UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
Commission File Number: 001-31584
I-TRAX, INC.
------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
23-3057155
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(I.R.S. Employer Identification No.)
4 Hillman Drive, Suite 130
Chadds Ford, Pennsylvania 19317
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(Address of principal executive offices)
(610) 459-2405
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(Issuer's telephone number)
One Logan Square, 130 N. 18th Street, Suite 2615
Philadelphia, Pennsylvania 19103
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November 11, 2004, the number
of outstanding shares of common stock, par value $.001 per share, was
28,655,871.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
EXPLANATORY NOTE
This amendment amends I-trax, Inc.'s Quarterly Report on Form 10-QSB
for the quarter ended September 30, 2004 filed with the Securities and Exchange
Commission on November 15, 2004. The purpose of this amendment is to amend the
following:
o Disclosure of number of shares of common stock issuable upon
exercise of options, warrants and convertible preferred stock
excluded from the diluted loss per share computation presented
in Note 2 of the notes to I-trax's condensed consolidated
financial statements (unaudited);
o Disclosure of options granted during the three month period
ended September 30, 2004 presented in Note 8 of the notes to
I-trax's condensed consolidated financial statements
(unaudited); and
o Supplemental disclosure of pro forma net loss per share under
SFAS No. 123 presented in Note 8 of the notes to I-trax's
condensed consolidated financial statements (unaudited).
The Quarterly Report on Form 10-QSB for the quarter ended September 30,
2004 filed with the Securities and Exchange Commission on November 15, 2004
reflected grants of options to acquire an aggregate of 1,742,000 shares of
I-trax common stock during the three month period ended September 30, 2004.
Following consultation with its professional advisors, I-trax has concluded that
these options were not validly granted, and therefore not outstanding, because,
among other reasons, the grants were not made in compliance with I-trax's 2001
Equity Compensation Plan and applicable Internal Revenue Code regulations.
I-trax expects its Board of Directors to validly grant these options as soon
as reasonably practicable on terms approved by the Board.
Except as described above, no other changes have been made to I-trax's
Quarterly Report on Form 10-QSB for the quarter ended September 30, 2004 filed
on November 15, 2004.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
I-TRAX, INC.
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Page No.
Report of Independent Registered Public Accounting Firm 4
Condensed Consolidated Balance Sheets at September 30, 2004
(unaudited) and December 31, 2003 5
Condensed Consolidated Statements of Operations
for the three month periods ended September 30, 2004 and 2003
(unaudited) 6
Condensed Consolidated Statements of Operations
for the nine month periods ended September 30, 2004 and 2003
(unaudited) 7
Condensed Consolidated Statement of Stockholders' Equity
for the nine month period ended September 30, 2004
(unaudited) 8
Condensed Consolidated Statements of Cash Flows
for the nine month periods ended September 30, 2004 and 2003
(unaudited) 9
Notes to Condensed Consolidated Financial Statements 11
3
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of I-trax, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
I-trax, Inc. (a Delaware corporation) and Subsidiaries as of September 30, 2004,
and the related condensed consolidated statements of operations for the three
month and nine month periods ended September 30, 2004 and 2003, the condensed
consolidated statements of stockholders' equity for the nine month period ended
September 30, 2004 and the condensed consolidated statements of cash flows for
the nine month periods ended September 30, 2004 and 2003. These interim
financial statements are the responsibility of the company's management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the condensed consolidated
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with United States generally accepted accounting
principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the balance sheet as of
December 31, 2003, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended (not presented
herein); and in our report dated February 16, 2004, we expressed an unqualified
opinion on those financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of December 31, 2003
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
October 27, 2004
4
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
September 30,
2004 December 31,
(unaudited) 2003
---------- ----------
Current assets
Cash and cash equivalents $ 5,453 $ 574
Accounts receivable, net 12,363 549
Income tax receivable 132 --
Other current assets 2,105 188
---------- ----------
Total current assets 20,053 1,311
Property and equipment, net 5,784 1,675
Goodwill 46,064 8,424
Customer list, net 28,374 769
Other intangible assets, net 1,805 1,400
Other long term assets 113 24
---------- ----------
Total assets $ 102,193 $ 13,603
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 6,024 $ 606
Accrued expenses 4,765 361
Due to officers and related parties -- 280
Notes payable 2,000 --
Net liabilities of discontinued operations 1,299 --
Other current liabilities 8,730 355
---------- ----------
Total current liabilities 22,818 1,602
Common stock warrants -- 2,760
Note payable 5,500 --
Other long term liabilities 2,437 856
---------- ----------
Total liabilities 30,755 5,218
---------- ----------
Commitments and contingencies -- --
Stockholders' equity
Preferred stock - $.001 par value, 2,000,000 shares authorized,
1,200,000 and -0- issued and outstanding, respectively 1 --
Common stock - $.001 par value, 100,000,000 shares authorized,
24,796,671 and 13,966,817 shares issued and outstanding, respectively 24 14
Additional paid in capital 130,593 47,276
Accumulated deficit (59,180) (38,905)
---------- ----------
Total stockholders' equity 71,438 8,385
---------- ----------
Total liabilities and stockholders' equity $ 102,193 $ 13,603
========== ==========
See accompanying notes to consolidated financial statements (unaudited).
5
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(in thousands, except share data)
Three months Three months
ended ended
September 30, September 30,
2004 2003
------------- -------------
Net revenue $ 24,136 $ 1,001
------------- -------------
Costs and expenses:
Operating expenses 18,816 642
General and administrative expenses 4,670 1,024
Depreciation and amortization 1,097 440
------------- -------------
Total costs and expenses 24,583 2,106
------------- -------------
Operating loss (447) (1,105)
------------- -------------
Other expenses (income):
Interest expense 124 948
Amortization of financing costs 13 57
Other income -- (500)
------------- -------------
Total other expenses 137 505
------------- -------------
Loss before provision for income taxes (584) (1,610)
------------- -------------
Provision for income taxes 251 --
Net loss (835) (1,610)
------------- -------------
Less preferred stock dividend (605) --
------------- -------------
Net loss applicable to common stockholders $ (1,440) $ (1,610)
============= =============
Loss per common share, basic and diluted $ (0.06) $ (0.14)
============= =============
Weighted average number of shares outstanding, basic and diluted 24,730,933 11,121,724
============= =============
See accompanying notes to consolidated financial statements (unaudited).
6
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(in thousands, except share data)
Nine months ended Nine months ended
September 30, September 30,
2004 2003
------------ ------------
Net revenue $ 49,968 $ 3,668
------------ ------------
Costs and expenses:
Operating expenses 38,631 1,506
General and administrative expenses 11,342 4,243
Depreciation and amortization 2,889 1,318
------------- -------------
Total costs and expenses 52,862 7,067
------------- -------------
Operating loss (2,894) (3,399)
------------- -------------
Other expenses (income):
Interest expense 900 1,922
Amortization of financing costs 60 295
Other expenses (income) 350 (300)
------------- -------------
Total other expenses 1,310 1,917
------------- -------------
Loss before provision for income taxes (4,204) (5,316)
------------- -------------
Provision for income taxes 251 --
------------- -------------
Net loss (4,455) (5,316)
Less preferred stock dividend (1,282) --
Less deemed dividends applicable to preferred stockholders (15,820) --
------------- -------------
Net loss applicable to common stockholders $ (21,557) $ (5,316)
============= =============
Loss per common share, basic and diluted: $ (1.00) $ (0.53)
============= =============
Weighted average number of shares outstanding, basic and diluted: 21,613,701 10,111,766
============= =============
See accompanying notes to consolidated financial statements (unaudited).
7
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(UNAUDITED)
(in thousands, except share data)
Preferred Stock Common Stock Additional Total
--------------------- -------------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
---------- ---------- ---------- -------- -------- ---------- ----------
Balances at January 1, 2004 -- $ -- 13,966,817 $ 14 $ 47,276 $ (38,905) $ 8,385
Reclassification of common stock warrants to paid in
capital -- -- -- -- 3,110 -- 3,110
Issuance of common stock in connection with
conversion of promissory note and other
settlement, net of costs -- -- 69,165 -- 71 -- 71
Issuance of common stock for conversion of debenture
and accrued interest -- -- 427,106 -- 747 -- 747
Issuance of common stock for exercise of warrants -- -- 333,583 -- 52 -- 52
Sale of preferred stock, net of costs 1,000,000 1 -- -- 23,509 -- 23,510
Issuance of preferred stock for acquisition of CHD
Meridian 400,000 -- -- -- 10,000 -- 10,000
Redemption of preferred stock (200,000) -- -- -- (5,000) -- (5,000)
Issuance of common stock for acquisition of CHD
Meridian -- -- 10,000,000 10 36,290 -- 36,300
Beneficial conversion feature in connection with
issuance of preferred stock -- -- -- -- 15,820 (15,820) --
Preferred stock dividend -- -- -- -- (1,282) -- (1,282)
Net loss for the nine months ended September 30, 2004 -- -- -- -- -- (4,455) (4,455)
---------- ------- ---------- -------- ---------- ---------- ----------
Balances at September 30, 2004 1,200,000 $ 1 24,796,671 $ 24 $ 130,593 $ (59,180) $ 71,438
========== ======= ========== ======== ========== ========== ==========
See accompanying notes to consolidated financial statements (unaudited).
8
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(in thousands, except share data)
Nine months Nine months
ended ended
September 30, September 30,
2004 2003
-------- --------
Operating activities:
Net loss $ (4,455) $ (5,316)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,889 1,318
Accretion of discount on notes payable charged to interest expense
and beneficial conversion value of debenture 573 1,609
Increase in fair value of common stock warrants 350 --
Amortization of debt issuance costs 47 295
Write-off of deposit on cancelled acquisition -- 200
Issuance of securities for services -- 1,414
Other non-cash items -- 10
Changes in operating assets and liabilities, net of acquisition:
Decrease in accounts receivable 996 33
Decrease in income tax receivable 147 --
Increase in other current assets (920) (670)
Increase in other long term assets (52) --
Decrease in accounts payable (948) (207)
Increase in accrued expenses 1,463 134
(Decrease) increase in other current liabilities 260 (1,379)
--------- --------
Net cash provided by (used in) operating activities 350 (2,559)
--------- --------
Investing activities:
Purchases of property, plant and equipment (1,628) (649)
Acquisition of intangible assets (688) --
Acquisition of CHD Meridian, net of acquired cash (18,134) --
--------- --------
Net cash used in investing activities (20,450) (649)
--------- --------
Financing activities:
Principal payments on capital leases (35) (62)
Proceeds from/ repayment to related parties (280) 575
Proceeds (repayment) of note payable (618) 175
Proceeds from exercise of warrants 52 --
Proceeds from bank credit facility, net of issuance costs 7,350 --
Proceeds from sale of preferred stock, net of issuance costs 23,510 --
Proceeds from sale of common stock -- 2,405
Redemption of preferred stock (5,000) --
--------- --------
Net cash provided by financing activities 24,979 3,093
--------- --------
Net increase (decrease) in cash and cash equivalents 4,879 (115)
Cash and cash equivalents at beginning of period 574 360
--------- --------
Cash and cash equivalents at end of period $ 5,453 $ 245
========= ========
Supplemental disclosure of non-cash flow information:
Cash paid during the year for:
Interest $ 377 $ 28
========= ========
(Continues on following page.)
See accompanying notes to consolidated financial statements (unaudited).
9
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Continues from previous page.)
Nine months Nine months
ended ended
September 30, September 30,
2004 2003
------------- -------------
Income taxes $ 257 $ --
======== ========
Schedule of non-cash financing activities:
Reclassification of common stock warrants to paid in capital $ 3,110 $ --
======== ========
Issuance of common stock in connection with conversion of promissory
note and other settlement $ 71 $ 1,169
======== ========
Issuance of common stock in connection with conversion of debenture
payable $ 747 $ 565
======== ========
Beneficial conversion feature in connection with issuance of preferred
stock $ 15,820 $ --
======== ========
Issuance of common and preferred stock in connection with the
acquisition of CHD Meridian $ 46,300 $ --
======== ========
Preferred stock dividend $ 1,282 $ --
======== ========
Issuance of common stock in connection with the conversion of deferred
salaries $ -- $ 122
======== ========
Purchase of all capital stock of CHD Meridian and assumption of liabilities
in the acquisition as follows:
Fair value of non-cash tangible assets acquired $ 17,257 $ --
Goodwill 37,429 --
Customer list 29,184 --
Other intangibles 1,167 --
Cash paid, net of cash acquired (includes $85 of transaction costs
incurred in a prior period) (18,834) --
Common stock issued (36,300) --
Preferred stock issued (10,000) --
======== ========
Liabilities assumed $(19,903) $ --
======== ========
See accompanying notes to consolidated financial statements (unaudited).
10
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--ORGANIZATION
I-trax, Inc. (the "Company") was incorporated in the State of Delaware on
September 15, 2000. On March 19, 2004, the Company consummated a merger with
Meridian Occupational Healthcare Associates, Inc., a private company, which does
business as CHD Meridian Healthcare ("CHD Meridian"). (See Note 3--Business
Combination.)
Following the merger, the Company offers two categories of services: (1) on-site
health related services such as occupational health, primary care, corporate
health, and pharmacy; and (2) personalized health management programs.
The Company conducts its on-site services through CHD Meridian Healthcare, LLC,
a Delaware limited liability company ("CHD Meridian LLC"), and its subsidiary
companies, and its personalized health management programs through I-trax Health
Management Solutions, LLC, a Delaware limited liability company, and I-trax
Health Management Solutions, Inc., a Delaware corporation.
Physician services at the Company's on-site locations are provided under
management agreements with affiliated physician associations, which are
organized professional corporations that hire licensed physicians who provide
medical services (the "Physician Groups"). The Physician Groups provide all
medical aspects of the Company's on-site services, including the development of
professional standards, policies and procedures. The Company provides a wide
array of business services to the Physician Groups, including administrative
services, support personnel, facilities, marketing, and non-medical services.
NOTE 2--INTERIM RESULTS AND BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and the instructions to Form 10-QSB and Item
310(b) of Regulation S-B promulgated under the Securities Exchange Act of 1934.
In the opinion of management, the unaudited financial statements have been
prepared on the same basis as the annual financial statements and reflect all
adjustments necessary to present fairly the financial position as of September
30, 2004 and the results of the operations and cash flows for the three and nine
months ended September 30, 2004. Because the combination of the Company and CHD
Meridian for accounting purposes was effective as of April 1, 2004, the results
for the nine months ended September 30, 2004 only include the operations of CHD
Meridian for the six months ended September 30, 2004. The balance sheet at
December 31, 2003 has been derived from the audited financial statements of the
Company at that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations.
Loss per common share is computed pursuant to SFAS No. 128, "Earnings Per
Share." Basic loss per share is computed as net income (loss) available to
common stockholders 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 preferred stock. As of September 30, 2004 and 2003,
17,168,561 and 5,809,093 shares issuable upon exercise of options, warrants and
convertible preferred stock, respectively, were excluded from the diluted loss
per share computation because their effect would be anti-dilutive.
11
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2--INTERIM RESULTS AND BASIS OF PRESENTATION (continued)
These unaudited financial statements should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 2003
included in the Company's annual report on Form 10-KSB/A filed on August 11,
2004, and the financial statements of CHD Meridian and notes thereto included in
the Company's current report on Form 8-K/A filed on November 10, 2004.
The consolidated financial statements include the balance sheet of CHD Meridian
LLC, its wholly owned subsidiaries, the Physician Groups and Green Hills
Insurance, a risk retention group (see Note 9- Risk Retention Group). The
financial statements of the Physician Groups are consolidated with CHD Meridian
LLC in accordance with the nominee shareholder model of Emerging Issues Task
Force ("EITF") Issue No. 97-2, "Application of FASB Statement No. 94 and APB
Opinion No. 16 to Physician Practice Management Entities and Certain Other
Entities with Contractual Management Arrangements." CHD Meridian LLC has
unilateral control over the assets and operations of the Physician Groups.
Control of the Physician Groups is perpetual and other than temporary because of
the nominee shareholder model and the management agreements between the
entities. The net tangible assets of the Physician Groups were not material at
September 30, 2004.
The Company records pass-through pharmaceutical purchases on a net basis in
compliance with EITF Issue No. 99-19, "Reporting Gross Revenue as a Principal
vs. Net as an Agent." The amounts of pass-through pharmaceuticals purchased by
the Company for the three and nine months ended September 30, 2004 were
$25,357,000 and $50,228,000, respectively.
For comparability, certain 2003 amounts have been reclassified to conform to the
financial statement presentation used in 2004.
As shown in the accompanying financial statements, the Company has suffered
recurring losses from operations, has an accumulated a deficit, and a working
capital deficiency. The Company borrowed funds under its senior secured credit
facility (see Note 6 - Long Term Debt) and has entered into agreements with new
customers which management expects to provide increased revenue. The Company
believes these measures will sustain operations through December 31, 2004.
NOTE 3--BUSINESS COMBINATION
On March 19, 2004, the Company merged with CHD Meridian, a privately held
company and a major provider of outsourced, employer-sponsored healthcare
services. CHD Meridian provides such services to large self-insured employers,
including Fortune 1,000 companies.
Pursuant to the merger agreement, the Company, (1) issued 10,000,000 shares of
common stock, (2) issued 400,000 shares of convertible preferred stock (with
each share convertible into 10 shares of common stock) at $25.00 per share or
$10,000,000 in the aggregate, and (3) paid approximately $25,508,000 in cash 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 $25.00 per share or
$5,000,000. The total value of the merger consideration is $73,592,000, made up
of common stock valued at $36,300,000, preferred stock valued at $10,000,000,
cash of $25,908,000 and transaction expenses of $1,384,000. The Company has
filed a registration statement with the Securities and Exchange Commission to
register for resale the (a) common stock issued in the merger, and (b) common
stock issuable upon conversion of convertible preferred stock issued in the
merger.
12
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3--BUSINESS COMBINATION (continued)
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 will increase
proportionately with EBITDA above $8,100,000, 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 shares are not recorded as outstanding for accounting
purposes until the earn-out target is satisfied.
The Company funded the cash portion of the merger consideration by (1) selling
1,000,000 shares of convertible preferred stock at $25.00 per share (with each
share convertible into 10 shares of common stock), for gross proceeds of
$25,000,000, and (2) drawing $12,000,000 under a new senior secured credit
facility with a national lender. (See Note 6 - Long Term Debt.)
In connection with the sale and issuance of the convertible preferred stock, the
Company reported $15,820,000 as a deemed dividend to preferred stockholders
representing the beneficial conversion value for the underlying common stock as
of the date of the merger agreement. The beneficial conversion value is treated
as a dividend on the convertible preferred stock solely for the purpose of
computing earnings per share. The dividend is computed by multiplying (1) the
difference between the value of the underlying common stock calculated using the
average closing price for the three days prior and three days after the
announcement of the merger ($3.63 per share) and the conversion price ($2.50 per
share) by (2) the number of shares of common stock into which the convertible
preferred stock outstanding at the merger's effective time was convertible
(14,000,000 shares).
The acquisition was accounted for using the purchase method of accounting. The
Company incurred acquisition costs of $1,384,000 that are included in the
purchase price. In addition, $832,000 of transaction related bonuses and
termination pay are included in the general and administrative expense item on
the condensed consolidated statement of operations.
The aggregate purchase price of $73,592,000 for this transaction is summarized
as follows:
Fair value of tangible assets acquired (includes
cash of $8,444,000) $ 25,715,000
Liabilities assumed (19,903,000)
Goodwill 37,429,000
Customer list 29,184,000
Other intangibles 1,167,000
-------------------
$ 73,592,000
===================
The following are the Company's unaudited pro forma results of operations giving
effect to the acquisition of CHD Meridian as though the transaction had occurred
on January 1, 2003. The results exclude transaction costs of $1,938,000 and
transaction related bonuses and termination pay of $832,000 included in the CHD
Meridian and the Company's statements of operations, respectively. The pro forma
results also include adjustments to amortization expense associated with the
intangibles acquired and interest expense related to the new senior secured
credit facility.
13
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3--BUSINESS COMBINATION (continued)
Nine months Nine months
ended ended
September 30, September 30,
2004 2003
------------------ ------------------
Net revenue 73,322,000 73,018,000
------------------ ------------------
Operating loss (1,453,000) (1,070,000)
------------------ ------------------
Net loss (3,166,000) (4,253,000)
================== ==================
Loss per share (0.13) (0.21)
================== ==================
NOTE 4--GOODWILL AND INTANGIBLE ASSETS
During the quarter ended September 30, 2004, goodwill increased by $211,000.
This increase is related to the cost of continuing directors and officers'
insurance coverage for former directors and officers of CHD Meridian. The
changes in the carrying amount of goodwill for the nine months ended September
30, 2004 are as follows:
Total
------------------
Balance as of January 1, 2004 $ 8,424,000
Goodwill acquired in the nine months
ended September 30, 2004 37,640,000
------------------
Balance as of September 30, 2004 46,064,000
==================
The components of identifiable intangible assets, which are included in the
consolidated balance sheet as of September 30, 2004, are as follows:
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
----------------- --------------- -----------------
Amortized intangible assets:
Customer lists 36,492,000 8,118,000 28,374,000
Other intangibles 5,124,000 3,319,000 1,805,000
----------------- --------------- -----------------
Total 41,616,000 11,437,000 30,179,000
================= =============== =================
Customer lists are amortized on a straight-line basis over the expected periods
to be benefited, generally 12 to 15 years. Other intangible assets represent
technology and deferred marketing costs, which are amortized on a straight-line
basis over the expected periods to be benefited, generally 3 to 5 years. In
accordance with SFAS No. 142, the Company completes a test for impairment of
goodwill and certain other intangible assets annually.
14
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5--CONVERTIBLE DEBENTURE
During the first quarter of 2004, Palladin Opportunity Fund LLC converted the
remaining balance of the debenture payable and accrued interest into common
stock. Accordingly, the Company issued 427,106 shares of common stock for the
conversion of principal and accrued interest amounting to $747,000.
Interest expense associated with the convertible debenture amounted to $368,000
for the nine months ended September 30, 2004. This amount includes $362,000 that
represents accelerated accretion to interest expense for the discount of the
value assigned to the warrants issued to the debenture holder and the beneficial
conversion value at date of issuance.
NOTE 6--LONG TERM DEBT
On March 19, 2004, in connection with the CHD Meridian acquisition, the Company
obtained a $20,000,000 senior secured credit facility from a national lender.
The credit facility expires on April 1, 2007. The credit facility originally had
a $6,000,000 term loan commitment with a $14,000,000 revolving credit
commitment. Outstanding letters of credit liabilities reduce the amount
available to be borrowed under the revolving credit commitment. The credit
facility has subsequently been amended, as discussed below.
In addition to funding the merger and related costs, the Company used a portion
of the proceeds from the credit facility to repay $280,000 in related party
loans and $944,000 in principal and interest for all other outstanding
promissory notes.
The credit facility is secured by substantially all of the Company's assets.
Borrowings, at the Company's 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 the Company's debt service
coverage ratios. Eurodollar rate loans bear interest at the Eurodollar rate plus
up to 3.0% per annum likewise depending on the Company's debt service coverage
ratios.
As of September 30, 2004, the Company had outstanding $10,500,000 under the
credit facility, $2,000,000 of which is classified as short term, $5,500,000 of
which is classified as long term, and an aggregate of $3,000,000 under letters
of credit.
The credit facility includes certain financial covenants, including a covenant
measuring: (1) the ratio of the Company's funded indebtedness to earnings before
income, taxes, depreciation and amortization, or EBITDA, (2) the ratio of the
Company's funded indebtedness to capitalization, and (3) the Company's fixed
charges coverage ratio. As of September 30, 2004, the Company was in compliance
with these financial covenants.
On August 12, 2004, the Company and the senior lender amended the credit
facility. Among other things, the amendment added two additional covenants that
required the Company to achieve: (1) minimum stockholders' equity of $82,878,000
as of October 31, 2004, an increase of $10,000,000 from the stockholder's equity
reflected on the balance sheet as of June 30, 2004, and (2) pro forma 2004
EBITDA (giving effect to the acquisition of CHD Meridian Healthcare as though
the transaction had occurred on January 1, 2004) of $3,560,000. The credit
facility amendment also limited the amount the Company could borrow under the
facility through October 31, 2004 to $8,500,000, although the amount of the
revolving credit commitments under the facility remained at $14,000,000.
15
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6--LONG TERM DEBT (continued)
On October 27, 2004, the Company amended its credit facility with its senior
secured lender. The amendment: (1) increased the funded indebtedness to EBITDA
ratio and the fixed charge coverage ratio; (2) moved the first measurement date
for the consolidated net worth covenant to December 31, 2005, and restated the
covenant as a maintenance of minimum stockholders' equity at 90% of the level as
of December 31, 2005; (3) excluded the outstanding letters of credit from the
credit facility borrowing base through January 1, 2006; and (4) converted
amounts outstanding under the term loan commitment of the credit facility into
the revolving credit commitment, and eliminated the term loan commitment. The
Company continues to have access to $14,000,000 under the credit facility, of
which $3,000,000 is currently allocated to outstanding letters of credit and up
to $11,000,000 is available under the revolving portion.
NOTE 7--COMMITMENTS AND CONTINGENCIES
Litigation
CHD Meridian is a defendant in a lawsuit seeking a return of approximately
$556,000 in payments received in the ordinary course of business from a client
that filed for protection under bankruptcy laws during 2003. Management believes
that such amounts were not preference payments, and as such are not subject to
repayment. The outcome of this lawsuit, however, cannot be determined. During
the three months ended September 30, 2004, a second lawsuit seeking a return of
approximately $475,000 as preference payments was settled for substantially less
than the demand amount.
CHD Meridian is also involved in certain legal actions and claims on a variety
of matters related to the normal course of business. Management believes that
such legal actions will not have a material effect on the results of operations
or the financial position of the Company. (See also Note 9 - Risk Retention
Group.)
Compliance with Healthcare Regulations
Because the Company operates in the healthcare industry, it is subject to
numerous laws and regulations of Federal, state, and local governments. These
laws and regulations include, but are not limited to, matters regarding
licensure, accreditation, government healthcare program participation
requirements, reimbursement for patient services, and Medicare and Medicaid
fraud and abuse. Recently, government activity has increased with respect to
investigations and allegations concerning possible violations of fraud and abuse
statutes and regulations by healthcare providers. Violations of these laws and
regulations could result in, among other things, expulsion from government
healthcare programs together with the imposition of significant fines and
penalties, as well as significant repayments for patient services previously
billed.
Management believes that the Company is in compliance with fraud and abuse
statutes as well as other applicable government laws and regulations. Compliance
with such laws and regulations can be subject to future government review and
interpretation as well as regulatory actions unknown or unasserted at this time.
Significant Customers
As of September 30, 2004, one customer represented 15% of the Company's accounts
receivable as reflected on the Company's consolidated balance sheet.
For the three and nine months ended September 30, 2004, one customer of the
Company accounted for 12% of the Company's revenue as reflected on the Company's
condensed consolidated statement of operations.
16
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7--COMMITMENTS AND CONTINGENCIES (continued)
Risk-Sharing Contracts
From time to time the Company enters into risk-sharing contracts. A risk-sharing
contract generally requires the Company to manage the health and wellness of a
predetermined set of individuals for a term of three to five years. A
risk-sharing contract provides that the Company is required to refund to its
client a percentage of the Company's fees if its program does not save the
client an agreed upon percentage of the client's healthcare costs. The Company
did not generate material risk revenue, which may be subject to a refund, during
the quarter or nine months ended September 30, 2004.
NOTE 8--STOCKHOLDERS' EQUITY
Preferred Stock
The Company has 2,000,000 authorized shares of preferred stock. As of September
30, 2004, the Company had issued and outstanding 1,200,000 shares of Series A
Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock
is convertible, at any time, into 10 shares of common stock, has a liquidation
preference of $25.00 per share, the original purchase price, and accrues
dividends on that amount at a rate of 8% per year. Dividends are payable, at the
Company's option, in cash or common stock, and only upon the Company's
liquidation or conversion of the Series A Convertible Preferred Stock into
common stock. For the nine months ended September 30, 2004, the Company recorded
approximately $1,282,000 in accrued dividends.
The placement agents that assisted the Company in the sale of 1,000,000 shares
of the Series A Convertible Preferred Stock to fund the acquisition of CHD
Meridian received a commission of $1,490,000, and warrants to acquire 492,000
shares of common stock exercisable at $2.50 per share. Such warrants were valued
at $1,506,000 utilizing the Black-Scholes valuation model. The amount of the
cash paid and the value of the warrants have been classified as a cost of equity
in the condensed consolidated statement of stockholders' equity.
Common Stock
The Company has 100,000,000 authorized shares of common stock. As of September
30, 2004, the Company had issued and outstanding 24,796,671 shares, which
excludes 3,859,200 shares held in escrow for purposes of the CHD Meridian merger
earn out.
Warrants
Under the terms of a private placement completed during October 2003, the
Company filed a registration statement under the Securities Act of 1933, as
amended, covering the resale of the common stock and the common stock underlying
warrants issued in the private placement. The Securities and Exchange Commission
declared the registration statement effective on February 17, 2004.
In accordance with EITF Issue No. 00-19, "Accounting for Derivative Financial
Instruments Indexed To, and Potentially Settled In a Company's Own Stock," upon
issuance of such warrants, the Company recorded a liability in the amount of
$2,459,000, representing the fair value of the warrants to acquire 890,000
shares of common stock. The fair value of the warrants was estimated using the
Black-Scholes valuation 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 was estimated to be $2,760,000 and
$3,110,000 at December 31, 2003 and February 17, 2004, respectively. The Company
recorded an additional liability, with a corresponding charge to operations, of
$301,000 and $350,000 on December 31, 2003 and February 17, 2004, respectively,
associated with the increase in fair value of the warrants.
17
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8--STOCKHOLDERS' EQUITY (continued)
Warrants (continued)
The adjustments required by EITF Issue No. 00-19 were triggered by the terms of
the private placement subscription agreement, which imposed penalties if the
Company did not timely register the common stock underlying the warrants issued
in the private placement. The Securities and Exchange Commission declared the
related registration statement effective within the contractual deadline and the
Company incurred no penalties. The adjustments for EITF Issue No. 00-19 had no
impact on the Company's working capital, liquidity or business operations.
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 has been 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 following table summarizes the Company's activity as it relates to its
warrants for the nine months ended September 30, 2004:
Shares Underlying
Warrants
------------------
Balance outstanding at January 1, 2004 3,351,372
Quarter ended March 31, 2004:
Granted 492,000
Exercised (179,278)
------------------
Balance outstanding at March 31, 2004 3,664,094
------------------
Quarter ended June 30, 2004:
Granted --
Exercised (7,500)
------------------
Balance outstanding at June 30, 2004 3,656,594
------------------
Granted --
Exercised (361,700)
------------------
Balance outstanding at September 30, 2004 3,294,894
==================
Warrants issued during the nine months ended September 30, 2004 are exercisable
at $2.50 per share. Such warrants were valued at $1,506,000 and recorded as a
cost of equity because they were granted to placement agents in connection with
sales of convertible preferred stock.
On October 27, 2004, in connection with the amendment of the Company's senior
credit facility (see Note 6 - Long-Term Debt), the Company issued a warrant to
purchase 100,000 shares of the Company's common stock at an exercise price of
$.01 per share to its senior secured creditor. The warrant expires on December
31, 2014.
18
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8--STOCKHOLDERS' EQUITY (continued)
Stock Options
The table below summarizes the activity in the Company's stock option plans for
the nine months ended September 30, 2004:
Non-Plan
Non-Qualified Non-Qualified
Incentive Options Options Options Total
------------------------ -------------------- ------------------- ------------------- -------------------
Outstanding as of
January 1, 2004 652,941 795,973 669,000 2,117,914
Granted 70,921 -- -- 70,921
Exercised -- -- -- --
Forfeited/Expired -- (30,000) -- (30,000)
-------------------- ------------------- ------------------- -------------------
Outstanding as of
March 31, 2004 723,862 765,973 669,000 2,158,835
-------------------- ------------------- ------------------- -------------------
Granted -- -- -- --
Exercised -- -- -- --
Forfeited/Expired (95,875) -- -- (95,875)
-------------------- ------------------- ------------------- -------------------
Outstanding as of June
30, 2004 627,987 765,973 669,000 2,062,960
-------------------- ------------------- ------------------- -------------------
Granted -- -- -- --
Exercised -- -- -- --
Forfeited/Expired (14,291) -- (175,002) (189,293)
-------------------- ------------------- ------------------- -------------------
Outstanding as of
September 30, 2004 613,696 765,973 493,998 1,873,667
==================== =================== =================== ===================
Vesting Dates:
December 31, 2004 10,530 31,083 6,666 48,279
December 31, 2005 102,448 82,665 26,668 211,781
December 31, 2006 54,175 50,004 -- 104,179
December 31, 2007 5,191 -- -- 5,191
December 31, 2008 -- -- 20,000 20,000
Thereafter -- -- -- --
As of September 30, 2004, exercisable plan and non-plan options to purchase an
aggregate of 1,410,307 shares, with exercise prices ranging from $.005 to
$10.00, were outstanding.
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.
19
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8--STOCKHOLDERS' EQUITY (continued)
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:
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------------ ----------------- ----------------- -----------------
Net loss as reported $ (835,000) $ (1,610,000) $ (4,455,000) $ (5,316,000)
Add back intrinsic value of the - - -
options issued to employee and
charged to operations - - - 24,000
Deduct stock based employee
compensation expense determined
under fair value based methods
for all awards (160,000) (817,000) (578,000) (2,953,000)
------------------ ----------------- ----------------- -----------------
Pro forma net loss $ (995,000) $ (2,427,000) $ (5,033,000) $ (8,245,000)
================== ================= ================= =================
Basic and diluted net loss per
share as reported $ (0.06) $ (0.14) $ (1.00) $ (0.53)
================== ================= ================= =================
Pro forma basic and diluted net
loss per share $ (0.06) $ (0.22) $ (1.02) $ (0.82)
================== ================= ================= =================
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 valuation model with the following weighted-average
assumptions:
Dividend yield 0.00%
Expected volatility 112%
Risk-free interest rate 4%
Expected life 5 years
Securities and Exchange Commission Registration
Pursuant to the terms of the merger agreement between the Company and CHD
Meridian, on April 19, 2004 the Company filed a registration statement under the
Securities Act of 1933, as amended, covering the resale of (1) the common stock
issued in the merger, (2) the common stock underlying the convertible preferred
stock issued in the merger and the related financing, and (3) the common stock
issuable upon exercise of warrants issued to the placement agents in connection
with the merger.
20
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9--Risk Retention Group
During the first quarter of 2004, CHD Meridian formed Green Hills Insurance, a
Risk Retention Group (the "RRG"), licensed in the State of Vermont for the
purposes of self-insuring a portion of the merged companies' professional and
general liability insurance.
The RRG was capitalized with $2,000,000 in cash and a $1,000,000 letter of
credit under the Company's credit facility. The RRG began issuing policies on a
claims-made basis to CHD Meridian LLC, its direct subsidiaries and Physician
Groups in May 2004. As of September 30, 2004, cash held by the RRG, which
includes $2,000,000 contributed to RRG's capital, is invested in cash
equivalents in accordance with the regulations promulgated by the State of
Vermont and is reflected on the balance sheet as cash and cash equivalents.
Loss and loss adjustment expense reserves are recorded monthly and represent
management's best estimate of the ultimate net cost of all reported and
unreported losses incurred from May 1, 2004 through September 30, 2004.
Management's estimates are based on an independent actuarial report. The Company
does not discount loss and loss adjustment expense reserves. The reserves for
unpaid losses and loss adjustment expenses are estimated using individual
case-basis valuations and statistical analyses. Those estimates are subject to
the effects of trends in severity and frequency. Although considerable
variability is inherent in such estimates, management believes the reserves for
losses and loss adjustment expenses are adequate. The estimates are reviewed and
adjusted continuously as experience develops or new information becomes known;
such adjustments are included in current operations. No claims have been filed
against these policies as of September 30, 2004. To the extent claims are made
against the policies in the future, the Company expects such claims to be
resolved within five years of original date of claim.
The RRG does not plan to pay dividends to the policyholders in the foreseeable
future.
21
PART II. OTHER INFORMATION
Item 6. Exhibits
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
22
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
I-TRAX, INC.
Date: December 15, 2004 By: /s/ Frank A. Martin
----------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
23