or EBITDA, additional
shares of common stock will be payable as follows: If EBITDA equals or exceeds
$8,100,000, the number of such additional shares of common stock payable will be
3,473,280; the number of such shares increases proportionately up to a maximum
of 3,859,200 shares if EBITDA equals or exceeds $9,000,000. Any escrowed shares
that are not released will be returned to I-trax for cancellation. Further, the
escrowed shares are not deemed outstanding for accounting purposes until
released.
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In the merger, I-trax assumed all of CHD Meridian Healthcare's
liabilities, which equaled approximately $21,000,000.
Immediately following the closing of the merger, I-trax redeemed from
former CHD Meridian Healthcare stockholders that participated in the merger, pro
rata, an aggregate of 200,000 shares of Series A Convertible Preferred Stock at
their original issue price of $25.00 per share.
I-trax obtained the cash portion of the merger consideration by selling
1,000,000 shares of Series A Convertible Preferred Stock at a purchase price of
$25.00 per share for gross proceeds of $25,000,000 by borrowing $12,000,000 on a
new $20,000,000 senior secured debt facility from a national lender.
Under the merger agreement and the related financing documents, we are
required to register for resale the shares of common stock issued in the merger
and issuable upon conversion of shares of Series A Convertible Preferred Stock
issued in the merger and in the related financing.
The estimated purchase price we paid for CHD Meridian Healthcare,
valuing our common stock at $3.63 per share, the average closing share price for
the three days prior and the three days after the announcement of the merger,
and before the issuance of any of the earn-out shares, is approximately $73.0
million. The acquisition will be accounted for as a purchase. As such, the
purchase price will be allocated to the estimated fair values of the assets
acquired and liabilities assumed. If the escrow shares are paid to former CHD
Meridian Healthcare in accordance with the terms of the merger agreement, the
purchase price of the acquisition will increase, and the additional purchase
price will be also allocated to the estimated fair values of the assets acquired
and liabilities assumed. We will obtain a third-party valuation of the acquired
intangible assets.
The following are our unaudited pro forma results of operations giving
effect to the acquisition of CHD Meridian Healthcare as though the transaction
had occurred on January 1, 2002.
Year ended Year ended
December 31, December 31,
2003 2002
------------------ -------------------
Sales $ 117,599,000 $ 107,384,000
Expenses 124,159,000 117,844,000
------------------ -------------------
Net loss $ (6,560,000) $ (10,460,000)
================== ===================
We acquired WellComm effective February 6, 2002. In the acquisition, we
paid the WellComm stockholders approximately $2,200,000 in cash and 1,488,000
shares of our common stock. We also issued to each of two senior officers of
WellComm options to acquire 56,000 shares of our common stock at a nominal
exercise price. Because the acquisition was structured as a merger, we also
assume all of WellComm's liabilities, which equaled approximately $775,000.
We funded this acquisition by selling a 6% convertible senior debenture
in the aggregate principal amount of $2,000,000 to Palladin Opportunity Fund
LLC. We also issued Palladin a warrant to purchase up to 307,692 shares of our
common stock. As of March 19, 2004, Palladin has converted all amounts
outstanding under the debenture into common stock and has exercised the warrant
in full at the conversion price and exercise price of $1.75 per share.
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."
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Key Trends and Analytical Points
The following is a summary of key trends and analytical points covered
in greater detail in management's discussion and analysis:
o CHD Meridian Healthcare Acquisition: On March 19, 2004, we finalized
the acquisition of CHD Meridian Healthcare. We will commence reporting
financial results that include CHD Meridian Healthcare operations
beginning as of April 1, 2004. When we begin to report CHD Meridian
Healthcare revenue, operational expenses, general and administration
expenses, depreciation and amortization expenses and interest expense
will also increase.
o Revenue and Cost of Revenue: Revenue and cost of revenue increased
modestly from year ended December 31, 2002 to year ended December 31,
2003. In accordance with management's expectation, we continued to
increase our service revenue and decrease our technology revenue.
o Operating Expenses: Operating expenses have decreased from year ended
December 31, 2002 to year ended December 31, 2003, with salary and
related benefits, research and development, depreciation and
amortization and impairment charges related to intangible assets
declining. The decline is partially offset by an increase in marketing
and publicity expenses.
o Other Income and Expenses: Interest expense and financing costs
increased from year ended December 31, 2002 to year ended December 31,
2003.
o Working Capital: We finished the year ended December 31, 2003, with
negative working capital. However, as of March 31, 2004, we had
estimated pro forma working capital, which together with operating
cash flow and amounts available under a newly established secured
credit facility should be sufficient to conduct our operations for the
next twelve months.
Results of Operations
The following discussion of results of operations is limited to the
historic business of I-trax as in effect as of December 31, 2003.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002.
Revenue for the year ended December 31, 2003 was $4,188,860, an
increase of $256,950 or 7% from $3,931,910 for the year ended December 31, 2002.
Total revenue was comprised of two components: (1) prevention and care services
revenue of $2,612,941; and (2) technology license and services revenue of
$1,575,919. Of the total technology license and services revenue, approximately
$1,400,000 represents revenue from a perpetual license of CarePrime(R) and
MyFamilyMD(TM) to UICI, Inc. This license also grants UICI an exclusive right to
use CarePrime(R) and MyFamilyMD(TM) in the student health market. We contracted
this license and software development in the third quarter of 2002 and we
recognize it based on deliverables throughout 2002 and 2003. We expect to
commence reporting CHD Meridian Healthcare revenue beginning as of April 1, 2004
pursuant to a letter of understanding between the two companies.
Cost of revenue for the year ended December 31, 2003 was $1,371,870, an
increase of 12% from $1,229,044 for the year ended December 31, 2002. The
increase is attributable to the personnel costs required to service our
prevention and care services contracts. Cost of revenue will increase when we
begin to report CHD Meridian Healthcare revenue as of April 1, 2004.
Software development costs amounting to $1,237,713 were capitalized for
the year ended December 31, 2003, since the development stage of these products
had reached technological feasibility. For the year ended December 31, 2002, we
charged to operations $410,220 in research and development costs. We expensed
such costs during the year ended December 31, 2002 because the products under
development had not reached technological feasibility and therefore, the related
expense could not be capitalized. We expect to continue to spend funds to
improve our technology and to add functionality to our technology products. Such
products include the
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MyFamilyMD(TM) application and its MedWizard(R) tools, the CarePrime(TM)
application, which interacts with MyFamilyMD(TM) and its MedWizard(R) tools, and
the Health-e-Coordinator(TM) application, which is a disease management
platform.
General and administrative expenses (excluding salary and related
benefits which are discussed separately below) increased from $1,721,685 for the
year ended December 31, 2002 to $1,740,710 for the year ended December 31, 2003,
an immaterial increase of $19,025. Our ability to control general and
administrative expenses is attributable to increased efficiencies and
implementation of stringent budgetary controls. General and administrative
expenses will increase when we begin to report CHD Meridian Healthcare revenue
and associated expenses as of April 1, 2004.
Salary and related benefits were $2,468,468 for the year ended December
31, 2003 as compared to $4,233,209 for the year ended December 31, 2002. This
decrease amounted to $1,764,741 or 42%. The two major reasons for the large
decrease in salary and related benefits were: (1) capitalization of
approximately $805,000 of development salaries to software development costs in
2003, and (2) implementation of a variable pay plan in December 2002. Pursuant
to the plan, all employees accepted a 10% salary reduction in order to fund the
variable plan. If certain financial and personal goals were met during 2003, the
employees were eligible to participate in the plan, thus potentially receiving
additional compensation in excess of the accepted 10% salary reduction. Because
we only met the financial goals established under the plan during the first
quarter of 2003, the net reduction in salary associated with the plan amounted
to approximately $500,000. The balance of the decrease in salary and related
benefits is the result of consolidating positions and improving efficiencies.
Salary and related benefits will increase effective April 1, 2004 when we begin
to report CHD Meridian Healthcare revenue and related expenses.
Depreciation and amortization expenses were $1,702,469 for the year
ended December 31, 2003, as compared to $2,045,461 for the year ended December
31, 2002. The decrease is primarily attributable to the write down of certain
intangible assets during the last quarter of 2002.
During 2002, we incurred an impairment charge of $1,648,332 in
connection with certain intangible assets (customer relations) acquired in the
WellComm acquisition. During the quarter ended December 31, 2003, we recorded an
impairment charge of approximately $458,000 representing the un-amortized
portion of covenants not to compete attributable to the founder of WellComm, who
passed away.
Marketing and publicity expenses were $1,762,567 for the year ended
December 31, 2003 as compared to $773,963 for the year ended December 31, 2002.
The increase of 128% or $988,604 is a direct result of augmented marketing and
investor relation campaigns to promote I-trax in the capital markets and its
products in the wellness and disease management market. The marketing and
publicity expense for 2003 includes a non-cash charge of approximately
$1,414,000, for the issuance of common stock, granting of warrants and
contribution of common stock by certain of our stockholders to an investor
relations firm.
Interest expense and financing costs for the year ended December 31,
2003 were $2,405,015 an increase of $1,297,383 or 117% from $1,107,632 for the
year ended December 31, 2002. For the year ended December 31, 2003, interest
expense includes charges of approximately $1,880,826 related to the debenture
and related warrants issued to Palladin Opportunity Fund, LLC. Of this amount,
$224,350 represents interest of 6% on the debenture for the year ended December
31, 2003; $1,125,085 represents amortization of the value assigned to the
original beneficial conversion value of the Palladin debenture and the
associated warrants and additional charges and amortization for the further
beneficial conversion value caused by the June 2003 reset of the conversion
price of such debenture and the exercise price of the associated warrants; and
$531,391 represents an accelerated charge to interest expense for the portion of
the debenture converted during the year ended December 31, 2003. During the
period, Palladin converted $1,483,351 of principal outstanding under the
debenture into common stock. 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. The remaining balance of
interest expense of approximately $524,189 is associated with interest on other
debt and the amortization of the value of warrants granted to certain
shareholders for loans made to us. Interest expense will increase effective
April 1, 2004 to reflect interest payable in connection with $12,000,000
outstanding under a new $20,000,000 senior secured credit facility established
to fund a portion of the CHD Meridian Healthcare acquisition price.
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Amortization of debt issuance and conversion costs was $336,783 and
$187,337 for the years ended December 31, 2003 and 2002, respectively. These
amounts represented costs incurred in selling the $2,000,000 debenture to
Palladin and were amortized over the two-year life of the debenture. During the
year ended December 31, 2003, however, we recorded a one-time charge of $122,228
in connection with the re-pricing of the exercise price of the warrants issued
to the third party that brokered the Palladin investment and increasing the
number of shares covered by the warrant as per the broker agreement.
Under the terms of the registration rights agreement entered in
connection with the private placement of common stock and warrants closed on
October 31, 2003, we were required to file with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933, as
amended, covering the resale of all the common stock purchased and the common
stock underlying the warrants within 30 days of the placement's closing.
Additionally, under the same registration rights agreement, we were required to
use our best efforts to cause such registration statement to become effective
within 90 days of closing of the placement. The registration rights agreement
further provided that if the registration statement was not filed, or did not
become effective within the defined time period, I-trax would have been required
to pay each holder an amount in cash, as liquidated damages, equal to 1.5% per
month of the aggregate purchase price paid by such holders. The registration
statement was filed within the allowed time, and was declared effective by the
Commission on February 17, 2004.
In accordance with EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," the
fair value of the warrants issued in the October 2003 private placement was
accounted for as a liability, with an offsetting reduction to additional paid-in
capital received in the private placement. The warrant liability was
reclassified to equity as of February 17, 2004, the effective date of the
registration statement. Such transaction did not impact our financial position
or business operations.
The fair value of the warrants was estimated using the Black-Scholes
option-pricing model with the following assumptions: no dividends; risk-free
interest rate of 4%; the contractual life of 5 years and volatility of 112%. The
fair value of the warrants at December 31, 2003 was estimated to be
approximately $2,760,000, which reflects an increase in fair value of $301,305
from the time the warrants were granted. This amount has been charged to
operations as an increase in common stock warrants. The fair value of the
warrants increased by approximately an additional $350,000 from December 31,
2003 to February 17, 2004. This increase will be charged in the statement of
operations for the quarter ended March 31, 2004 as an increase in common stock
warrants.
The adjustments required by EITF 00-19 were required because of a
private placement subscription agreement, which specified a penalty if we did
not timely register the common stock underlying the warrants issued in the
transaction. The Securities and Exchange Commission declared the related
registration statement effective within the contractual deadline and we did not
incur any penalties. The adjustments for EITF 00-19 had no impact on our working
capital, liquidity, or business operations.
During January 2003, in connection with the termination of our
agreement to acquire DxCG, Inc., a Boston-based predictive modeling company, we
charged $200,000 to earnings. This sum was paid to DxCG following DxCG's
termination of the merger agreement because certain conditions to closing,
including third party financing for the cash portion of the purchase price, were
not satisfied.
No provision or benefit for Federal or state income taxes has been
recorded for the years ended December 31, 2003 and 2002, because we have
incurred net operating losses and have no carry-back potential. Based on a
number of factors, including the lack of a history of profits and net operating
loss carry-forward limitations due to changes in ownership, management believes
that there is sufficient uncertainty regarding the realization of deferred tax
assets such that a valuation allowance has been provided. At December 31, 2003,
our net operating loss carry-forwards of approximately $23,700,000 were
available to reduce future taxable income. These losses expire at various times
beginning in 2004. These carry-forward losses are also of no value unless we are
profitable. To the extent that we are profitable, the utilization of these
carry-forward losses may be limited as a result of substantial changes in our
stock ownership in the past along with the effect of the CHD Meridian Healthcare
acquisition. The amount of the limitation has not yet been calculated.
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For the year ended December 31, 2003, our net loss was $8,058,579,
inclusive of $500,000 of income resulting from a life insurance policy pay out
following the death of an executive officer, compared to a net loss of
$9,424,973 for the year ended December 31, 2002, a decrease of 14%.
Liquidity and Capital Resources
The following discussion concerns the liquidity and capital resources
of I-trax, with the exception of portions specifically addressing the CHD
Meridian Healthcare acquisition and certain pro forma information subsequent to
the CHD Meridian Healthcare acquisition.
Working Capital
As of December 31, 2003, we had a working capital deficiency of
$290,042.
On March 19, 2004, we completed the CHD Meridian Healthcare
acquisition. We obtained some of the cash merger consideration by selling
1,000,000 shares of Series A Convertible Preferred Stock at a purchase price of
$25.00 per share for gross proceeds of $25 million.
In addition, on March 19, 2004, contemporaneously with the CHD Meridian
Healthcare acquisition, we obtained a permanent $20 million senior secured
credit facility from Bank of America, N.A., and borrowed $12 million under this
facility to fund the balance of the cash merger consideration. The credit
facility expires on April 1, 2007. The credit facility has a $6 million term
loan commitment with a $14 million revolving credit commitment, which is reduced
by letter of credit liabilities, which currently amount to $3.25 million. The
credit facility is secured by substantially all of our assets. At any time prior
to June 1, 2004, the borrowings under the revolving credit commitment may not
exceed $10 million. From June 1, 2004 until November 1, 2005, the borrowings
under the revolving credit commitment may not exceed 80% of eligible receivables
and 50% of eligible fixed assets. Borrowings, at our election, may be either
Base rate or Eurodollar rate loans. Base rate loans bear interest at the prime
rate as published from time to time, plus up to 0.75% per annum depending on our
coverage rations. The Eurodollar rate loans bear interest at the Eurodollar rate
plus up to 3.0% per annum likewise depending on our coverage ratios. As of March
26, 2004, we had outstanding $6 million under the term loan, $6 million under
the revolving loan and an aggregate of $3.25 million under letters of credit.
The credit facility includes certain financial covenants customary for
the amount of duration of this commitment. As of the date of this filing, we
were in compliance with all such covenants.
We are required to make twelve principal installment payments of $0.5
million each quarter beginning on July 1, 2004.
As of March 31, 2004, we had estimated pro forma working capital of
approximately $5,500,000. We believe that this amount, together with our
operating cash flow and amounts available to be drawn from the credit facility,
is sufficient to meet our working capital and operating expense requirements for
the next twelve months. We also believe that cash flow from operations, existing
working capital and additional availability under the credit facility should be
sufficient to fund long-term operations, capital expenditures and expansion of
our existing client base. If we have other long-term capital needs, however,
such as for acquisition capital, additional equity or debt financings may be
needed.
Sources and Uses of Cash
Despite negative cash flows from operations, which amounted to
$3,509,478 for the year ended December 31, 2003 and $2,871,201 for the year
ended December 31, 2002, we have been able to secure funds to support our
operations. During the year ended December 31, 2002, we secured funding by
selling equity securities, issuing a debenture and receiving advances from
officers, directors and other related parties, which aggregated approximately
$4,800,000. Of the $4,800,000, approximately $2,200,000 was used to acquire
WellComm, $190,000 was used to repay debt and the remainder was used to fund
operations. During the year ended December 31, 2003, we borrowed, net of
repayments, approximately $600,000 from officers, related parties and certain
stockholders. Additionally, during the year ended December 31, 2003, we raised
an aggregate of $5,010,000 in two private
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placements of our securities and upon the exercise of warrants to acquire
720,866 shares of common stock, which yielded approximately $970,000. The funds
were used primarily to fund operations, continue the investment in our
technology and satisfy certain liabilities, including the pay off of a $300,000
credit line.
Current Liabilities. As of December 31, 2003, our current liabilities
were $1,601,524, of which $280,000 was due to related parties. The remainder of
current liabilities of $1,321,524 was comprised primarily of trade payables of
$605,689, accrued expenses of $361,168, $114,452 of short term loans and capital
lease obligations and $250,000 of deferred revenue. We have good relationships
with all of our vendors.
Long-Term Debt. As of December 31, 2003, the face value of our
long-term debt was $1,358,808 (with a carrying value of $797,805), and was held
by two investor groups. Psilos Group Partners and affiliated entities were owed
$617,809 for which principal and interest was not due until March 2006. The
balance of $740,999 was outstanding under the convertible debenture held by
Palladin, which was not due until February 2005 (after receiving a one year
extension effective December 31, 2003).
Pay-off of Liabilities. In connection with obtaining a senior secured
credit facility to fund the CHD Meridian Healthcare acquisition, we repaid all
related party loans and advances, and all other outstanding loans on March 19,
2004. Accordingly, contemporaneously with the closing of the CHD Meridian
Healthcare acquisition, we repaid an aggregate of $1,233,932 of which $289,897
was for related party loans and accrued interest and $944,035 was for principal
and accrued interest under various promissory notes.
In the first quarter of 2004, Palladin converted the remaining balance
of its debenture into 427,106 shares of our common stock.
Equity Sales. Under a private placement initiated in June 2003, we
raised approximately $1,000,000 in cash, converted approximately $1,169,270 in
related party loans, of which $1,037,038 represented principal and $132,232
represented interest, and converted $121,997 of deferred salaries by selling or
issuing, as applicable, common stock. In this offering, we issued a total of
1,311,682 shares.
During August 2003 we commenced a private placement whereby we offered
as a unit, two shares of common stock and a warrant to purchase an additional
share of common stock exercisable at $3.00, the market price of our common stock
on the date we commenced the private placement, for a unit purchase price of $5.
The maximum amount offered was $3,500,000. Through October 31, 2003, the end of
the private placement, we issued a total of 1,400,000 shares of common stock and
granted warrants to purchase 700,000 additional shares. We realized net proceeds
of $3,037,894 after expenses as of December 31, 2003.
For the year ended December 31, 2003, we received approximately
$973,000 from exercises of warrants.
Material Commitments
The following schedules summarizes the contractual obligations of
I-trax and CHD Meridian Healthcare by the indicated period as of December 31,
2003:
For the year ending I-trax CHD Meridian Total
December 31: Healthcare
--------------------------- ---------------- --------------- --------------
2004 $ 206,000 $ 1,294,000 $ 1,500,000
2005 119,000 986,000 1,105,000
2006 56,000 927,000 983,000
2007 24,000 780,000 804,000
2008 -- 651,000 651,000
Thereafter -- 574,000 574,000
---------------- --------------- --------------
Total future payments $ 405,000 $ 5,212,000 $ 5,617,000
================ =============== ==============
8
Related Party Transactions
During February 2003, we repaid $140,000 of the $225,000 loan
outstanding to a relative of our former chief operating officer.
During February 2003, pursuant to two promissory notes, two of our
former directors advanced us $200,000 for working capital. The notes accrued
interest at 8% per year and matured in February 2004.
As of June 30, 2003, our chief executive officer and former chief
operating officer, along with a director, advanced us a total of $540,000 for
working capital at an interest rate of 8% per year.
As of December 31, 2003, we repaid an aggregate of $99,622 to our chief
executive officer and other related parties. As of March 22, 2004, we repaid all
related party loans, and interest accrued on such loans, in the aggregate amount
$289,897.
In connection with the death of a senior executive officer, in October
2003 we were entitled to receive proceeds of $500,000 from a key-person life
insurance policy we maintained on the life of such senior executive officer. The
proceeds from the life insurance policy were pledged as security for loans made
to us in 2002 and 2003 by the deceased executive officer, a former director and
a key employee. Accordingly, the life insurance company was instructed to
disburse such proceeds directly to the note holders in partial satisfaction of
such loans.
Critical Accounting Policies
The following critical accounting policies concern the business of
I-trax at December 31, 2003. The policies will be reassessed effective as of
April 1, 2004 when we begin to report revenue, expenses and other financial
information concerning CHD Meridian Healthcare.
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 year
ended December 31, 2003 and 2002, we recorded an impairment charge of $458,252
and $1,648,332, respectively in connection with certain intangible assets
acquired in the WellComm acquisition. For 2003, the charge related to the
unamortized portion of covenants not to compete directly attributable to the
founder of WellComm. The founder of WellComm passed away in 2003. For 2002, the
charge related to the write off of a portion of an intangible asset associated
with customer relations.
Revenue Recognition
Technology Revenue. We derive our revenue pursuant to different
contract types, including perpetual software licenses, subscription licenses and
custom development services, all of which may include support services revenue
such as licensed software maintenance, training, consulting and web hosting
arrangements. As described below, significant management judgments and estimates
must be made and used in connection with the revenue recognized in any
accounting period. Material differences may result in the amount and timing of
our revenue for any period if our management made different judgments or
utilized different estimates.
We license our software products for a specific term or on a perpetual
basis. Most of our license contracts also require maintenance and support. We
apply the provisions of Statement of Position 97-2, "Software Revenue
Recognition," as amended by Statement of Position 98-9 "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions" to all
transactions involving the sale of software products and hardware transactions
where the software is not incidental. For hardware transactions where software
is not incidental, we do not unbundle our fee and, accordingly, 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
9
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 the product is delivered to a common
carrier.
We assess collection based on a number of factors, including past
transaction history with the customer and the 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. Accordingly, we defer revenue for the amount equivalent to
the fair value of the undelivered elements.
We recognize revenue for maintenance services ratably over the contract
term. Our training and consulting services are billed based on hourly rates, and
we generally recognize revenue as these services are performed. However, upon
execution of a contract, we determine whether or not any services included
within the arrangement require us to perform significant work either to alter
the underlying software or to build additional complex interfaces so that the
software performs as the customer requests. If these services are included as
part of an arrangement, we recognize the fee using the percentage of completion
method. We determine the percentage of completion based on our estimate of costs
incurred to date compared with the total costs budgeted to complete the project.
Services Revenue. We recognize service revenue as services are
rendered. We contract with our customers to provide services based on an agreed
upon monthly fee, a per-call charge or a combination of both.
Upon execution of a contract for services, we assess whether the fee
associated with our revenue transactions is fixed and determinable and whether
or not collection is reasonably assured. We assess whether the fee is fixed and
determinable based on the payment terms associated with such contract. If a
significant portion of a fee is due after our normal payment terms, which are
generally 30 to 90 days from invoice date, we account for such fee as services
are provided.
We also enter into risk-sharing contracts. These contracts are
generally for a term of three to five years, provides for automatic renewal, and
may provide that a percentage of our fee is refundable ("performance based")
based on achieving a targeted percentage reduction in a customer's healthcare
costs.
Material Equity Transactions
In 2003, 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. Please refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Sources and Uses of Funds" and "Item
5-Recent Sales of Unregistered Securities" above.
10
ITEM 7. FINANCIAL STATEMENTS
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003
AND
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Item Page No.
Report of Independent Registered Public Accounting Firm...........................................12
Balance sheet at December 31, 2003................................................................13
Statements of operations for the years ended December 31, 2003 and 2002...........................14
Statement of stockholders' equity for the years ended December 31, 2003 and 2002..................15
Statements of cash flows for the years ended December 31, 2003 and 2002...........................17
Notes to consolidated financial statements........................................................19
11
Report of Independent Registered Public Accounting Firm
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, 2003, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period 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 audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits 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
audits provide 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, 2003, and the results of its operations and cash flows for each
of the two years in the period then ended in conformity with U.S. generally
accepted accounting principles.
Goldstein Golub Kessler LLP
New York, New York
February 16, 2004, except for Note 19,
as to which the date is as of March 19, 2004.
12
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
ASSETS
Current assets
Cash $ 573,774
Accounts receivable, net 549,229
Prepaid expenses 150,631
Other current assets 37,848
-----------------
Total current assets 1,311,482
-----------------
Office equipment, furniture, leasehold improvements and
software development costs, net 1,514,767
Deposit on acquisition of perpetual license 160,000
Deferred marketing costs, net 831,109
Deferred acquisition costs 84,783
Debt issuance costs, net 34,718
Goodwill 8,424,062
Intangible assets, net 1,217,609
Security deposits 24,659
-----------------
Total assets $ 13,603,189
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 605,689
Accrued expenses 361,168
Due to officers and related parties 280,000
Capital lease payable 26,814
Note payable - other, net of discount of $12,362 87,638
Deferred revenue 240,215
-----------------
Total current liabilities 1,601,524
-----------------
Common stock warrants 2,760,105
Capital lease obligation, net of current portion 58,626
Promissory notes and debenture payable, net of discount of $561,003 797,805
-----------------
Total liabilities 5,218,060
-----------------
Commitments and contingencies
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,
13,966,817 shares issued and outstanding 13,966
Additional paid in capital 47,276,266
Accumulated deficit (38,905,103)
-----------------
Total stockholders' equity 8,385,129
-----------------
Total liabilities and stockholders' equity $ 13,603,189
=================
See accompanying notes to financial statements.
13
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
------------ ------------
Revenue:
Technology licenses $ 1,575,919 $ 2,225,308
Services 2,612,941 1,706,602
------------ ------------
Total revenue 4,188,860 3,931,910
------------ ------------
Cost of revenue:
Technology licenses 63,363 67,788
Services 1,308,507 1,161,256
------------ ------------
Total cost of revenue 1,371,870 1,229,044
------------ ------------
Gross profit 2,816,990 2,702,866
Operating expenses:
General and administrative 1,740,710 1,721,685
Salary and related benefits 2,468,468 4,233,209
Research and development -- 410,220
Depreciation and amortization 1,702,469 2,045,461
Marketing and publicity, includes non-cash charges of $1,414,000
for 2003 1,762,567 773,963
Impairment charge related to intangible assets 458,252 1,648,332
------------ ------------
Total operating expenses 8,132,466 10,832,870
------------ ------------
Operating loss (5,315,476) (8,130,004)
------------ ------------
Other income (expenses):
Proceeds from life insurance company 500,000 --
Costs in connection with terminated acquisition (200,000) --
Amortization of debt issuance and conversion costs (336,783) (187,337)
Interest expense and financing costs (2,405,015) (1,107,632)
Increase in fair value of common stock warrants (301,305) --
------------ ------------
Total other income (expenses) (2,743,103) (1,294,969)
------------ ------------
Net loss $ (8,058,579) $ (9,424,973)
============ ============
Loss per common share:
Basic and diluted $ (.74) $ (1.04)
============ ============
Weighted average number of shares outstanding: 10,904,553 9,096,958
============ ============
See accompanying notes to financial statements.
14
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
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.
15
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Common Stock Additional Total
----------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
-------------- ------------- ---------------- -------------- ---------------
Balances at December 31, 2002 9,372,727 $ 9,372 $ 39,236,119 $ (30,846,524) $ 8,398,967
Issuance of compensatory stock options -- -- 27,942 -- 27,942
Mark to market of warrants granted for
investor relations services and stock
options granted to a former employee -- -- (4,097) -- (4,097)
Fair market value of detachable warrants
and additional beneficial conversion
value in connection with re-pricing of
convertible debenture -- -- 1,007,833 -- 1,007,833
Issuance of common stock for services 332,760 333 522,375 -- 522,708
Contribution of common stock given by
shareholders to vendor for services
rendered to the Company -- -- 246,240 -- 246,240
Proceeds from sale of common stock and
exercise of warrants, net of costs and
common stock warrants liability 2,675,838 2,676 2,549,373 -- 2,552,049
Issuance of warrants for services -- -- 649,448 -- 649,448
Fair value of detachable warrants issued in
connection with convertible note -- -- 268,000 -- 268,000
Issuance of common stock for conversion of
related party debt and assigned debt 668,152 668 1,168,602 -- 1,169,270
Issuance of common stock for conversion of
deferred salaries 69,711 69 121,928 -- 121,997
Issuance of common stock upon conversion of
debenture 847,629 848 1,482,503 -- 1,483,351
Net loss for the year ended December 31, 2003 -- -- -- (8,058,579) (8,058,579)
-------------- ------------- ---------------- -------------- ---------------
Balances at December 31, 2003 13,966,817 $ 13,966 $ 47,276,266 $ (38,905,103) $ 8,385,129
============== ============= ================ ============== ===============
See accompanying notes to financial statements.
16
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
----------- -----------
Operating activities:
Net loss $(8,058,579) $(9,424,973)
Adjustments to reconcile net loss to net cash used in operating
activities:
Accretion of discount on notes payable charged to interest 858,887 498,751
expense
Accretion of beneficial conversion value of debenture 1,168,285 434,798
Amortization of option liability (13,423) (147,655)
Amortization of debt issuance costs 336,783 187,337
Depreciation and amortization 1,702,469 2,045,461
Impairment charge related to intangible assets 458,252 1,648,332
Expenses for compensatory stock options and warrants 23,845 --
Bad debt expense 58,829 --
Issuance of securities for services 1,418,396 230,467
Increase in fair value of common stock warrants 301,305 --
Write-off of deposit on terminated acquisition 200,000 --
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in:
Accounts receivable 8,406 (119,888)
Prepaid expenses (73,062) 54,828
Other current assets (16,888) (19,045)
(Decrease) increase in:
Accounts payable (333,582) 235,686
Accrued expenses (409,694) 273,608
Deferred revenue (1,139,707) 1,231,092
----------- -----------
Net cash used in operating activities (3,509,478) (2,871,201)
----------- -----------
Investing activities:
Proceeds from repayment of note receivable -- 72,437
Increase in transaction costs (84,783) --
Proceeds from release of security deposit 6,905 38,839
Deposit on potential acquisition -- (200,000)
Deposit on acquisition of perpetual license (160,000) --
Property, equipment and software development costs acquired (1,278,891) (68,040)
Net cash to acquire WellComm Group, Inc. -- (2,199,136)
----------- -----------
Net cash used in investing activities (1,516,769) (2,355,900)
----------- -----------
Financing activities:
Principal payments on capital leases (71,372) (21,918)
Proceeds from credit line payable -- 125,000
Repayments to credit line (300,000) --
Repayment to related parties (239,622) (190,000)
Proceeds from related parties 740,000 700,000
Proceeds from notes payable 350,000 --
Proceeds from sale of Common Stock and exercise of warrants 5,010,849 1,944,976
Proceeds from sale of option -- 161,078
Proceeds from issuance of debenture -- 1,838,923
Notes payable repayments (250,000) --
----------- -----------
Net cash provided by financing activities 5,239,855 4,558,059
----------- -----------
Net increase (decrease) in cash 213,608 (669,042)
Cash at beginning of period 360,166 1,029,208
----------- -----------
Cash at end of period $ 573,774 $ 360,166
=========== ===========
Supplemental disclosure of non-cash flow information:
Cash paid during the year for: Interest $ 83,833 $ 15,163
=========== ===========
17
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
(Continues from previous page.)
2003 2002
=============== ===========
Schedule of non-cash investing activities:
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 promissory
notes, related party advances, and accrued interest $ 1,169,270 $ --
=============== ===========
Issuance of common stock in connection with conversion of deferred
salaries $ 121,997 $ --
=============== ===========
Issuance of common stock in connection with conversion of debenture
payable $ 1,483,351 $ --
=============== ===========
Accrued interest expense on debenture payable and promissory notes $ 394,538 $ --
=============== ===========
Proceeds from life insurance company in connection with the death of
executive officer $ 500,000 $ --
=============== ===========
Repayments to related parties from pledged life insurance proceeds $ 500,000 $ --
=============== ===========
Issuance of common stock in connection with conversion of accounts
payable $ -- $ 16,667
=============== ===========
Acquisition of office equipment in connection with capital lease
obligation $ -- $ 107,709
=============== ===========
Issuance of warrants in connection with marketing agreement $ -- $ 1,360,000
=============== ===========
Fair market value of detachable warrants and beneficial conversion
value in connection with re-pricing $ 1,007,833 $ --
=============== ===========
Fair market value of warrants granted in connection with convertible
note $ 268,000 $ --
=============== ===========
See accompanying notes to financial statements.
18
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
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. ("Health
Management") completed a holding company reorganization. At the effective time
of the reorganization, 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, 2003, the Company had two wholly owned subsidiaries: Health
Management, a corporation, and I-trax Health Management Solutions, LLC (formerly
known as WellComm Group, LLC) ("Health Management, LLC"), a single member
limited liability company. The Company formed Health Management, LLC to conduct
the activities of WellComm Group, Inc., which the Company acquired on February
6, 2002, as further described in Note 4. The Company conducts its operations
through Health Management and Health Management, 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 Company entered into a merger agreement, as amended, on December 26, 2003,
with Meridian Occupational Healthcare Associates, Inc, (doing business as CHD
Meridian Healthcare) ("CHD Meridian"), a privately held company and a provider
of outsourced, employer-sponsored healthcare services. The merger was
consummated on March 19, 2004. (See note 19 for additional information.)
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.
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, 2003 and 2002, 5,469,286 and
3,843,755, respectively, of options and warrants were excluded from the diluted
loss per share computation, as their effect would be anti-dilutive.
19
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
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, 2003
The carrying value of cash, accounts receivable, accounts payable and accrued
expenses 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 $1,358,808.
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. For the year ended
December 31, 2003, the Company did not incur any research and development costs.
Such costs amounted to $410,220 for the year ended December 31, 2002.
Revenue Recognition
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.
The Company recognizes revenue from technology licenses in accordance with
Statement of Position ("SOP") 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.
20
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Revenue Recognition (cont'd)
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.
Software Development Costs
In accordance with the provisions of AICPA Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," the Company capitalizes all application development costs and
expenses all preliminary project and post-implementation costs in the
accompanying statement of operations.
For the year ended December 31, 2003, the Company capitalized $1,237,713 of
software developed for internal use. The Company expects to start amortizing
such software development costs during the first quarter of 2004.
Deferred Marketing Costs
Deferred marketing costs consist of the value of the warrant to acquire 400,000
shares of common stock issued to a customer in October 2002 in connection with a
three-year joint marketing agreement. The warrant 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. For the years ended December 31, 2003 and 2002, $453,336
and $75,555, respectively was charged to amortization expense. The unamortized
portion of the deferred marketing costs was $831,109 and is reflected on the
accompanying consolidated balance sheet.
Marketing and publicity costs are expensed as incurred and totaled $1,762,567
and $773,963 for the years ended December 31, 2003 and 2002, respectively.
Marketing and publicity costs for 2003 included a non- cash charge of
approximately $1,414,000 in addition to the amortization of the value of the
warrant referred to in the preceding paragraph.
Debt Issuance Costs
The Company recorded a total of $416,610 of debt issuance costs in connection
with the sale of a 6% senior debenture in February 2002. These costs consisted
of a cash payment of $130,000 and common stock and warrants valued at $286,610,
which were issued to an placement agent as a finder fee. The Company amortized
these costs on a straight-line basis over the two-year life of the debenture.
Accordingly, for the years ended December 31, 2003 and 2002, amortization of
debt issuance costs amounted to $214,555 and $187,337, respectively.
Additionally, during June 2003, in connection with the re-pricing of the
warrants granted to such placement agent, the Company charged an additional
$122,228 as amortization of debt issuance costs, bringing the total amortization
expense for the year ended December 31, 2003 to $336,783. As of December 31,
2003, the remaining un-amortized portion of debt issuance costs amounted to
$34,718.
21
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
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, 2003 and
2002.
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.
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 based on the fair value at the
grant dates for those awards consistent with the method of SFAS 123, the
Company's net loss per share would have been increased to the following pro
forma amounts:
22
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
2003 2002
------------ ------------
Net loss as reported $ (8,058,579) $ (9,424,973)
Add back intrinsic value of the options issued to
employee and charged to operations 27,942 163,200
Deduct total stock based employee compensation
expense determined under fair value based methods
for all awards (2,952,906) (2,844,904)
------------ ------------
Pro forma net loss $(10,983,543) $(12,106,677)
============ ============
Basic and diluted net loss per share as reported $ (.74) $ (1.04)
Pro forma basic and diluted net loss per share $ (1.01) $ (1.33)
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 112%
Risk-free interest rate 4%
Expected life 5 year
Segment Reporting
The Company evaluates segment performance based on income from operations.
Through December 31, 2003, the Company has not measured segment performance
because the Company has operated in only one segment.
New Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board issued Statement No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity, effective for the fiscal period beginning after December
15, 2003. Statement No. 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. To the extent that the Company is either now or in the
future required to repurchase shares of common stock, the adoption of Statement
No. 150 would require the Company to classify common stock subject to redemption
as a liability as of January 1, 2004, based on the latest revision.
Prospectively, changes in the liability with the exception of redemptions will
be included in pre-tax income.
23
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
New Accounting Pronouncements (cont'd)
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-21 ("Issue 00-21"), Revenue Arrangements with Multiple
Deliverables. Issue 00-21 provides guidance on how to account for arrangements
that involve delivery or performance of multiple products, services and/or
rights to use assets. The adoption of Issue 00-21 is not expected to have an
impact on the Company's consolidated 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--OFFICE EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Office equipment, furniture and leasehold improvements are as follows at
December 31, 2003:
Office equipment $ 889,720
Furniture 145,422
Software Development Costs 1,237,713
Leasehold improvements 50,000
--------------
Less accumulated depreciation and amortization (808,088)
--------------
$ 1,514,767
==============
Certain office equipment is pledged as collateral for related capital lease
obligations. (See Note 8.)
Depreciation and amortization expense for the years ended December 31, 2003 and
2002 amounted to $176,903 and $216,762, respectively.
NOTE 4--ACQUISITION OF WELLCOMM GROUP
On February 6, 2002, the Company acquired all of the issued and outstanding
common stock of WellComm Group, Inc. ("WellComm Group"). WellComm Group was a
disease management company. As stipulated in the Merger Agreement dated January
28, 2002, as amended, the Company issued 1,488,000 shares of common stock valued
at $9,746,400, granted 112,000 options valued at $733,600 to acquire common
stock at a nominal exercise price and paid $2,199,136 in cash. In addition, the
Company issued 16,000 shares of common stock, valued at $104,800 and charged to
operations as compensation expense, to an employee for introducing the Company
to WellComm Group. The aggregate acquisition price amounted to $12,679,136. 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 was January 31, 2002.
24
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 4--ACQUISITION OF WELLCOMM GROUP (cont'd)
The Company now conducts the former operations of WellComm Group through Health
Management, LLC. The financial statements include the former operations of
WellComm Group from February 1, 2002 forward.
The purchase price allocation was based on a formal valuation prepared by an
independent appraiser. Of the total purchase price, the Company allocated
$1,648,000 to non-compete covenants, $4,501,563 to customer relationships,
$330,237 to net assets acquired with the remainder of $6,199,336 to goodwill.
Non-compete covenants are being amortized on a straight-line basis over a
four-year life and customer relationships are amortized over a three-year life.
The following table summarizes the actual fair values of the assets acquired and
liabilities assumed at the acquisition date:
Current assets $ 651,474
Property and equipment 190,000
Intangible assets 6,149,563
Goodwill 6,199,336
-----------
Total assets acquired $13,190,373
===========
Current liabilities $ 482,882
Long term debt 28,355
-----------
Total liabilities assumed 511,237
-----------
Net assets acquired $12,679,136
===========
The following pro forma results of operations of the Company give effect to the
acquisition of WellComm Group as though the acquisition was consummated as of
January 1, 2002.
For the year
ended December
31, 2002
------------
Total revenue $ 4,185,689
============
Total expenses $ 13,688,289
============
Net loss $ (9,502,600)
============
Pro forma net loss per share:
Basic and Diluted $ (1.03)
============
Weighted average number of shares outstanding:
Basic and Diluted 9,220,958
============
25
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 5--GOODWILL AND INTANGIBLE ASSETS
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.
There were no changes in the carrying amount of goodwill for the year ended
December 31, 2003.
The components of identifiable intangible assets, which are included in the
consolidated balance sheet as of December 31, 2003, are as follows:
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
------------------ --------------- -----------------
Amortized intangible assets:
Non-compete covenants 1,648,000 (1,198,815) 449,185
Customer relationships 4,501,563 (3,733,139) 768,424
------------------ --------------- -----------------
Total $ 6,149,563 $ (4,931,954) $ 1,217,609
================== =============== =================
During the quarter ended December 31, 2003, the Company recorded an impairment
charge of approximately $458,000 representing the unamortized portion of
covenants not to compete directly attributable to the founder of WellComm Group
who passed away. For the year ended December 31, 2002, the Company recorded an
impairment charge amounting to $1,648,332 related to customer relationships.
Total amortization expense for all the intangibles amounted to $1,072,230 for
the year ended December 31, 2003. The estimated amortization expense for the
years ending December 31, 2004 and 2005 is $1,095,944 and $37,185, respectively.
NOTE 6--DEPOSIT ON ACQUISITION OF PERPETUAL LICENSE
On April 25, 2003 the Company entered into a Marketing and Services Agreement
with BioSignia, Inc. ("BioSignia"), whereby the Company committed to pay
BioSignia certain minimum payments in return for allowing the Company to private
label BioSignia's technology, products and services in connections with the
Company's products and services. BioSignia provides products and services in the
field of predictive modeling, health economics, epidemiology and prospective
medicine. Pursuant to the agreement, the Company paid BioSignia $160,000.
Subsequent to December 31, 2003, the Company and BioSignia entered into a new
agreement whereby for an additional $575,000, the Company acquired a perpetual
license to BioSignia's technology and products. Accordingly, as of December 31,
2003, the Company classified the $160,000 paid under the original agreement as a
deposit on perpetual license.
26
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 7--ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 2003:
Interest $ 157,280
Salaries 203,888
-------------
Total $ 361,168
=============
NOTE 8--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. Such lease terminated during October 2003.
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,
2003 are as follows:
For the year ending December 31:
2004 $ 32,836
2005 26,257
2006 24,064
2007 14,037
-------------
Total future payments 97,194
Less amount representing interest (11,754)
-------------
Present value of minimum lease payments 85,440
Less current portion 26,814
-------------
Net long term portion $ 58,626
=============
At December 31, 2003 equipment under capital leases is carried at a book value
of $79,424.
27
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 9--RELATED PARTIES TRANSACTIONS
During February 2003, the Company repaid $140,000 of the $225,000 loan
outstanding to a relative of the Company's Chief Operating Officer.
During February 2003, pursuant to two promissory notes, two former directors of
the Company advanced $200,000 to the Company for working capital. The notes
accrued interest at 8% per year and matured in February 2004.
As of June 30, 2003, the Company's Chief Executive and Operating Officers, along
with a director of the Company, advanced the Company a total of $540,000 for
working capital at an interest rate of 8% per year.
As of December 31, 2003, the Company repaid an aggregate of $99,622 to its Chief
Executive Officer and other related parties.
During May 2003, certain stockholders of the Company contributed a total of
163,073 shares of common stock valued at $246,240 to an investor relations
consultant for services rendered. Accordingly, the Company charged this amount
to operations.
In June 2003, certain of the Company's officers, directors and a venture capital
fund managed by the Company's Chief Executive Officer converted a total
$909,421, comprised of loans and advances of $790,697 (includes $75,000 from a
venture fund managed by the Company's Chief Executive Officer) and accrued
interest of $118,724, into 519,667 shares of common stock at $1.75 per share. In
addition, certain of the same parties assigned additional loans in the principal
amount of $246,342, and accrued interest of $13,507 thereon, to an investor
relations firm, which thereafter converted the assigned loans into common stock
also at $1.75 per share. The price of the conversions was determined with
reference to a private placement of common stock to third parties completed by
the Company contemporaneously with the conversions as disclosed in Note 17
below.
In connection with the death of a senior executive officer of the Company,
during 2003, the Company was entitled to receive proceeds of $500,000 from a
key-person life insurance policy maintained by the Company on the life of such
senior executive officer. The proceeds from the life insurance policy were
pledged as security for loans made to the Company in 2002 and 2003 by the
deceased senior executive officer, a former director and a key employee.
Accordingly, the life insurance company was instructed to disburse such proceeds
directly to the related note holders in partial satisfaction of such loans.
As of December 31, 2003, the amount due to officers and related parties amounted
to $280,000, which are classified as current liabilities since they are due on
demand. On March 19, 2004, the Company repaid such related party advances along
with accrued interest. See Note 19.
Interest expense associated with related party loans and advances amounted to
$83,761 and $79,735 for the years ended December 31, 2003 and 2002,
respectively.
NOTE 10--CREDIT LINE
The Company, by virtue of acquiring WellComm Group, assumed a revolving line of
credit that allowed the Company to borrow up to $300,108. Amounts outstanding
under the line of credit incurred interest at 0.5% over the national prime rate,
as reported by the Wall Street Journal, and were payable monthly. During October
2003, the Company repaid $300,000 owed on the line of credit, representing
payment in full. Interest expense associated with the credit line amounted to
$12,996 and $11,742 for the years ended December 31, 2003 and 2002,
respectively.
28
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 11--NOTES PAYABLE--OTHER
In April 2003, the Company borrowed $100,000 from a shareholder pursuant to a
convertible promissory note. The note, with an eleven-month term, accrues
interest at 6% per annum and a default interest rate of 12% per annum. The
principal and related accrued and unpaid interest is convertible by the
shareholder into common stock at anytime at $1.50 per share. As consideration
for this loan, the Company also granted the shareholder a warrant to acquire
100,000 shares of common stock at an exercise price of $1.50 per share. The
value assigned to the warrant of $68,000 was recorded as a discount to the
promissory note using the relative fair value of the debt and the warrant to the
actual proceeds from the convertible promissory note. The discount is accreted
to interest expense over the term of the convertible promissory note. For the
year ended December 31, 2003, the discount accreted to interest expense
associated with the convertible promissory note amounted to $55,638. At December
31, 2003 the carrying value of the note amounted to $87,638 and is included in
"Notes payable - other, net of discount" on the accompanying consolidated
balance sheet. On March 19, 2004, the Company repaid such note payable along
with accrued interest. See Note 19.
Pursuant to a promissory note dated April 10, 2003, the Company borrowed
$150,000 from a shareholder with an interest rate of 12% per annum, requiring
monthly payments of $25,000 plus accrued interest with a final payment due on
December 31, 2003. As of December 31, 2003, the outstanding principal balance
and related accrued interest was paid in full. For the year ended December 31,
2003, interest expense amounted to $7,981.
On May 29, 2003, the Company borrowed $100,000 from a shareholder. For the
period the loan was outstanding, interest expense amounted to $12,000. The loan
and related interest amounting to $112,000 was repaid in full on September 29,
2003.
NOTE 12--PROMISSORY NOTES PAYABLE
On March 2, 2001, the Company borrowed $692,809 from an investor group that
included $75,000 from a venture capital fund managed by the Company's Chief
Executive Officer. The loan bears interest at 8% per annum, with a default rate
of 12% per annum, and is due on March 2, 2006. The Company also granted this
investor group warrants to purchase 364,694 shares of common stock at $0.50 per
share, which were exercised during the first quarter of 2002 into 340,317 shares
of common stock, net of shares surrendered as exercise price. The value assigned
to detachable warrants of $459,854 is accreted to interest expense over the
five-year term of the underlying promissory notes.
In June 2003, as part of certain related parties converting and assigning debt
as discussed in Note 9 above, the venture capital fund managed by the Company's
Chief Executive Officer, with the consent of the Company, assigned the fund's
loan in the principal amount of $75,000 and a portion of the accrued interest
thereon amounting to $6,669 to an investment relations firm, which thereafter
converted the assigned loan into common stock at $1.75 per share. The balance of
the accrued interest not assigned in the amount of $6,098 was converted into
3,484 shares of common stock also at $1.75 per share. The price of the
conversion was determined with reference to a private placement of common stock
to third parties completed by the Company contemporaneously with the conversion
as disclosed in Note 17 below.
The amount accreted to interest expense amounted to $90,708 and $90,708 for the
years ended December 31, 2003 and 2002, respectively. At December 31, 2003, the
carrying value of the notes amounted to $418,744 and is included in the
"Promissory notes and debenture payable, net of discount" on the accompanying
consolidated balance sheet. The face value of the promissory notes amounted to
$617,809 at December 31, 2003.
On March 19, 2004, the Company repaid such promissory notes along with accrued
interest. See note 19.
29
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 13--CONVERTIBLE DEBENTURE
The Company funded the acquisition of WellComm Group by selling a 6% convertible
senior debenture in the aggregate principal amount of $2,000,000 to Palladin
Opportunity Fund LLC. Pursuant to the purchase agreement, the Company also
issued Palladin a warrant to purchase an aggregate of up to 307,692 shares of
common stock at an exercise price of $5.50 per share. The outstanding principal
and any interest under the debenture was payable in full on or before February
3, 2004. Further, outstanding principal and any accrued interest may be
converted at any time at the election of Palladin into common stock. The
original conversion price of the debenture was $5.00 per share. In accordance
with the terms of the debenture, the price was reset to $3.03 in February 2003
and to $1.75 in June 2003. In accordance with the terms of the warrant, the
exercise price of the warrant was reset from $5.50 to $1.75 in June 2003.
The initial value assigned to the warrant of $890,272 was recorded as a discount
to the debenture and is accreted to interest expense over the term of the
debenture. The amount accreted to interest expense associated with the original
value assigned to the warrant amounted to $343,782 and $257,650 for the years
ended December 31, 2003 and 2002, respectively. As a result of resetting of the
exercise price of the warrant in June 2003, the Company recorded an additional
charge of $203,077 for interest expense for the additional market value of the
warrant on the date of resetting. Lastly, as a result of Palladin's partial
conversion of the debenture, the Company recorded $165,682 of additional
interest expense for the year ended December 31, 2003. This amount represents
the acceleration of the unamortized discount of the warrant, which is
attributable to the converted portion of principal.
Upon the initial sale of the debenture, the Company recorded a beneficial
conversion value of $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 (or the date the conversion price is changed) and the price
at which the debt could be converted into common stock. The beneficial
conversion value was increased by $682,528 as a result of the reset in June
2003. The Company recorded $802,576 and $424,113 of interest expense for the
years ended December 31, 2003 and 2002, respectively, for the amortization of
the beneficial conversion value of the debenture. As a result of Palladin's
partial conversion of the debenture, the Company recorded $365,709 of additional
interest expense for the year ended December 31, 2003. This amount represents
the unamortized portion of the beneficial conversion value, which is
attributable to the converted portion of principal.
The Company, pursuant to the debenture agreement, has also recorded accrued
interest at the rate of 6% on the outstanding principal portion of the
debenture. Interest accrued for the year ended December 31, 2003 amounted to
$224,350.
For the year ended December 31, 2003, Palladin converted an aggregate of
$1,483,351 of the amount due on the debenture for which the Company issued
847,629 shares of common stock.
As of December 31, 2003, the carrying value of the debenture amounted to
$379,061 and is included in "Promissory notes and debenture payable, net of
discount" on the accompanying consolidated balance sheet. The face value of the
debenture amounted to $740,999 at December 31, 2003.
The debenture is classified as a long-term liability because, during December
2003, Palladin agreed to extend the maturity date of the debenture until
February 2005. As consideration for the extension, the Company granted 50,000
warrants to acquire common stock at $1.75, which Palladin exercised on December
30, 2003. The warrants have been valued at approximately $200,000 utilizing the
Black-Scholes valuation model. This amount was recorded as a discount to the
debenture and is accreted to interest expense over the extension period of one
year.
30
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 13--CONVERTIBLE DEBENTURE (cont'd)
During November and December 2003, Palladin exercised 307,692 warrants,
representing the warrants granted upon the sale of the debenture during February
2002 and the 50,000 warrants granted for the extension of the maturity date of
the debenture. As a result of the exercise, the Company received proceeds of
$625,961.
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 per share valued at $246,000 delivered to a
third party that brokered the transaction. In connection with the reset in June
2003 of the conversion price of Palladin's debenture and the exercise price of
Palladin's warrant, the Company also, in accordance with a contractual
commitment: (1) reset the exercise price of the warrant originally granted to
the third party from $5.00 to $1.75 per share, resulting in a charge to
operations of $26,400 for additional debt issuance costs; and (2) increased the
shares of common stock issuable under the warrant by 74,285 shares, resulting in
a further charge to operations of $95,828.
For the years ended December 31, 2003 and 2002 the amortization of these debt
issuance costs amounted to $336,783 and $187,337, respectively.
During the first quarter of 2004, Palladin converted the balance of the
debenture payable. See Note 19.
NOTE 14--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 $83,000 to $200,000.
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, 2003, one
customer represented 25% of the total accounts receivable. For the year ended
December 31, 2003, the Company had three unrelated customers, which accounted
for 29%, 13%, and 14%, respectively, of total revenue. For the year ended
December 31, 2002, the Company had two unrelated customers, which accounted for
42% and 30%, respectively of total revenue.
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 requiring monthly payments of approximately $3,600. The lease expired on
October 31, 2003.
31
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 14--COMMITMENTS AND CONTINGENCIES (cont'd)
Office Leases (cont'd)
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, 2003, are as follows:
For the year ending December 31:
2004 $ 206,000
2005 119,000
2006 56,000
2007 24,000
-------------
$ 405,000
=============
Rent expense for the years ended December 31, 2003 and 2002 amounted to
approximately $245,000 and $275,000, respectively.
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, 2003, the Company has made no
contributions.
Risk Sharing Contracts
The Company enters into risk sharing contracts with some customers 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 customer if the Company does not save such customer a
pre-determined percentage of the expenses incurred by individuals whose health
is managed by the Company. As of December 31, 2003, the Company is not a party
to any risk sharing contracts.
32
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 15--COSTS IN CONNECTION WITH TERMINATED ACQUISITION
On November 8, 2002, the Company entered into a merger agreement to acquire a
technology company, which had developed web based predictive modeling software.
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 to be
released to the company being acquired if the Company failed to satisfy certain
conditions to closing, including third party financing for the cash portion of
the purchase price. As a result of not securing the financing by January 31,
2003 as stipulated in the merger agreement, the sum of $200,000 was released in
the first quarter of 2003 and charged to operations as terminated acquisition
cost.
NOTE 16--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.
As of December 31, 2003, the Company had deferred tax assets of approximately
$9,561,000 resulting from temporary differences and net operating loss
carry-forwards of approximately $25,160,000, which are available to offset
future taxable income, if any, through 2018. 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. Further, the Company will be limited in the amount of net operating
losses it may utilize following the merger with CHD Meridian. Such limitations
resulting from 50% or more change in ownership have not been determined.
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,
2003
-----------
Temporary differences:
Fair value of warrants and common stock $ 574,000
Net operating losses 8,987,000
Less valuation allowance (9,561,000)
-----------
Deferred tax assets $ 0
===========
The reconciliation of the effective income tax rate to the federal
statutory rate for the years ended December 31, 2003 and 2002 is as
follows:
Federal income tax rate (38.0)%
Change in valuation allowance on net operating carry-forwards 38.0
-----------
Effective income tax rate: 0.0 %
============
33
NOTE 17--STOCKHOLDERS' EQUITY
2002 Issuance of Common Stock and Warrants
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.
The Company funded the acquisition of WellComm Group by selling a 6% convertible
senior debenture in the aggregate principal amount of $2,000,000 to Palladin
Opportunity Fund LLC. Pursuant to the purchase agreement, the Company also
issued Palladin a warrant to purchase an aggregate of up to 307,692 shares of
common stock at an exercise price of $5.50 per share. The original conversion
price of the debenture was $5.00 per share. In accordance with the terms of the
debenture, the price was reset to $3.03 in February 2003 and to $1.75 in June
2003. In accordance with the terms of the warrant, the exercise price of the
warrant was reset from $5.50 to $1.75 in June 2003.
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. This amount is accreted to interest
expense over the life of the debenture.
Upon the initial sale of the debenture, the Company recorded a beneficial
conversion value of $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 (or the date the conversion price is changed) and the price
at which the debt could be converted into common stock.
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. In addition, 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.
On February 6, 2002, the Company acquired all of the issued and outstanding
common stock of WellComm Group, Inc. by issuing 1,488,000 shares of common stock
valued at $9,746,400, granting options valued at $733,600 to acquire 112,000
shares common stock at a nominal exercise price, and paying approximately
$2,200,000 in cash. The aggregate acquisition price amounted to approximately
$12,680,000.
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.
34
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 17--STOCKHOLDERS' EQUITY (cont'd)
2002 Issuance of Common Stock and Warrants (cont'd)
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.
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.
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.
2003 Issuance of Common Stock and Warrants
During May 2003 the Company issued an aggregate of 332,760 shares of common
stock to four investor relations firms. The common stock valued at $522,708,
based on the market price of the Company's common stock on the date of issuance,
has been charged to operations for 2003.
During May 2003, certain shareholders of the Company contributed loans (which
were thereafter converted into common stock) and 163,073 shares of common stock
to an investor relations firm retained by the Company as compensation for
services. The benefit that the Company has received from these contributions
aggregates $246,240 based on the market price of the Company's common stock on
the date of the contribution, and was charged to operations.
During June 2003 the Company sold 613,986 shares of common stock at $1.75 per
share yielding net proceeds (after direct costs including 40,167 shares of
common stock) of $1,004,186.
During June 2003, the Company issued 519,667 shares of common stock in
connection with the conversion of related party debt and accrued interest
thereon amounting to $909,421 based on the market price of the Company's common
stock on the date of issuance.
During June 2003, the Company issued 148,485 shares of common stock in
connection with the conversion of assigned debt to an investor relations firm
amounting to $259,849 based on the market price of the Company's common stock on
the date of issuance.
35
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 17--STOCKHOLDERS' EQUITY (cont'd)
2003 Issuance of Common Stock and Warrants (cont'd)
During June 2003, the Company issued 69,711 shares of common stock in connection
with the conversion of deferred salaries amounting to $121,997 based on the
market price of the Company's common stock on the date of issuance.
During August 2003, the Company commenced a private placement whereby it offered
as a unit, two shares of common stock and a warrant to purchase an additional
share of common stock exercisable at $3.00 (the market price on the Company's
common stock on the date the Company commenced the private placement) for a unit
purchase price of $5. The maximum amount offered was $3,500,000. Through October
31, 2003, the end of the private placement, the Company has issued a total of
1,400,000 shares of common stock and granted warrants to purchase 700,000
additional shares under this private placement. The Company has realized net
proceeds of $3,037,894 after expenses as of December 31, 2003.
Pursuant to the terms of the registration rights agreement entered in connection
with the transaction, within 30 days of the closing of the private placement,
the Company was required to file with the Securities and Exchange Commission
(the "SEC") a registration statement under the Securities Act of 1933, as
amended, covering the resale of all the common stock purchased and the common
stock underlying the warrants. Additionally, within 90 days of closing, the
Company was required to use its best efforts to cause such registration
statement to become effective. The registration rights agreement further
provided that if a registration statement is not filed, or does not become
effective, within the defined time periods, then in addition to any other rights
the holders may have, the Company would be required to pay each holder an amount
in cash, as liquidated damages, equal to 1.5% per month of the aggregate
purchase price paid by such holders. The registration statement was filed within
the allowed time, and was declared effective by the SEC on February 17, 2004.
In accordance with EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed To, and Potentially Settled In a Company's Own Stock," and the terms of
the warrants and the transaction documents, the fair value of the warrants
amounted to $2,458,800 on date of grant. The warrants were accounted for as a
liability, with an offsetting reduction to additional paid-in capital received
in the private placement. The warrant liability will be reclassified to equity
as of February 17, 2004, the effective date of the registration statement,
evidencing the non-impact of these adjustments on the Company's financial
position and business operations.
The fair value of the warrants was estimated using the Black-Scholes option-
pricing model with the following assumptions: no dividends; risk-free interest
rate of 4%; the contractual life of 5 years and volatility of 112%. The fair
value of the warrants at December 31, 2003 was estimated to be approximately
$2,760,000, which reflects an increase in fair value of $301,305 from the time
the warrants were granted. This amount has been charged to operations as an
increase in common stock warrants. The fair value of the warrants increased
additionally by approximately $350,000 from December 31, 2003 to February 17,
2004. Accordingly, such increase will be charged in the statement of operations
for the quarter ended March 31, 2004 as an increase in common stock warrants.
The adjustments required by EITF 00-19 were triggered by the terms of the
private placement agreement, specifically the potential penalties if the Company
did not timely register the common stock underlying the warrants issued in the
transaction. The SEC declared the related registration statement effective
within the contractual deadline and the Company incurred no penalties. The
adjustments for EITF 00-19 had no impact on the Company's working capital,
liquidity, or business operations.
For the year ended December 31, 2003, Palladin converted an aggregate of
$1,483,351 of its debenture into 847,629 shares of the Company's common stock.
36
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 17--STOCKHOLDERS' EQUITY (cont'd)
2003 Issuance of Common Stock and Warrants
During 2003, the Company granted fully vested, non-forfeitable warrants to
purchase 375,000 shares of common stock with exercise prices of $1.50 and $1.76
(based on market value at the date of issuance) to certain individuals and one
institution for investor relations services pursuant to various consulting
agreements expiring in May and June 2004. The value of such warrants, utilizing
the Black-Scholes model amounted to $649,448.
During May 2003 pursuant to the approval of the Board of Directors, the Company
granted warrants to purchase an aggregate of 450,000 shares for an exercise
price of $1.80 per share (representing a premium over market price on the date
of grant) to its Chief Executive and Operating Officers for their continued
financial support and for their guarantees to continue to support the Company
through January 2004. The granting of such warrants did not result in any
charges to operations because they were granted to employees.
In April 2003, the Company borrowed $100,000 from a shareholder pursuant to a
convertible promissory note. The note, with an eleven-month term, accrues
interest at 6% per annum and a default interest rate of 12% per annum. The
principal and related accrued and unpaid interest is convertible by the
shareholder into common stock at anytime at $1.50 per share. As consideration
for this loan, the Company also granted the shareholder a warrant to acquire
100,000 shares of common stock at an exercise price of $1.50 per share. The
value assigned to the warrant of $68,000 was recorded as a discount to the
promissory note using the relevant fair value of the debt and the warrant to the
actual proceeds from the convertible promissory note.
During December 2003, Palladin agreed to extend the maturity date of the
Debenture until February 2005, in exchange for which, the Company granted an
additional 50,000 warrants with an exercise price of $1.75. The warrants have
been valued at approximately $200,000 utilizing the Black-Scholes valuation
model. This amount, also recorded as a discount to the debenture, is accreted to
interest expense over the extension period of one year.
In connection with the reset in June 2003 of the conversion price of Palladin's
debenture and the exercise price of Palladin's warrant, the Company, in
accordance with a contractual commitment, reset the exercise price of the
warrant originally granted to a third party that brokered the Palladin
investment from $5.00 to $1.75 per share and amended the warrant to increase the
number of shares issuable thereunder by 74,285 shares of common stock. This
reset of the exercise and the amendment to the warrant resulted in a charge to
operations in the amount of $95,828.
During the last quarter of the year, the Company received an aggregate of
$968,769 (net of financing costs) from the exercise of warrants from various
holders.
37
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 17--STOCKHOLDERS' EQUITY (cont'd)
2003 Issuance of Common Stock and Warrants (cont'd)
The following table summarizes the Company's activity as it relates to its
warrants for the year ended December 31, 2003:
Shares
------------------
Balance outstanding at January 1, 2003 2,132,953
Quarter ended March 31, 2003:
Granted --
Exercised --
------------------
Balance outstanding at March 31, 2003 2,132,953
------------------
Quarter ended June 30, 2003:
Granted 999,285
Exercised --
------------------
Balance outstanding at June 30, 2003 3,132,238
------------------
Quarter ended September 30, 2003:
Granted 320,000
Exercised
------------------
Balance outstanding at September 30, 2003 3,452,238
------------------
Quarter ended December 31, 2003:
Granted 620,000
Exercised (720,866)
------------------
Balance outstanding at December 31, 2003 3,351,372
==================
Outstanding warrants are exercisable at prices ranging from $.75 to $5.50.
NOTE 18--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.
38
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 18--STOCK OPTIONS (cont'd)
Equity Compensation Plans and Non-Plan Stock Options (cont'd)
Originally, there were 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 or (b) 200,000 shares. As a result, effective
January 1, 2003, the number of shares of common stock available for issuance
under the 2001 plan increased from 1,200,000 to 1,400,000.
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, 2003, an aggregate of 226,500 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, 2003, an aggregate of 1,222,414 options were outstanding
under the 2001 plan. Exercise prices of these options range from $1.77 to $7.50
(depending on fair market value of the stock on the date of grant).
Non-Plan Stock Option Grants
As of December 31, 2003, the Company had outstanding an aggregate of 669,000
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).
39
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 18--STOCK OPTIONS (cont'd)
Equity Compensation Plans and Non-Plan Stock Options (cont'd)
The table below summaries the activity in the Company's stock option plans for
the years ended December 31, 2002 and 2003:
Non-Qualified Non-Plan
Incentive Options Options Non-Qualified Total
Options
------------------------ -------------------- ------------------- ------------------- -------------------
Outstanding as of
January 1, 2002 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
Granted 288,000 340,000 300,000 928,000
Exercised -- -- -- --
Forfeited/Expired (370,888) (80,000) (70,000) (520,888)
-------------------- ------------------- ------------------- -------------------
Outstanding as of
December 31, 2003 652,941 795,973 669,000 2,117,914
==================== =================== =================== ===================
Vesting Dates:
December 31, 2004 172,045 200,998 177,496 550,539
December 31, 2005 112,248 82,665 101,665 296,578
December 31, 2006 75,089 50,004 75,006 200,099
December 31, 2007 -- -- -- --
December 31, 2008 -- -- 20,000 20,000
Thereafter -- -- -- --
As of December 31, 2003, there were outstanding an aggregate of 1,050,698 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, 2003 amounted to $2.90.
For the year ended December 31, 2003 and 2002, the Company recorded $27,942 and
$163,000, respectively, of compensation in connection with granting of options.
NOTE 19--SUBSEQUENT EVENTS
Acquisition of CHD Meridian (unaudited)
The Company entered into a merger agreement, as amended, on December 26, 2003,
with CHD Meridian, a privately held company and a provider of outsourced,
employer-sponsored healthcare services.
40
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 19--SUBSEQUENT EVENTS (cont'd)
Acquisition of CHD Meridian (unaudited) (cont'd)
Pursuant to the merger agreement, the Company, on March 19, 2004, the effective
date of the merger, (1) issued 10,000,000 shares of common stock valued at
$36,300,000 utilizing $3.63 (the average closing market price for the three days
prior and three days after the announcement date of the merger) per share, (2)
issued 400,000 shares of convertible preferred stock (with each share
convertible into 10 shares of common stock at a price of $2.50 per share or
4,000,000 shares in the aggregate) at $25 per share or $10,000,000 in the
aggregate, and (3) paid approximately $25,508,000 to the CHD Meridian
stockholders. Immediately following the closing of the merger, the Company also
redeemed from former CHD Meridian stockholders that participated in the merger,
pro rata, an aggregate of 200,000 shares of convertible preferred stock at its
original issue price of $25 per share or $5,000,000.
The former CHD Meridian stockholders will also receive additional shares of the
Company's common stock if CHD Meridian, continuing its operations following the
closing of the merger as CHD Meridian LLC, achieves calendar 2004 milestones for
earnings before interest, taxes, depreciation and amortization (or EBITDA) as
follows: If EBITDA equals or exceeds $8,100,000, the number of such additional
common shares payable will be 3,473,280; the number of such shares increases
proportionately up to a maximum of 3,859,200 additional shares of the Company's
common stock if EBITDA equals or exceeds $9,000,000. In connection with this
earn-out, the Company placed 3,859,200 shares in escrow.
The Company funded the cash portion of the merger consideration by (1) selling
1,000,000 shares of convertible preferred stock at $25 per share with each
preferred share convertible into 10 shares of common stock at a price of $2.50
per share, for gross proceeds of $25,000,000, and (2) drawing $12,000,000 under
a new $20,000,000 senior secured credit facility with a national lender. The
credit facility expires on April 1, 2007. The credit facility has a $6,000,000
term loan commitment with a $14,000,000 revolving credit commitment, which is
reduced by letters of credit, which currently amount to $3,250,000. The credit
facility is secured by substantially all of the Company's assets.
The acquisition, which is valued at $ 72,977,000 as of March 19, 2004, the date
of acquisition, is accounted for as a purchase. As such, the purchase price will
be allocated to the estimated fair values of the assets acquired and liabilities
assumed. The Company will be obtaining third-party valuations of certain
intangible assets.
The following unaudited pro forma results of operations of the Company give
effect to the acquisition of CHD Meridian as though the transaction had occurred
on January 1, 2002.
Year ended Year ended
December 31, December 31,
2003 2002
------------- -------------
Sales $ 117,599,000 $ 107,384,000
Expenses 124,159,000 117,844,000
------------- -------------
Net loss $ (6,560,000) $ (10,460,000)
============= =============
Less: Dividends applicable to
Preferred Stockholders $ -- $ 15,820,000
============= =============
Net loss applicable to common stock $ (6,560,000) $ (26,280,000)
============= =============
Loss per share
Basic and Diluted $ (.31) $ (1.38)
============= =============
Weighted average shares outstanding
Basic and Diluted 20,905,000 19,097,000
============= =============
41
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 19--SUBSEQUENT EVENTS (cont'd)
Repayments of related party loans and advances and promissory notes
In connection with obtaining a credit line facility for the funding of the CHD
Meridian merger, the Company was required to repay all related party loans and
advances and any other outstanding loans immediately prior to closing.
Accordingly, contemporaneously with the closing of the merger, the Company
repaid an aggregate of $1,233,932 of which $289,897 was for related party debts
and accrued interest and $944,035 was for principal and accrued interest
(through March 19, 2004) pursuant to various promissory notes.
Conversion of Debenture Payable
During the first quarter of 2004, Palladin converted the remaining balance of
the debenture payable. Accordingly, the Company issued 427,106 shares of common
stock.
Conversion of Note Payable
Effective March 19, 2004, the Company issued 70,533 shares of common stock in
connection with the conversion of a note payable, and interest accrued
thereunder, issued to a stockholder.
42
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 August 11, 2004.
I-TRAX, INC.
By: /s/ Frank A. Martin
-------------------------------------
Frank A. Martin, Chairman and
Chief Executive Officer
43